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06/12/2024 [Link] [BI] Bloomberg Intelligence
PAKISTAN INSIGHT: How to End Debt Trap? Cut External Deficit (1)
By Ankur Shukla (Economist)
(Bloomberg Economics) -- Pakistan keeps moving from one International Monetary Fund bailout to the next to avoid
defaulting on its growing external debt. Can this cycle end? We think so. But the country would need to keep its
current account deficit low permanently – at least enough to stabilize its foreign debt as a share of GDP.
Pakistan needs to keep its current account deficit at 1.1% of GDP if it wants to keep its dollar debt stable at the
current level, which we estimate to be 31% of GDP.
That’s a tall order. Its current account deficit has averaged 2.4% of GDP over the past 10 years, pushing up its
external debt-to-GDP ratio by around 8 percentage points. The country has received three IMF bailouts over the
same period and is currently seeking another one.
Pakistan’s Historically High Current Account Deficit
Source: Bloomberg Economics
The smaller deficit expected for fiscal year 2024 – the consensus sees 1.3% of GDP, the IMF predicts 1.1% of GDP
– offers little solace. The sharp decline from a deficit of 4.7% of GDP in fiscal 2022 was driven largely by the
combination of weak domestic demand and import restrictions introduced by the government.
The government has rolled back import bans, so imports will likely rise as growth picks up – bringing the deficit
closer again to the historical average, we believe.
A historical perspective shows the odds are stacked against Pakistan. Since 1980, the country has achieved a
current account balance that’s better than the target 1.1% of GDP in only 12 years. It needs to increase exports
and attract more remittances to keep the deficit low on a permanent basis.
To be sure, our calculations are sensitive to the assumptions we make, especially on the exchange rate. A weaker
rupee would lower nominal GDP growth in dollar terms. This would necessitate a narrower current account deficit
or a larger surplus to keep dollar debt stable. However, a weaker rupee could also boost the competitiveness of
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Bloomberg News Story
exports and curb demand for imports, making it easier to improve the current account balance.
How We Calculate Debt-Stabilizing Current Account Balance
We use the equations below from a State Bank of Pakistan working paper. They calculate the current account balance
required to keep external debt stable at a specific level. We combine them with our assumptions for long-term
nominal GDP growth, interest rates, foreign investment flows and the exchange rate.
Equations and Assumptions
Source: Bloomberg Economics
(Adds link in the second bullet. The report was first published on June 11. )
To contact the economist on this analysis:
Ankur Shukla (Economist) in Mumbai at ashukla112@[Link]
To contact the editor responsible for this analysis:
Mareen Goebel at mgoebel7@[Link]
This report may not be modified or altered in any way. The BLOOMBERG PROFESSIONAL service and BLOOMBERG Data are owned and distributed locally by Bloomberg Finance LP ("BFLP") and its
subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the ("BFLP Countries"). BFLP is a wholly-owned subsidiary of Bloomberg LP ("BLP"). BLP provides BFLP
with all the global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. BFLP, BLP and their
affiliates do not provide investment advice, and nothing herein shall constitute an offer of financial instruments by BFLP, BLP or their affiliates.
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