With the country’s economy going through what can be termed its worst phase ever, and with the lifesaver of the International Monetary Fund (IMF) programme looking increasingly out of reach, some people began to advocate that real solution to Pakistan’s economic woes lay in choosing the route of default. Even some politicians began to propose that this would, somehow, miraculously, put Pakistan on its feet. But those who think a default is not such a big deal should think again.

An event like a sovereign default, and its attendant breakdown of the economy’s critical life support systems, leaves consequences that are felt almost a decade down the road. A recent study looked at 131 instances of default since the year 1900, and found that poverty headcount rises by 30 percent, infant mortality rises by 13 percent per year, life expectancy for those infants who survive falls, and access to nutrition, energy and health falls sharply. Standards of living can take more than a decade to recover.

Take a few examples from our own past, when parts of the system broke down, even if for brief periods, and extrapolate out from there and you will begin to get a sense of what a “default” might actually look like.

At different periods, the power, fuel, financial and communications systems have broken down — sometimes for brief periods, other times for days on end. Each such episode provides a trailer of what a generalised, system-wide breakdown might play out.

What is commonly being called “default” in the country is basically a situation where the foreign currency reserves of the country deplete to a point where the critical life support systems of the economy start shutting down.

A number of voices have been claiming that Pakistan defaulting would not be as bad as is being made out by the doom-and-gloom brigade and have even advocated it as a panacea, somehow, to the country’s mounting economic woes. What does default really mean? And what would it actually look like? Recent scenarios in Lebanon, Sri Lanka and Zambia give us a glimpse of what we could expect…

In a strict, technical sense, the word “default refers to an event when a ruler or a country is unable to make payment on a debt service obligation when it falls due. But more broadly, the word is being used these days to refer to a situation where the foreign exchange reserves of the country deplete to the point where import payments cannot be made, where international banks refuse to enter correspondent banking relationships with Pakistani banks to process cross-border payments, and where the disconnection from the global market leads to crippling shortages of essential items such as fuel, food and medicines.

Three of these life support systems are especially important: energy, food and the financial system. Once these begin to shut down, the consequences cascade outwards to touch all other areas of normal day to day life.

The ramifications of a default

Imagine a scenario where fuel pumps are dry for most days of the week, grid power is only available for a few hours of the day, food prices have skyrocketed by multiples due to paucity of trucks plying the road and you begin to get an idea what a generalised balance of payments crisis — what many are calling “default” — actually looks like.

Remember the nationwide power shutdown in January earlier this year? Less than 13 hours into that event, mobile towers around the country had begun to run out of back-up power and were shutting down. As mobile networks went down, so did ATM machines and point-of-sale machines for card payments, since they rely on cellular networks to communicate.

According to Cloudfare, the country’s internet traffic fell to less than half its normal level for 24 hours, starting early morning on January 23, thereby impacting all businesses that rely on the internet. Now stretch that scenario out for five days. What happens if power goes out for a week? Or two weeks?

In the petrol crisis of 2015, it took about 24 hours for emergency services to shut down as ambulances and police vehicles ran out of fuel. The larger vehicular fleet of the city of Lahore was largely stranded within 48 hours, since most automobiles are not fuelled up enough to last beyond that. If fuel shortages extend to diesel as well, the country’s trucking fleet will be increasingly unable to move. Food arrivals in all major cities of Pakistan rely on trucks that carry this crucial cargo for urban consumers.

Karachi, for example, barely has six to seven days of perishable foods in its inventory on any given day, and estimates of the number of trucks that bring food into the city on a daily basis range from the hundreds to the thousands. What happens if the fleet that ferries these supplies is degraded because of a lack of availability of fuel? Thus far, we have not had a diesel crisis in the country, except perhaps a short one in the early pandemic days, when the fuel supply chain was severely disrupted due to the lockdown. But even then, it did not last long enough to impact food availability in the cities.

Imagine a scenario where fuel pumps are dry for most days of the week, grid power is only available for a few hours of the day, food prices have skyrocketed by multiples due to paucity of trucks plying the road and you begin to get an idea what a generalised balance of payments crisis — what many are calling “default” — actually looks like

Power breakdowns can hit the payments and communication systems in less than 24 hours. Fuel supply breakdowns can hit food movement as well as emergency law enforcement and rescue services, within the same span of time. In densely populated cities, the combined impact of a food price spiral and breakdown of law enforcement can potentially lead to looting and, should the situation persist, even food riots.

This is an extreme scenario, and the likelihood that things will deteriorate this far is small, for now. But simply the fact that such a scenario is now a possibility, however remote, is cause enough for deep concern and provides no room for complacency.

 Minister of Finance Ishaq Dar (second from the right) attending the IMF Managing Director’s meeting in Washington DC, US, on October 16, 2022 | Finance Ministry
Minister of Finance Ishaq Dar (second from the right) attending the IMF Managing Director’s meeting in Washington DC, US, on October 16, 2022 | Finance Ministry

Sri Lanka fell into such a situation in the opening months of 2022. But Sri Lanka has one tenth the population of Pakistan, near universal literacy and primary and secondary school enrollment rates, and nearly twice the internet penetration rate. This made it easier for them to manage the fallout of the devastating systemic pressures created by the default.

For example, when hit by fuel shortages, they rolled out the “National Fuel Pass” scheme that required users to enter their identity number and chassis number of their vehicle. Once registered, the app allowed the user to purchase a weekly quota of fuel through a QR code. This ensured that hoarding would not take place and the limited quantity of the country’s fuel stocks were available to everybody in controlled quantities.

As the situation improved, they increased the weekly quota steadily until February of this year, when they phased the system out altogether. The scheme ensured that the burden of fuel shortages was shared equally by all vehicle owners.

Such schemes have had limited success in Pakistan. The government has databases that can be used to target assistance to specific households and has used them with reasonable effectiveness in the aftermath of natural disasters, especially floods. But fuel shortages are a different matter.

The vast majority of pumps in the country are dealer-owned and getting them to comply with government directives can be very difficult, beyond the price. This is one important reason why the government’s own attempt to introduce a subsidised fuel scheme for two-wheelers never took off.

In Pakistan, we have seen glimpses of what this sort of a situation can be like. The freezing of the foreign currency accounts in 1998, the freezing of the stock market and near run on the banks in 2008, the load-shedding crisis in the run up to the elections in 2013, and the so-called “petrol crisis” of 2015 were all precursors of what a comprehensive balance of payments crisis looks like

Electricity is also very difficult to ration in this way. Already the country has been running a “recovery-based load-shedding” regime for many years, which basically ensures the wealthier neighbourhoods have priority access to the scarce electricity in our system, mainly because it is the wealthy neighbourhoods from where the distribution companies get the highest bill recoveries.

Lessons from Lebanon

In Lebanon, for example, the state-owned power company could manage only one to three hours of power supply per day to most areas, following crippling foreign exchange shortages that shut down its power system in July 2021. It prompted a searing report from Human Rights Watch (HRW) which said access to electricity should now be considered a basic human right.

“Electricity in Lebanon has effectively become a service only the wealthiest can afford,” the HRW report, released in March of 2023, noted. The rest of the country made do with diesel generators, with fuel purchased from the black market, or they learned to adapt to a life largely without electricity.

“We found that the average household had generator bills that accounted for 44 percent of monthly income,” HRW states in its report. For the poorest households in their survey sample, this was as high as 88 percent, while the wealthiest were paying 21 percent of their monthly income to keep their generators running.

Meanwhile, inflation skyrocketed through the year 2022, further burdening household budgets. In 2021, when the crisis in Lebanon began — it hit its peak in early 2022 — inflation had already soared by 145 percent, and the currency value was halved. Imagine the dollar and petrol at 600 rupees today to get an idea what that year was like for that country.

And that was before the peak. For decades, Lebanon had pegged its pound to the dollar at a rate of 1500. But as the crisis dragged on during 2021, black markets in foreign exchange appeared and foreign currency disappeared from the open market. News reports from that time said the dollar was being sold for 3000 pounds, sometimes more.

 A balance of payments crisis would lead to the freezing of the stock market | White Star
A balance of payments crisis would lead to the freezing of the stock market | White Star

Then in late January 2022, in an effort to secure an IMF agreement, they let the currency go and, in one week, the pound plummeted to 15,000 to a dollar. Imagine the dollar going to 600 rupees in one week and you’ll get a sense of what the Lebanese endured.

In April 2022, Lebanon reached a Staff Level Agreement for an IMF bailout but, to this day, that country has not been able to complete the conditions required to activate the programme. By March of this year, the dollar had reached 100,000 Lebanese Pounds.

Lebanon may be an extreme case. It defaulted back in 2020, yet limped along for a few more months before its energy supply chain broke. It limped without power for a few more months before its currency collapsed. Then it limped a few more months before its banking system caved and local currency withdrawals from banks were halted. That happened earlier this year, and triggered widespread riots and attacks on banks, ATM machines, and violent protests, where mobs tried to advance on government buildings in the capital before they were dispersed by riot police.

Lebanon has a total population of six million. Its economic crisis may be more intense than what many countries, even those in the throes of default, have experienced. But its job of managing the fallout is also simpler by comparison to a country like Pakistan, with a population of 220 million and massive urban centres whose population can be as high as 20 million.

Power shutdowns cascade through society the same way fuel shortages do. Without power, hospitals cut back on surgeries, to take one example. In the last prolonged power outage in Pakistan, back in January, water distribution in the city of Karachi shut down within 24 hours, as the water board could not operate its pumps. Many filling stations for tankers also shut down since they too rely on pumps, and back-up generators ran out of fuel after a few hours of operation. And those homes that had water in their underground tanks could not pump it up to their rooftop tanks without using a generator.

Envisioning a Pakistani default

So what would a default look like in Pakistan?

The country barely carries enough inventory of fuel for 14 days, whereas a default brings crippling shortages for years. So, imagine your car fuel light is on and you know it is good to go for another 20 kilometres at best. Your rooftop water tank has enough water for maybe two days. Your generator has been running for 12 hours and you are not sure whether it has enough fuel to last through the night. Gas is off in your house because the utility’s compressors cannot operate.

You call every tanker owner whose number you have saved in your phone, and one by one they all tell you they have nothing to deliver, that they are standing in line at the pumping station, waiting for power to return, or fuel to arrive for the back-up generator.

You now need to arrange for an LPG cylinder so your stove can work. After that you need fuel for the car, since that will be your conveyance to fetch the essentials you need to arrange. Then you need fuel for the generator so you can run your fridge and water motor. After that you need to find a water tanker.

For all this you will need cash and, since cards are no longer working, you need to go to the bank branch to make the withdrawal. Which of these tasks will you prioritise? Let’s assume you go to the bank first, since without cash it will be hard to procure any of these essentials. At the branch, you find hundreds of people gathered to make withdrawals, since ATMs handle more than two million transactions per day across the country, and now that entire load has fallen on to the branches to process.

It takes you two hours to get to the teller and they tell you cash is being rationed since the branch has not been replenished. The reason is obvious: the banks’ fleet of cash vans is barely operational, given fuel shortages, and demand for cash at the branches is skyrocketing. You withdraw whatever you can and push and shove your way out of the branch back to your car.

Instinctively you reach for your phone to message home about the situation, only to find there is no signal in the area. Mobile signal coverage is patchy and sporadic, and you have to keep an eye on the phone while you drive, to see if you pass by an area where there is coverage, so you can pull over and make a quick call.

You notice a number of cars parked by the side of the road a little way ahead and, as you drive by, you notice the occupants are all busy on their phones. This spot has coverage you realise and you pull over and join them to send a quick message home. That’s when you realise folks at home will likely not have signals either.

You get to the fuel station and find a line almost half a kilometre long, with throngs of motorbikes trying to push past each at the head, and a large crowd of men holding jerry cans scuffling around the pump. Now begins your second two hour wait.

People step out of the car, since nobody wants to keep the engine running while they wait, and the scorching heat is too much to take inside the car. While you mill around, those ahead of you in line tell you they fear the pump could run out of fuel soon, or its back-up generator could fail at any point, which means they won’t be able to pump any fuel into any more cars. Some in the line decide to give up and try again later. You decide to wait since your fuel light is on, your generator is running on fumes, and you still have the water and LPG errands to run.

At the pump, the attendant tells you they’re only selling 10 litres per car because, if they don’t, those in the back of the line are likely to get violent if there is nothing left for them by the time their turn arrives. You take what you can get. Ten litres should be enough for the day, so you take 10 for the car and 10 for the generator after persuading the attendant that these are two separate sales.

Then you head out to the water pumping station in the hopes of finding a tanker. There too you find a large mob, cars backed up a long way and people walking towards where the tankers are parked. Only a few drivers have a tanker full of water, while the others are waiting for the pumps to come back into action.

These drivers are surrounded by a crowd, with each individual trying to outbid the other for the water and scuffles breaking out among them. Still, somehow, you manage to get a tanker and decide to escort it home to ensure you get the full delivery. Once you reach home, the tanker offloads its water into your underground tank, while you arrange to have the jerry can with 10 litres of fuel emptied into your generator.

Once this is done, you pay off the tanker driver and head out looking for LPG, where the same story repeats itself one more time. By the time you are finished, you are exhausted, caked in dried sweat and you realise most of the funds you withdrew from the bank earlier in the day are gone. When you get home you sit in front of the TV and learn that dollars have vanished from the open market and reports are coming in that they are selling for as high as 3,000 rupees in the black market.

The box of cereal that you used to buy for Rs 1,200 at the supermarket now carries a price tag of Rs 12,000. “This is the morning price, sir,” the attendant tells you when you ask whether this might be a mistake. “By the evening it will rise even further.”

The shortages will not hit all localities evenly. One trend being noticed even today is that some essential food items, such as wheat, are being diverted to elite localities, because consumers there are more price insensitive and willing to pay whatever is being asked.

In poorer, working class areas, sporadic reports have already emerged of scuffles breaking out at stores where the shopkeeper refuses to sell at the government controlled price, telling customers he has no more wheat in stock, when everybody knows he received a bulk delivery only that morning. He prefers to sell his wares to the more well-off customers, who are willing to pay higher than the controlled price.

At some point through this, strong rumours begin to circulate of an impending freeze on withdrawals from dollar accounts. You can’t withdraw anyway because the bank keeps telling you to come the next day. “We are out at the moment,” is the response you receive every time. At a later point, maybe a fortnight into the whole affair, strong rumours emerge of an impending freeze on lockers as well, since the government suspects people are hoarding cash dollars in them.

Nowhere left to run

This is exactly how it worked in Sri Lanka, Lebanon and Zambia, when those countries defaulted and ran out of foreign exchange reserves. In Pakistan, it could be a fortnight before the resultant shortages will reach these crippling levels. But bear in mind that, in each of these three countries, this situation persisted for at least one year while they negotiated debt restructuring deals with their creditors in order to pave the way for an IMF programme, which is their only way out.

In Pakistan, we have seen glimpses of what this sort of a situation can be like. The freezing of the foreign currency accounts in 1998, the freezing of the stock market and near run on the banks in 2008, the load-shedding crisis in the run up to the elections in 2013, and the so-called “petrol crisis” of 2015 were all precursors of what a comprehensive balance of payments crisis looks like.

Put all of those together, and you have an idea of what default, of the sort Sri Lanka, Lebanon or Zambia (to name only three examples) have just seen.

Neither of these countries is as populous as Pakistan. None has social cleavages quite like Pakistan does, although Lebanon is no stranger to conflict. They certainly don’t have densely packed urban metropolises like Karachi or Lahore, and their debt profile is nowhere near as large and as complex as Pakistan’s is.

At the moment this article is being written, news is filtering in that Pakistan may yet clinch a deal with the IMF. If this happens, the likelihood of default will be pushed forward perhaps by a year. But there is little doubt that in the months ahead, Pakistan will need to enter another fund programme to take the steps required to avert default for the longer term.

If the programme does not come through, and the shortages around the country today start impacting the critical life support systems of the economy, Pakistan could find itself in the sort of situation described in the article by October or November, given the present state of the foreign currency reserves and the debt repayments looming in the months ahead.

It would be better to not find out firsthand what default actually looks like.

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