Pakistan may face a financial crisis like Sri Lanka: report

Pakistan may face a financial crisis like Sri Lanka: report

The country’s biggest economic issue today (in immediate terms) is its falling foreign exchange reserves. Nothing else. It must shore up in the next few months to not see a situation like Sri Lanka in Pakistan.

There are two ways to gauge the reserves health – one is to see the import cover – that is to measure how much more the country can sustain without defaults. The other is Net International Reserves (NIR) – it gets the pulse on the quality of reserves and its usability. IMF and other lenders look at these two measures very closely.

In terms of import cover, today the country is barely covering 7-8 weeks of imports on SBP reserves.

The situation was similar in Jun 18 when the country was covering 8-9 weeks of imports, and in June 2013, when the import cover was 7-8 weeks. 2008 was no different. Thus, none of the successive four governments have not inherited a balance of payment crisis kind of situation.

One can argue on the reasons behind the crisis – like in PPP term (FY09-13) oil prices averaged at $92/barrel while in the PMLN term oil prices averaged at $68/barrel.

Thus, the PMLN was lucky and the country wasted earned reserves by not increasing interest rates and keeping currency artificially overvalued.