Temporary Relief Or Lasting Solution? – OpEd
The recent financial operations connected to reverse debts with China, Saudi Arabia (KSA), and the United Arab Emirates (UAE) alongside the Fitch Ratings upgrade of Pakistan’s credit rating to ‘CCC+’, suggest that South Asia is at a new turning point. These development explain the complexity in international finance, layers of power relations involving Middle Eastern nations as well as the perpetual problems that Pakistan is experiencing in its endeavor to reconstruct its economy.
It was revealed in early August 2024 that China, KSA, and the UAE extend $12 bn dept to Pakistan for an additional year by rollover. This move the ongoing bailout talks Pakistan holding with the IMF for the financial help of seven billion dollar for revamping the country’s economy. This rollover of this huge debt is not just a balancing of books; it is part of the geopolitical calculus of these countries to keep their foot in Pakistan and manage a region that is of strategic economic value to them.
The rollover agreement is quite crucial because it takes the pressure off the Pakistan government in terms of shorter-term Financial concerns so that it can opt for the critical social adjustment. The latest rollover, like the previous ones, became a necessity to obtain the approval of the IMF for the bail out package as was pointed out by Finance Minister Muhammad Aurangzeb. These three nations are among Pakistan’s bilateral creditors, to whom the IMF had said that Islamabad must give credible commitments to before moving ahead with the financial help it had promised.
On July 29, 2024, the Fitch Ratings lifted Pakistan’s Long Term Foreign Currency ratings from the current status of CCC to CCC+. This upgrade is an important sign of the enhancement of the country’s economic situation, mainly due to the recent staff-level arrangement with the IMF on a new 37 months EFB arrangement. Having pointed this out, Fitch pointed out that cautious optimism on the sustainability of external financing is important for Pakistan’s economy.
It is not simply a qualitative change from an 8 to a 9: it is a change in the investors’ outlook to the credit-worthiness of Pakistan. This implies that the country is on the process of reducing the fiscal deficits and reconstructing the foreign exchange reserves that are vital in the process of economic transformation. But Fitch pointed out that Pakistan has large funding requirement that makes it highly sensitive if it does not undertake appropriate structural changes.
The link between the two seems to lie in the fact that Pakistan has had to rely on debt rollovers to keep floating its external debt but Fitch recognized this and upgraded the country’s rating. The reforms may place pressure on the government to act in the tax system, the energy sector and state-owned enterprises that have been the major causes of slowdown in the growth of the economy. The IMF program is expected to correct these structural vices, and thus the contingent support from China, KSA, and the UAE.
External financing risk and requirement have also been high features of Pakistan’s economy. External Public debt – At least the country is again faced with over $ 22 billion of external public debt maturities in the coming FY and the major portion of it is with major bilateral partners – china & KSA. This debt is then rolled over to the future and is sustainable in the short-term but does not obviate the necessity to come up with lasting answers.
The move by the three countries to offer Pakistan with financial support is also an issue of strategic importance in the region. These countries have stakes in Pakistan to expand their business and markets but also for geopolitical business. Through the provision of money, they want to ensure that the target country’s conditions become stable in order to develop trade and investment which in turn would benefit the donors.
Secondly, the grants received from these countries bear testimony to their political associations with Pakistan. Again, as Pakistan tries to sail through the economic storms, the political muscle that comes with support from these nations can boost its political might in the region as it tries to appease the west and other international players.
The recent trends of debt rollovers by China, KSA and UAE along with Fitch credit rating widget upgrade of Pakistan’s economy can be termed as the crossroad of economic history of Pakistan. On the one hand, any monetary bail-out is of course appreciated and needed, but on the other, it is high time for Pakistani authorities to use the funding for reformation in order to achieve long-term economic development. The people across the global would be expecting a lot out of Pakistan as it ventures into this journey with an aim of achieving better results out of these measures to help develop a better economy. Centered as it is on the dynamics of global finance, local geopolitics and national industrial policies over the next decade, the Pakistan’s future is set to be its most critical period in economic terms.
