ISLAMABAD: The economic affairs ministry in a comparison on economic front stated that Pakistan’s debt servicing is relatively lower than Sri Lanka and overall policies would likely prevent it from facing default.
It shared a paper titled “Is Pakistan Closer to Sri Lanka? A Comparative Analysis.” The paper concluded: “It can be said that Sri Lanka’s heavy reliance on the tourism industry and then the tourism sector’s collapse, devastated the foreign earnings of the economy. Political expediency compelled politicians to take unwise economic and policy decisions whose cost is now being paid by the entire nation. To show smooth running of government affairs, they continued to borrow from the market at high-interest rates which ultimately made it default on its debts.”
“In the case of Pakistan, the borrowing from multilateral and bilateral sources (i.e. concessionary loans) keeps its debt servicing relatively lower than that of Sri Lanka,” it stated.
“Furthermore, Pakistan’s strategy to handle the pandemic crisis, better level of foreign exchange earnings and reforming the economy under the IMF programme will most likely prevent it from going into default.
“Moreover, Pakistan’s strong economic relations with China, UAE, and Saudi Arabia have always provided a cushion during hard times. However, the global as well as regional dynamics have significantly been changed, it is high time we changed our thinking and policy making approaches from assistance seeking to self-sustained economy for a better future,” it stated.
“There were some policy mistakes to save the political face of the Sri Lankan ruling party that intensified the economic issues. Given the pandemic, the government of Sri Lanka introduced tax exemptions in 2019 which reduced the government revenue by USD 1.4 billion. On the other hand, the decline in foreign earnings through reduced tourism created foreign currency shortages which led to the ban on imports of expensive chemical fertilisers and the promotion of organic farming using locally produced fertilisers in April, 2020. Consequently, the government faced shortage of domestic and foreign resources which discouraged investment and production of commodity-producing sectors, causing a decline in growth of all sectors in FY2020.
“In contrast, Pakistan tried to contain the impact of the pandemic by launching many livelihood incentives as well as generating economic activities. The most significant initiative was the provision of a stimulus package of Rs1.2 trillion that includes direct financial assistance of Rs200 billion for the vulnerable, electricity bill payments, deferment of rents and installments at all banks level, and lowering the policy rate to 8 percent, etc.
“The fiscal policy of a country plays a crucial role in macroeconomic stabilisation. The recent global challenges such as the pandemic, and the ongoing Ukraine-Russia war added to the domestic challenges. The economies of Pakistan and Sri Lanka are battling with such emerging global and domestic issues which immediately affect the fiscal space available to the government. However, while comparing the factual fiscal position of both the countries, it is obvious that Pakistan’s tax collection and the budget deficit are far better than those of Sri Lanka. “Moreover, in the case of Sri Lanka, the impact of the tax-cuts policy is evident in 2020 which reduced the tax to GDP ratio from 11.6% in 2019 to 8.1% in 2020 and widened the budget deficit.
“Similarly, the total government debt to GDP of Sri Lanka has witnessed a jump from 86.8% (2019) to 105% (2021) within two years indicating the severity of fiscal challenges that the country faced. Though Pakistan has also kept on borrowing, its macroeconomic imbalances have been in control being a relatively large country with a better-performing real sector.
“Remittances and tourism are the two largest sources of foreign exchange earnings for the Sri Lankan economy after exports. The reliance of the Sri Lankan economy on tourism has made the country vulnerable in the external and real sectors by squeezing the aggregate demand. After excluding exports, the remittances and tourists’ income constitute a significant role in providing foreign earnings contributing 57% and 31% to total external inflows in 2019. However, due to terrorist attacks in 2019 and a global pandemic in 2020, foreign exchange earnings from tourism have substantially declined which has a severe impact on Sri Lanka’s balance of payments. Likewise, the remittances received through official channels which cover 80% of the annual trade deficit of Sri Lanka have also dropped significantly due to exchange rate pegging with the Middle Eastern exchange houses. It is observed that the country experienced an overall 29% decrease in the foreign earnings in 2021 when compared to those of 2019 with an 86% decline in tourism earnings and an 18% decline in the remittances in 2021 (CBS, 2022). Consequently, the shortage of foreign earnings has aggravated the external sector and debt-servicing problems.
“On the other side, by excluding exports, remittances provide 82% of the foreign earnings to Pakistan. The country received one of the highest remittances inflows during Covid-19 period defying all predictions (World Bank, 2021). Furthermore, a 26% increase in 2021’s foreign earnings was observed as compared to those in 2019 with a 35% increase in remittances and a 10% increase in FDI in 2021 (SBP, 2022).
At a glance, the international trade profile of Sri Lanka resembles that of Pakistan as the trade deficit of both countries is at worrisome levels. Similarly, the direction of imports of both countries highlights the crucial need and consumption of fuel. Since, there is no alternative to cutting down fuel imports, at least in the short-run, it is prudent for Pakistan to abolish subsidies on fuel to save the country from default. Pakistan recently opted for this policy and ended the fuel subsidy to reduce the fiscal burden.
“The government of Sri Lanka continued to borrow from external sources for the last two decades without generating sufficient revenues at home. Since the civil war ended in 2009, the country started excessive borrowing through market-based instruments and commercial loans which are expensive forms of borrowings with five to 10 years long maturity. Recently, the borrowing through sovereign bonds and commercial banks by Sri Lanka reached approximately 55 percent of the total external debt. The debt servicing also rose, making it difficult for the government to repay its loan.
“In the case of Pakistan, two-thirds of total external public debt is concessional, obtained from multilateral and bilateral sources, having an average maturity of 25 years. As of FY22, approximately, 10% of total external public debt has been acquired through Eurobonds/Sukuk and 9% through commercial banks. The average maturity of international bonds is 20 years whereas commercial banks’ instruments’ maturity is one to three years.”
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