Sovereign Default and Economic Recovery: Pakistan’s Vulnerabilities and Lessons from Global Defaults
Keywords:
Default, South Korea, Sri Lanka, Argentina, Economy, Social ImpactsAbstract
Sovereign default is the inability of the government to fulfil its debt obligation and in many cases can have very dire economic, social and political outcomes. This paper explores the effects of sovereign default using Pakistan as a context and examples of Argentina, Greece and South Korea. Pakistan is characterized by continuous fiscal deficits, external debt increase, and low foreign reserves, which predispose it to default. The threat of default might provoke the currency depreciation, inflation, loss of investor confidence, unemployment, poverty, and political instability. The default of Argentina in 2001 resulted in the devaluation of the peso, economic recession and social instability. Debt restructuring, credit negotiations and austerity made recovery but left it fragile because of inflation and dependence on external conditions. The 2012 default of Greece caused by structural deficits and the financial crisis of 2008 left the country in the austerity measures under the supervision of the EU-IMF, a deep recession, joblessness, and social turmoil. Conversely, South Korea has bounced back quickly into its crisis in 1997 with the aid of IMF, financial reforms, institutional restructuring, and export-led growth. The comparative study indicates that default is associated with temporary crises, although recovery can be realized by practicing sound fiscal policies, reforms, and global collaboration. In the case of Pakistan, it is important to work towards minimizing economic vulnerabilities, diversifying the economy to prevent or recycle default by learning internationally.
References
Ahmad, F., & Bashir, T. (2013). Explanatory power of macroeconomic variables as determinants of non-performing loans: Evidence form Pakistan. World Applied Sciences Journal, 22(2), 243-255. https://doi.org/10.5829/idosi.wasj.2013.22.02.1863
Ahmed, J., Kumar, V., & Javed, H. (2022). Default Risk Pricing–An evidence from Pakistan. ILMA Journal of Social Sciences & Economics (IJSSE), 1(3). http://ijsse.ilmauniversity.edu.pk/arc/Vol3/pdf/1.pdf
Atta-Ur-Rahman, & Shaw, R. (2015). Hazard, Vulnerability and Risk: The Pakistan Context. In A.-U. Rahman, A. N. Khan, & R. Shaw (Eds.), Disaster Risk Reduction Approaches in Pakistan (pp. 31–52). Springer Japan. https://doi.org/10.1007/978-4-431-55369-4_2
Chandia, K. E., Iqbal, M. B., & Bahadur, W. (2022). An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: An econometric study. Fulbright Review of Economics and Policy. https://doi.org/10.1108/frep-06-2021-0036
Chaudary, M. S. (2023). Pakistan’s external debt Unsustainability and the required approach. Policy Perspectives, 20(1). https://doi.org/10.13169/polipers.20.1.ra4
Fraz, A., Hassan, A., & Khan, S. (2021). Bank specific and Macroeconomic Determinants of Distance-to-Default; Evidence from listed Banks of Pakistan [Thesis]. Pakistan Institute of Development Economics, Islamabad Pakistan.
George, A. S. (2023). Causes and consequences of Pakistan's economic crisis. Partners Universal International Innovation Journal, 1(5), 1-20. https://doi.org/10.5281/zenodo.8436578
Hamid, Z., & Siddiqui, M. A. (2023). Firm specific and macroeconomic determinants of probability of default: A case of Pakistani non-financial sector. International Journal of Sustainable Development and Planning, 18(2), 557-564. https://doi.org/10.18280/ijsdp.180225
Kashif, M., Iftikhar, S. F., & Iftikhar, K. (2016). Loan growth and bank solvency: Evidence from the Pakistani banking sector. Financial Innovation, 2(1), 22. https://doi.org/10.1186/s40854-016-0043-8
Khalid, W., Khan, S., Zahra, A., & Shah, N. H. (2021). Impact of bank profitability on default risk: Empirical evidence from Pakistan. Journal of Quantitative Methods, 5(2), 1-33. https://doi.org/10.29145/2021/jqm/52/01
Khan, N., Khan, H., Zulfiqar, M., Jan, I., Shafi, M. M., Zad, S., Adnan, M., Hassan, A. U., Muhammad, F., Durani, M., Noor, A., Fahad, S., & Naushad, M. (2023). Analysis of down falling causes of Pakistan economy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4406931
Khan, U. E., & Iqbal, J. (2021). The relationship between default risk and asset pricing: Empirical evidence from Pakistan. The Journal of Asian Finance, Economics and Business (JAFEB), 8(3), 717-729. https://doi.org/10.13106/jafeb.2021.vol8.no3.0717
Kurosaki, T. (2014). Vulnerability of household consumption to floods and droughts in developing countries: Evidence from Pakistan. Environment and Development Economics, 20(2), 209-235. https://doi.org/10.1017/s1355770x14000357
MMS143078, A. Z. (2016). Default Risk and Efficiency Nexus: Evidence from Banking Sector of Pakistan [PhD Thesis, Capital University]. https://thesis.cust.edu.pk/UploadedFiles/ANUM%20ZAHRA-%20MMS143078.pdf
Oxford Analytica. (2023). Pakistan will struggle to mitigate default risk. Emerald Expert Briefings. https://doi.org/10.1108/oxan-db277906
Saeed, M., & Izzeldin, M. (2016). Examining the relationship between default risk and efficiency in Islamic and conventional banks. Journal of Economic Behavior & Organization, 132, 127-154. https://doi.org/10.1016/j.jebo.2014.02.014
Saqib, S. E., Ahmad, M. M., Panezai, S., & Ali, U. (2016). Factors influencing farmers' adoption of agricultural credit as a risk management strategy: The case of Pakistan. International Journal of Disaster Risk Reduction, 17, 67-76. https://doi.org/10.1016/j.ijdrr.2016.03.008
Sial, F., Jafri, J., & Khaliq, A. (2023). Pakistan, China and the structures of debt distress: Resisting Bretton Woods. Development and Change, 54(5), 1226-1263. https://doi.org/10.1111/dech.12798
Younas, Z. I., Siddiqi, M. W., ur Rehman, J., & Mehmood, B. (2011). Does Disclosure Quality Reduce Default Risk? Empirical Evidence from Pakistan. Interdisciplinary Journal of Contemporary Research in Business, 3(1), 170–179.
Zafar, U., JAHANGIR WAHLA, M. S., Murtaza, S. A., Mahmood, A., & Molnár, E. (2022, April). Exploring the role of loan default ratio in the SME sector of Pakistan. In Forum on Economics & Business/Közgazdász Fórum (Vol. 25, No. 2).
