Pakistan’s struggle to service its debt is not just a disaster for the country but also not very good for the rest of the world either, according to Michael Pettis, a senior fellow at the Carnegie Endowment in Washington.
The researcher, who is also a professor of finance at the Guanghua School of Management at Peking University in Beijing, said this in response to Pakistani-American Atif Mian’s tweet on the state of Pakistan’s debt position and its consequences.
1/6
Atif Mian explains Pakistan's debt position and the terrible consequences for the Pakistani economy. I'd add that while struggling to service its debt is a disaster for Pakistan, it's not very good for the rest of the world either. https://t.co/CUdwiWL1u7— Michael Pettis (@michaelxpettis) May 24, 2023
While Mian briefly highlighted that Pakistan was on the verge of collapse, Pettis wrote a small thread of his own and called on creditors to reconsider their policies for the South Asian economy because the debt burden was effectively converting its demand into unwanted global savings. “Instead of recycling them in the form of imports, Pakistan’s export earnings must be recycled in the form of debt repayments,” he suggested.
Pettis argued that suppression may be good for Pakistan’s creditors, but it is bad for those who produce the goods that Pakistan might have imported.
“Pakistan’s struggle to repay debt doesn’t just make its own workers and businesses worse off, in other words, but also workers and businesses abroad,” he wrote, adding that “When a country clearly cannot service its debt, the debt should be quickly restructured and written down. This not only benefits businesses and workers in the debtor nation, but also in the creditor nations. Squeezing an economy to repay debt makes nearly everyone worse off”.
The researcher understood that Pakistan may be a small economy whose contribution to global demand is little, but as a rising number of developing countries find themselves struggling to service their external debts, they become an increasingly large drag on the economies across the world.
“Rather than worry about which creditors are coming out ahead of which other creditors, creditor nations should move more quickly to write down the debts owed to them. This automatically benefits their real economies, even if it hurts their financial sectors,” he concluded.
Speculators on the professor’s thread mostly suggested that a default was imminent for Pakistan. They opined that given the country’s issues, lenders are unwilling to invest which could aggravate the situation even more.
