Pakistan’s debt crisis

This is an audio transcript of the FT News Briefing podcast episode: ‘Pakistan’s debt crisis’

Marc Filippino
Good morning from the Financial Times. Today is Friday, January 13th, and this is your FT News Briefing.

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US inflation continued to cool down. A Swedish company says it’s discovered Europe’s largest deposit of rare earth metals, and Pakistan is still struggling with a severe economic and financial crisis.

Farhan Bokhari
Anyone that you talk to on the streets and their No 1 concern right now is not Pakistan’s very divisive politics, but it’s the future of the economy.

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Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day. 

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US markets crept up a little higher yesterday after the latest US inflation report came out. It, as expected, showed another slowdown in the inflation rate. Annual consumer price growth in December was six and a half per cent. That’s down from the previous month. This eases pressure on the Federal Reserve, but the Fed will likely continue raising rates. Here’s our US economics editor, Colby Smith.

Colby Smith
What we have to recognise and acknowledge is that inflation is coming from a very high base. So even if we’re seeing some improvements on a month-to-month basis, we’re still at a level that the Fed considers far too high.

Marc Filippino
So, Colby, the Federal Reserve is gonna meet again in a few weeks to set interest rates. What do you think might happen there?

Colby Smith
What I think they’re gonna do come the February meeting is step down the pace of interest rate increases yet again. So back in December, they moved from a string of four 75-basis point interest rate increases and downshifted to a half a percentage point rate rise. Now, it looks to be the case that they’re gonna step back to a quarter-point increase as they try to assess how much further to squeeze the economy.

Marc Filippino
And a few Fed officials said explicitly this past week that they support a quarter-point rate rise, but that . . . this doesn’t mean that the Fed is gonna go soft on inflation. Right, Colby?

Colby Smith
Yeah, that’s the message we hear from all Fed officials, really. They are not near done yet in terms of squeezing the economy. Most officials are still targeting the fed funds rate, eclipsing 5 per cent. That suggests that there’s still several more interest rate increases to come. The message here is a slower pace does not mean less commitment to fighting inflation. And it also doesn’t mean that the Fed is any closer to cutting interest rates, which markets currently predict they will do twice at the end of the year. What Fed officials have said is that they’re gonna keep rates elevated at least through the end of 2023.

Marc Filippino
Colby Smith is the FT’s US economics editor.

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Pakistan is facing, quote, “perhaps the greatest economic challenge the country has ever seen”. That’s according to one expert who spoke to the FT. Global inflation, fallout from the war in Ukraine and horrific flooding have sapped Pakistan’s finances. And this huge south Asian country could default on its foreign debt.

Farhan Bokhari
This whole environment has fuelled anxieties at the popular kind of level.

Marc Filippino
That’s our correspondent in Islamabad, Farhan Bokhari.

Farhan Bokhari
Anyone that you talk to on the streets and their No 1 concern right now is not Pakistan’s very divisive politics, but it’s the future of the economy. I was at a pharmacy about a week ago and a lady walked in and she wanted to buy her stock of daily medicines for the next one year. And, you know, the pharmacist was a bit surprised but she kept on insisting that she wanted to buy a stock for the year because, who knows, the medicines may just vanish. And then there’s also a lot of interest in the closure of certain industry. Toyota car manufacturers in Pakistan have shut down their plant because they can’t import parts to fit in locally assembled cars. Massey Ferguson, produced by a company called Millat Tractors, last week they shut down their plant indefinitely because they can’t import parts for Massey Ferguson tractors in Pakistan. And a lot of this is happening due to the ongoing, for want of a better word really, financial stress all across Pakistan.

Marc Filippino
That’s the FT’s Farhan Bokhari in Islamabad. For a global perspective on Pakistan’s debt crisis, I’m joined now by the FT’s emerging markets correspondent, Jonathan Wheatley. Hi, Jonathan.

Jonathan Wheatley
Hi there. Very happy to join you.

Marc Filippino
Now, how bad is Pakistan’s crisis compared to other countries facing similar economic crises and foreign debt pressures?

Jonathan Wheatley
Well, the one that Pakistan is facing is bad, as I’m sure Farhan has explained. They are running out of reserves and they need to do something pretty urgently to get themselves on to a sustainable path. It’s worth saying that we are not going into the kind of classic emerging market debt crisis where big emerging markets like Mexico and Brazil and South Africa, those big economies are pretty well protected from the kind of thing that knocked them over in the 1980s and 1990s. But what we are seeing now is a broad and widespread debt crisis among the poorer developing countries.

Marc Filippino
And what happens if Pakistan does default?

Jonathan Wheatley
Well, the worst of the consequences are for the people of Pakistan. We’ve seen Farhan has described the kind of hardships the people are facing. We saw what happened in Sri Lanka when, you know, just people were running out of the basic stuff that you need to lead your daily life. When a country that is reliable on imports runs out of foreign currency, it just stops importing and people run out of things that they badly need. So that’s really bad. And the other thing that happens is that the creditors don’t get paid. Now, we don’t need to have too much sympathy for investors that buy bonds and so on. They know the risks that they’re taking. Maybe we could have a bit more sympathy for the taxpayers of official lenders, bilateral lenders, other governments that lend to countries. China is a huge, it is the biggest bilateral lender of all. And in China, for example, there’s a lot of unease among the population that the government might bail out countries that can no longer afford to pay the huge multibillion-dollar debts to China at the expense of Chinese taxpayers.

Marc Filippino
And this raises the question really of whether Pakistan will be able to negotiate agreements with its lender, whether it be China or the IMF.

Jonathan Wheatley
Well, that is the big question. But as you say, there is an awful lot of fires for people like the IMF and the World Bank to put out. We’ve had, you know, back-to-back crises with the pandemic and Russia’s war in Ukraine, plus the preceding years of low growth and emerging markets looking around for a driver of growth. So countries were already building up too much debt, which they were having trouble paying a few years ago. Now it’s just, you know, they have this multiple crises and things have got much, much worse. But an awful lot of work is needed both on the creditor and debtor side to sort this out. And hopefully there’ll be a sense of urgency for Pakistan.

Marc Filippino
That’s the emerging markets correspondent, Jonathan Wheatley. Thanks, Jonathan.

Jonathan Wheatley
Thank you very much.

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Marc Filippino
Sweden’s state-owned mining company LKAB said it discovered Europe’s largest deposit of rare earth minerals. It’s north of the Arctic Circle in the Swedish province of Lapland. The company says it contains more than 1mn tonnes of rare earth oxides, but it’ll take several years to establish what the deposit contains. And then there’s the challenge of extracting and processing the minerals. So the discovery is a boost to Europe’s hopes of reducing its reliance on raw material imports.

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Before we let you go, here’s another reminder of a special offer for News Briefing listeners. Half off an annual subscription to FT.com. For a limited time, you can get a year of FT.com for only $187. You can sign up at ft.com/briefingsale. We’ll have the link in our show notes.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. 

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The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. With help this week from Eli Meixler, David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music.

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