Default is a choice: inside Pakistan's $26 billion debt squeeze

The $26 billion number, and what it is a fraction of

The episode opens with Muzamil framing the question almost everyone in Pakistan is asking in some form: is the country on the edge of default, are the independent power producers bleeding the books dry, and is there a realistic way out that does not depend on a politician’s speech. He introduces his guest as Ahmed Jamal Pirzada — senior lecturer in economics at the University of Bristol, formerly at Queen Mary, formerly at the Planning Commission of Pakistan, with a PhD in monetary economics — and asks him to paint the picture.

Pirzada starts with one number, and then makes that number do a lot of work. Over the next twelve months Pakistan has to service roughly twenty-six billion dollars of external debt. That figure, on its own, sounds abstract. He puts it against the only meaningful denominator: the country’s dollar income from exports and remittances. “That’s around 26 billion dollars,” he says, “and 26 billion dollars, this is around 35 to 40 percent of your dollar income — which in Pakistan’s case is mostly exports and remittances. This is actually one of the highest in the world.”

The comparison set, he adds, is not flattering. The only economies with a higher ratio are a handful of very small African or island economies that most people cannot name. Among major economies, Pakistan stands out. And this is not a one-off bad year. The number has floated between twenty and twenty-five billion for the better part of two years, has now peaked, and is the central constraint around which every other policy decision has to bend.

Rollover, and the polite fiction that has run out

Muzamil pushes on what a rollover actually means in practice. If half of the twenty-six billion is rolled over by friendly countries, is the country effectively only on the hook for the other half this year? Pirzada is careful here. The headline number that gets serviced does come down. Reserves go up. But the underlying liability has not gone away. It has been pushed by one year, maybe two, and the same conversation will have to be had again.

The deeper problem, he argues, is the story Pakistan has been telling itself about that rollover. For two years ministers have implicitly briefed that this can just keep going — that friendly countries will roll the debt every year because nobody wants Pakistan to default. “That’s very wishful thinking,” Pirzada says. “Because you have to explain how will it go away.” He notes that the current finance minister has now publicly stated that the kicking-the-can-down-the-road phase is over. Pakistan got a small breathing-space last year — partly because remittances were up, partly because India’s food-export ban gave Pakistan an unexpected couple of billion dollars of room — but, he is direct, “that’s only luck. You don’t make policy based on getting lucky every single time when you think about the future.”

Default is a choice, not an accident

The line that sits at the centre of the conversation is one Pirzada returns to several times: default is a choice. He frames it the way an economist does, not the way a politician does. “Default is a choice,” he says. “If you want to, don’t default. You can cut your food spending. You can cut your education spending. You can cut your other activities. You can stop paying your salaries. Then you’ll have enough income to maybe service part of your debt.”

He is not being cynical. He is pointing out that the country always has the option to service its external obligations if it is willing to compress everything else hard enough. The interesting question is not whether default is technically avoidable. It is whether the cost of avoiding it is worse than the cost of the default itself.

This is where Muzamil and Pirzada do some of their best back-and-forth. Both routes are costly. Choking the economy through tight monetary policy and a forced current-account surplus produces what Pirzada bluntly describes as conditions in which “people are killing each other on the street, or killing themselves, committing suicides.” Default produces a different set of costs — a loss of market access, a harder IMF conversation, a re-rated currency. The job of the economist, he says, is not to call one of them morally superior. It is to compare them honestly. “It’s a very economic question. Which of the two options is better?”

Why Pakistan does not get the Sri Lanka treatment

Muzamil asks whether Pakistan could not simply follow the path that Sri Lanka and Zambia walked — go to the IMF, restructure the external debt, take the hit, and reset. Pirzada explains why that route is narrower than people assume.

The cleaner restructurings that Sri Lanka and Zambia got were available partly because those countries fell into the low-income category. Pakistan does not. That changes what is on the table. In a Pakistan restructuring, the conversation is unlikely to be confined to external debt alone — domestic debt would almost certainly have to be touched as well, with all the political and banking-sector damage that implies. There is, Pirzada says, “a lot of uncertainty there.” He does not pretend otherwise.

The realistic best case he describes is not a default at all. It is a maturity-extension deal in which the annual external payment requirement comes down from roughly twenty-six billion dollars to somewhere closer to twelve or fifteen billion. That is still a high number. But it is a number that an economy growing modestly, with disciplined fiscal and monetary policy, can plausibly service. Anything short of that and the country is back to choking imports and praying.

Inflation, the exchange rate, and why printing money is not a free trick

Muzamil puts on what he jokingly calls his tinfoil hat and asks whether the United States, with its own debt pile, is not in a similar bind — and whether Pakistan could not just inflate its way out by quietly running higher inflation than its trading partners.

Pirzada walks through the mechanics patiently. If Pakistan runs ten percent inflation and the US runs two or three, the depreciation pressure on the rupee does not disappear — it accumulates. The exchange rate has to move to compensate. You cannot inflate away the obligation without producing a currency adjustment that reimposes the cost on importers and consumers. “Exchange rate depreciation pressures,” he says, “they persist for a good reason.”

He extends the logic to the US case as well. If the US prints aggressively and the dollar depreciates, that helps US export competitiveness only in the short run. Over time, prices in the US adjust upward, the real exchange rate snaps back, and the competitive boost is gone. There is no version of this where money printing is a clean substitute for productivity.

Currency policy: pick a side and own it

One of the more practical exchanges in the conversation is about how Pakistan should manage its exchange rate. Muzamil asks whether it would be smarter to let the rupee depreciate more freely rather than administratively choking imports. Pirzada gives a direct answer. If he had to pick, he would keep the currency systematically a little undervalued — a deliberate policy choice — rather than allow it to float to a level that overvalues the rupee and then defend that level by squeezing imports through quotas and letters of credit.

The advantage of a mildly undervalued currency, he argues, is that it does the import-suppression work through the price mechanism rather than through administrative rationing. It also gives exporters a stable competitiveness signal. The disadvantage is that it requires the central bank to actually run that policy — to absorb dollar inflows when they come, build reserves, and not pretend that the resulting exchange rate is purely market-determined. What Pakistan has been doing, he suggests, is the worst of both worlds: pretending the rate is market-set while administratively choking the demand side.

Productivity is the only real exit

When Muzamil presses on the long-run picture, the conversation moves from balance-sheet arithmetic to what actually has to change. Pirzada is careful to distinguish two things that get conflated in Pakistani policy debates. One is policy continuity, which he thinks Pakistan has had plenty of — the same protectionist, rent-seeker-friendly model has run for decades across governments. The other is policy direction, which is where the problem sits.

He uses the textile worker as an anchor. A worker stitches a certain number of garments per day. How many they stitch is partly about how well the factory is managed, partly about the capital equipment they are using, partly about the upstream supply of inputs. Raise that productivity and you can raise wages without raising prices — which is the only sustainable way out of a perpetual external-balance crisis. Lower it, or freeze it, and every wage increase has to come out of someone else’s pocket, usually through inflation.

The point Muzamil draws out, and Pirzada agrees with, is that this is the conversation Pakistan keeps not having. The country argues about subsidies and tariffs and IMF tranches. It does not argue, with any seriousness, about why output per worker is not rising.

The rent-seekers, and the part of reform that ends governments

The hardest section of the conversation is about who has to lose for reform to work. Pirzada points out that the resources currently locked up in protected, rent-seeking sectors are not just sitting idle — they belong to specific people, with specific political relationships, who will not move them voluntarily. Shifting capital and labour out of a protected sugar industry or an overbuilt assembly operation and into something that can compete on world markets is, in his framing, “not that straightforward.”

He references industrial-policy history. Countries that tried to force this transition too quickly often destroyed themselves doing it, because the people at the top did not want to give up. Muzamil counters with what he calls the inevitability of change — that change is often deadly, that it kills governments, but that the alternative of not changing is also a slow-motion version of the same outcome. Pirzada does not disagree. He simply notes that whichever route is taken, somebody has to absorb the cost, and the political system has to be honest about who that is.

He also recommends a book on camera — a recent volume on development pathways that compares India, Bangladesh, and Pakistan. He has only read the first three chapters, he says, but the framing is useful: three countries that started in similar places, took different institutional paths, and ended up in very different macroeconomic positions. The implication, which neither of them needs to spell out, is that Pakistan has been on the wrong path for long enough that the cost of changing it is now extremely high — and the cost of not changing it is higher still.

Three scenarios, no clean answers

By the end of the conversation, Muzamil asks the question listeners actually want answered: where does this go. Pirzada refuses to predict and instead sketches three scenarios.

The first is chaotic — a political or external shock that forces a disorderly adjustment, possibly a default, with all the second-order damage that implies. The second is the muddle-through path Pakistan has been on: rollovers, IMF programmes, choke-the-imports, ride the luck. The third, which he treats as the one worth working toward but not the one to bet on, is a deliberate maturity-extension deal coupled with a serious productivity-and-reform agenda that gradually pulls the country off the rollover treadmill.

He is honest that the muddle-through path is the most likely. It is the path of least immediate political pain. It is also the path that, compounded over five or ten more years, makes the eventual adjustment worse. Muzamil lets that hang.

The episode closes a little past the ninety-minute mark, with Muzamil noting that the planned forty-five minutes have stretched well past an hour and fifty, and thanking Pirzada for the time. What the listener is left with is not a forecast. It is a frame: Pakistan’s twenty-six billion dollar problem is not a mystery, the menu of options is finite and well understood, and the only thing standing between the country and a serious conversation about which option to pick is the willingness to call the costs by their real names.