Pakistan is on a knife edge — and a planned default beats a forced one

Why bring in an outsider

The episode opens with Muzamil framing the problem he keeps running into. Whenever he sits down with a Pakistani economist, the audience reads the conversation through a partisan filter before they read it as economics. He wanted someone outside that gravity well. “I thought, why not outside of Pakistan let’s get someone neutral to actually look at the data and be able to give us a better sense of what the economy is going through,” he says.

His guest is Doctor Sanjay Kathuria — a former lead economist at the World Bank with twenty-seven years inside the institution, extensive work across South Asia, the Caribbean and Latin America, a Delhi School of Economics master’s, and an M.Phil and PhD from Oxford. He now teaches at Georgetown, is a visiting professor at Ashoka University, and runs Trade Sentinel, a site that tracks South Asian economic developments in real time. Kathuria opens with goodwill — he has visited Pakistan often, has friends there, and wishes the country well. Then he is direct about what the numbers say.

Rollover, reprofiling, restructuring — the vocabulary the debate keeps muddling

Before the substantive argument, Muzamil asks for a base. Pakistani public discourse uses rollover, reprofiling, default and restructuring almost interchangeably, and the term that gets celebrated — rollover — is often the weakest form of debt management. Kathuria walks through the ladder cleanly.

A rollover is debt extended on the same terms it already carries. As he puts it, “It’s evergreening. It’s another way in the banking system you would call that evergreening.” The one positive he flags is that getting a rollover at all signals that you still have market access — countries deep in distress sometimes cannot get even that.

Reprofiling is the next rung. The maturity is extended, sometimes the interest is shaved if the creditor is generous, but the principal stands. Restructuring is the real conversation: a reduction in the net present value of the debt itself — what Kathuria calls “a haircut” — which lowers debt servicing over the years. The distinction matters because Pakistan keeps celebrating rollovers and avoiding the conversation about restructuring, which is the only one that actually changes the trajectory.

The knife-edge arithmetic

Kathuria’s case for restructuring is built on the IMF’s own numbers, which he treats as the optimistic case rather than the conservative one. “We are talking about external financing needs for Pakistan, which are, counting FY twenty-four, $128,000,000,000 over five years,” he says. The growth projections — 3.5, 4.5, then 5 percent — he calls quite optimistic. Reserve forecasts are too. And against those optimistic reserves, debt servicing of more than twenty billion dollars sits on top each year.

“You are on a knife edge here. Every year is going to be a difficult one,” he says. The implication is not abstract. It means the policy machine spends every year flying to Dubai, Beijing, Washington — going to creditors and well-wishers to make the next payment. “At best it will be more of the same,” Kathuria says. “And I am not sure that a country wants to run its economic policy on such a knife edge.”

Muzamil presses the point further. If interest payments eat the budget, what is left to build with? Kathuria gives the figure that anchors the rest of the conversation: “Revenue, total, almost 70 percent — 68 percent to be exact — is just interest payments.” Thirty percent of revenue is what remains for a country with a fast-growing population, an underbuilt education system and accelerating basic needs. There is no path to growth out of that envelope.

A planned restructuring is less painful than the alternative

Muzamil lays out three possible futures: a forced and painful default, the indefinite drag the country has done for the past decade, or some external miracle — lower global interest rates, money printing, a tech boom. He asks which Kathuria thinks is most likely. Kathuria will not write off Pakistan entirely. He concedes a surge in IT or in Sialkot exports is possible. But he flags “such systematic problems in the economy” that one-off wins cannot cure them.

The real argument lands here. A default is going to happen one way or another if the trajectory holds; the only question is whether it is planned or forced. “A default is much worse than a planned restructure,” he says. The current “business as usual” scenario already includes skyrocketing prices, some of the highest energy retail prices in the world, riots in the Pakistan-administered part of Kashmir over those prices, and shrinking real incomes. Inflation cooling into single digits is welcome but not predictable. A planned restructuring lowers debt servicing, frees discretionary spend and puts the country on a path. A forced default does not.

His reference case is Sri Lanka, which defaulted in April 2022. Three consecutive quarters of positive real GDP growth followed. Inflation declined. Reserves rebuilt. The IMF program is running. “The orderly default was managed well with the IMF support, and the economy is looking much better for having done it.”

What restructuring actually does to a country — and who pays

Muzamil pushes on the question that drives most Pakistani anxiety about restructuring. What happens to ordinary people? He notes — and Kathuria largely agrees — that the average Pakistani lives on locally produced food and locally produced textile. The pain of a restructuring lands hardest on imported elite goods, which means much of the fear-mongering is the elite protecting their own interests.

Sri Lanka, Kathuria explains, had run an infrastructure binge starting in 2005 under Mahinda Rajapaksa, accelerated after the civil war ended in 2009. Trade-to-GDP collapsed from 89 percent to roughly 49 percent as trade barriers went up. Reserves dwindled. Eventually policymakers faced a binary choice: pay external creditors or let the population eat, fuel up and get medicine. They chose the people. They defaulted.

Pakistan, Kathuria notes, is in a structurally better spot than Sri Lanka on self-sufficiency. “Pakistan grows a lot of things itself, unlike Sri Lanka.” The existing Benazir Income Support Programme is digitised and can be scaled to buffer the poorest against an inflation shock. “If we really decide to bite the bullet and plan for all the eventualities — and there is now so much of experience in the world to deal with default — it is much, much better to do it in an orderly way than to one day have it forced upon you.”

The China problem

CPEC sits in the middle of any restructuring conversation. Sixteen or seventeen billion dollars of Chinese debt in the power sector alone, with repayments already running, has helped push Pakistani average unit power costs to three or four times the regional average — Bangladesh runs at around 17 rupees per unit against Pakistan’s 65 to 70. That cost structure makes growing out of the problem mathematically harder, because every input is more expensive.

Kathuria’s answer is grounded in the Sri Lankan precedent. China is Sri Lanka’s biggest bilateral creditor too, and after considerable difficulty, a deal was struck — even if the terms remain opaque. China globally is “the single biggest bilateral creditor in the world” with perhaps a trillion dollars of debt across countries and a reputation for being difficult and non-transparent.

But, he argues, China is also Pakistan’s single most steadfast supporter. That is exactly the leverage Pakistan has to use. “Pakistan has to tell China, look, you have to come on board. You have to come the extra mile because you are our biggest supporter. Without your support, debt restructuring will not happen.” The Paris Club and the IMF will not allow a proper haircut without China at the table. Pakistan, he says — caricaturing the diplomatic language — has to plead with Beijing in a full-throated way to make the restructuring possible.

Private debt, sovereign guarantees, and the domestic banking question

Muzamil raises a tangle specific to Pakistan: CPEC power-sector debt is structured as commercial deals to private entities, but with sovereign guarantees from the government. After the Reko Diq mining dispute went badly in international arbitration, there is fear that touching anything with a sovereign guarantee is legally radioactive.

Kathuria’s answer is clean. A sovereign guarantee is de facto government debt — that is exactly why prudent fiscal calculations include it in headline government debt. And anything that can be renegotiated as government debt can be renegotiated as guaranteed private debt; it is just a separate track. Sri Lanka has been working through its private bondholders the same way. The creditors come to the table because the alternative is worse for them too. “They might get sixty cents on the dollar instead of twenty cents on the dollar. That’s the calculation they make when they come to the table.”

Domestic debt sits in the same logic. Pakistan’s banking system has been highly profitable on the back of high interest rates on government paper — the last IMF report confirms that. It has cushion to absorb a haircut. Kathuria points to Jamaica, where he worked years ago: most debt was held by domestic banks, and a domestic exchange programme around 2012-2013 cut coupons without destroying the banks’ credibility. Done properly, the domestic restructuring is manageable. Done as a forced default, the same banks face runs and chaos.

Five reforms — restructuring is only the start

Muzamil makes the point that without reform, restructuring just resets the clock. Pakistan did a restructuring in the early 2000s, had a window, and arrived back in the same place. He asks Kathuria to name the reforms an outsider would prioritise. Kathuria lists five.

First, introduce competition. Reduce and rationalise the wall of import tariffs that protect domestic producers, raise input prices and create an anti-export bias. Level the playing field for state-owned enterprises — put them on a path to profitability or privatise them, as India did with Air India.

Second, widen the tax base. Tax collection at 11 percent of GDP is unsustainable. High-value agriculture should be taxed. The “1 percent economy”, as a former finance minister called it, has to come on board. Spending cuts alone will not close the gap.

Third, depoliticise economic policy. “Economic policy should be left to economic policymakers,” he says, pointing to the military’s entrenched role through Fauji Foundation, real estate and logistics.

Fourth, fix public expenditure management. The CPEC build-out — and the power sector inside it — needs to be tested against social and economic rates of return rather than the preferences of leaders.

Fifth, fix economics with India. “India is the largest, fastest-growing large economy in the world. How can you afford to be shorn of economic engagement with this dynamic powerhouse?” He estimates Pakistan’s exports to India could rise 80 percent on trade-to-potential alone. A deal to export Indian energy to Pakistan almost happened. He calls India “Pakistan’s biggest missing market.”

Why crisis is the only window — and why Pakistan keeps missing it

The conversation widens into a question Muzamil has been circling: why does Pakistan never use its crises the way India used 1991 or East Asia used 1997-98? Kathuria’s framing is that economists talk about crisis breeding reform because political space briefly opens. The vested interests that block change in normal times lose grip when the country is hurting badly enough.

India in 1991 had to physically fly its gold to the Bank of England. The pain had already arrived. A core team of reformers — Kathuria mentions his current colleague Montek Singh Ahluwalia and the “M document” that informed the reforms — had been thinking about the changes for years. Prime Minister Narasimha Rao was a consensus-builder, and that consensus is what made hard decisions politically possible. India dismantled the licence raj, reformed the exchange rate, and dropped tariffs from over 100 percent in waves.

Pakistan, by contrast, has been to the IMF roughly twenty-four times — Sri Lanka seventeen — and has not converted any of those crises into structural reform. Kathuria’s read is that elite capture is uniquely deep and uniquely allied across sections of the country, so public opinion does not sway policy, and a benefactor — the IMF, the US, China — always arrives in time to defer the reckoning. “People’s memory are very short. Every time there is a crisis, you get some benefactor comes and bails you out.”

He points to Bangladesh’s recent student-led revolution as a possible South Asian model — a grassroots reset of governance, with elite capture explicitly in the crosshairs. Pakistan’s elite capture, he believes, is more deeply seated still.

Growth, inequality, and the cronyism trap

Muzamil ends on a worry he has about the Indian model. The growth is real, but inequality has widened, and the optics — a 300-million-dollar wedding alongside persistent poverty — sit uneasily next to it. He asks whether Pakistan should be aiming at that model at all.

Kathuria reframes the question. The right concern is absolute poverty, not the inequality ratio. If the poor are seeing real income rise after inflation, the trajectory is better than the alternative. The problem with extreme inequality is not the gap itself; it is what it enables. “It matters because it leads to cronyism.”

The check on cronyism, in his view, is competition. India’s venture market, the rise of “challenger” medium and small companies, the growth of women entrepreneurs — these are the antibodies. He notes India has started raising tariffs again, which is the wrong direction, and flags that the country’s defining decade-long challenge is generating good-quality labour-intensive employment for the eight to ten million people entering the workforce each year. That, he says, is a different seminar.

The global cycle will not save anyone

Muzamil’s final policy question is whether the easing cycle now under way — lower US rates, Chinese liquidity injections — gives countries like Pakistan room to breathe. Kathuria’s answer is one word: no. Elevated post-COVID debt levels have become the global norm. Pandemic preparedness, climate change, AI infrastructure, industrial policy on the scale the US is funding — these are all new structural claims on fiscal space that emerging markets cannot meet by mimicking the rich world. “It makes it more imperative than ever to go back to fundamentals.”

By the end of the conversation, Muzamil asks Kathuria for the long view — Asia in 2050 or 2075. Kathuria, who describes himself as “a South Asian without a hyphen” — his mother born in Rawalpindi, his father from Dera Ismail Khan, three years lived in Bangladesh — sees the centre of economic gravity returning to where it sat a few centuries ago. The Asian century is not a forecast; it is already happening. The only question is whether it is collaborative or fragmented. He hopes the US-China trade wars do not pull the whole region into geo-economic fragmentation, because that serves no one.

For Pakistan specifically, the message across the hour is consistent. The arithmetic does not work. The orderly path is open and proven. The crisis is the only window in which the country’s deepest constraint — elite capture — can be loosened. Using the window requires accepting the restructuring, then doing the reforms. Skipping either is how the next twenty-fifth IMF programme starts.