All roads lead to restructuring

A more sober conversation than the last one

The episode opens with Muzamil acknowledging the mood shift. When Javed Hassan last appeared on the show, the possibility of Pakistan defaulting on its external debt felt, as Muzamil puts it, like something that might happen but that “someone would come in and someone somewhere would do something to stop it.” Recording this episode in February 2023, with the IMF deal still unsigned and foreign exchange reserves at historic lows, that optimism has evaporated. “Unfortunately we’re at a point where, as radical as it is, default seems like a very real possibility,” Muzamil says at the outset, setting the tone for what follows.

Javed Hassan agrees the mood is different. “I have never been so pessimistic,” he says — a striking admission from someone who has spent years warning about exactly this trajectory.

The arithmetic of a debt spiral

Hassan opens with the numbers, and they are stark. Pakistan’s credit default swap — a market measure of default risk — had risen from around six or seven percent before the vote of no confidence in April 2022 to a peak of roughly 85 percent, settling around 45–50 percent at the time of recording. Any reading above 40 percent, he explains, effectively cuts a country off from international credit markets. The country’s sukuk bond was yielding close to 68 percent to maturity — meaning no rational private lender would extend new credit at a manageable rate.

With credit markets closed, the only sources of dollars are multilateral institutions (IMF, World Bank, ADB), and so-called friendly countries — and even those have become harder to tap. Meanwhile, the outflow side of the ledger keeps growing. Pakistan must repay roughly $22–25 billion every year in external debt service, a figure that snowballs because each rollover adds to the next year’s obligation. Add a current account deficit of $8–10 billion and the total financing need over the next three years approaches $100–120 billion. Against that, usable reserves at the State Bank are effectively negative once you strip out deposits that have been swapped and counted as reserves.

“Effectively hum log negative equity mein hain abhi,” Hassan says — we are in negative equity right now. The household analogy he reaches for is simple: imagine running a home with no savings, borrowing from whoever will lend, and spending whatever arrives. That is the current operating model of the Pakistani state.

What the IMF deal actually buys

Muzamil asks Hassan to walk through what the IMF program — assumed to have been signed by the time listeners hear this episode — will actually require. The list is painful: electricity tariffs rising by 7.5 to 12 rupees per unit (a potential 35 percent increase on already high bills), GST rising from 17 to 18 percent, removal of subsidies on electricity for export industries and agricultural tube wells, a freeze on subsidy-driven pay increases in government. The one concession Hassan credits to the IMF is a push to expand the Ehsaas/BISP social protection program for the lowest income segment. “On the whole it’s going to be inflationary,” he says flatly.

But Muzamil presses the harder question: does any of this actually solve the problem? He sketches the arithmetic himself — $30 billion in exports, minus the subsidies now being removed, minus higher energy costs, in a year when Pakistan’s two largest export markets (Europe and the US) are heading into recession and remittances are also falling. “I don’t see how this ends up anywhere other than imports coming down to $25 billion,” he says. Hassan agrees: cutting imports also cuts the inputs that feed exports, so the spiral is not easily arrested. “This is a spiral,” Muzamil says. “All I see right now is kicking the can down the road.”

Friendly countries are no longer offering deposits

One detail Hassan raises that reframes the conventional rescue narrative: the Gulf states that have historically parked deposits in the State Bank to prop up reserves have explicitly said they will not do so again. “Qatar and UAE have said deposits nahin hongi — woh investments karenge.” They will buy equity stakes in profitable assets: OGDC, PPL, airports. Pakistan’s entire listed market capitalisation is roughly $25–30 billion; you cannot sell all of it, and you can only sell the profitable parts once. “Once we have sold those assets, then what else will we sell?” Hassan asks. “We will literally be naked.”

The assets that remain — PIA, Pakistan Steel Mills, the electricity distribution companies — are loss-making, and no serious investor will pay a meaningful price for them. The Gulf states, he notes, are not interested in debt-laden liabilities; they want oil and gas reserves and infrastructure at distressed prices. “We’ll be effectively selling our oil reserves and our gas reserves at 50 cents to the dollar.”

The case for debt restructuring

This is where Hassan makes his central argument. Restructuring is not a catastrophe to be avoided; it is the destination that every other path eventually reaches. He draws the analogy to Chapter 11 bankruptcy in the United States — a legal mechanism that freezes creditor claims, allows a company to renegotiate its debt book (haircuts on face value, reprofiling of maturities, a moratorium on payments), and then re-emerges as a viable operating entity. “Solid companies, if you think about it, have gone through this and then they restructure.”

He cites economist Kenneth Rogoff’s research showing that countries which go through default and restructuring actually improve their long-run growth prospects compared with countries that remain trapped in rolling IMF programs, perpetually foregoing growth just to service debt. “Effectively hum log jo abhi kar rahe hain are foregoing growth — and we are foregoing growth just to meet our debt obligations.”

The restructuring process Hassan describes involves three elements: a debt moratorium (payments stop); haircuts (creditors accept, say, 70 cents on the dollar); and reprofiling (a three-year obligation becomes a ten-year obligation). He points to the IMF’s Sri Lanka proposal — a ten-year moratorium on repayments — as a recent precedent. Critically, he insists that all creditors must be treated equally: Chinese lenders, Paris Club members, Gulf states, commercial banks, pension funds. Preferential treatment for one class of creditor will poison the entire negotiation.

The creditors, in turn, will demand something in exchange: a credible plan showing that the economy has been restructured so that the same crisis cannot recur. “Aapki jo economy jo built up hai around subsidies and protection and inefficiencies — usko khatam karein. And that they will demand. It will not be a possibility.”

The political economy problem

Muzamil raises what he calls the real disconnect: every politician he has spoken to off-camera understands the solution. They know PIA should be shut down or sold, that steel mills are bleeding money, that structural subsidies are unsustainable. But when they face the public, they retreat. “Public is not ready for the structural changes even till date,” he says. He asks whether liberal democratic values can even survive what is coming, or whether Pakistan is heading toward something more authoritarian.

Hassan pushes back on the fatalism, but carefully. The problem, he argues, is not that democracy cannot deliver reform — it is that Pakistan has never had clean popular mandates. “Manipulation rahi hai hamari democracy mein. Popular mandates theek se hum ne allow nahin kara hai.” When mandates have been distorted or interfered with, you cannot then blame democracy for failing to produce reform. He points to India’s 1991 reforms, carried out by a minority coalition government under Manmohan Singh, as evidence that democratically elected governments can sell painful structural change — if they have genuine legitimacy.

The deeper issue, he argues, is incentive structures rather than national character. “Hum koi bure nahin hain Vietnamese se ya Bangladeshiyon se. But we have created incentive structures economy mein.” If a Pakistan Steel Mills employee can collect a salary without working and moonlight elsewhere, of course they will. If an industrialist can earn extra profit through protection and subsidy, of course they will. “I don’t think it’s national character.” The task is to dismantle those incentive structures — and that requires political leadership with a mandate to explain why the old consensus is over.

Hassan is explicit about what that new consensus must look like: not relief budgets that promise giveaways funded by borrowing (which simply feeds back into depreciation and inflation), but a clear road map that asks people to walk through fire for three to four years in exchange for a credible vision of what lies on the other side. “They have to show a brighter future. If a leadership cannot show a brighter future by going through, then you will have a complete societal breakdown.”

Integration, not isolation

Later in the discussion, Javed Hassan turns to the structural growth question: even if Pakistan stabilises, what does a genuine growth model look like? His answer is blunt. Pakistan is almost entirely unintegrated with the global economy. Its exports-to-GDP ratio is below 10 percent; Vietnam’s is over 100 percent. Its total trade is less than $60–70 billion in a global trading system worth $10–15 trillion. “Hum log kitne unintegrated hain — we are not at all part of the world.”

The import-substitution model Pakistan has clung to — protecting domestic industries behind tariff walls and subsidies — was discarded by East Asian economies in the 1970s, by Bangladesh before that, and by India in 1991. “We if we continue these silly policies jo nineteen fifties and forties ki thi, we are not going to progress.”

The natural markets, he argues using a gravity model framework, are the closest ones: China (a $15 trillion economy), India ($3–4 trillion), and the Middle East ($2.5 trillion). Pakistan’s potential exports to China alone are estimated at $15–20 billion; it is currently realising perhaps $2–3 billion of that. CPEC, he says, was an opportunity that was largely squandered by channelling Chinese investment almost entirely into the power sector rather than into manufacturing for re-export. “We should have done concurrently — industries lao, yahan se re-export karo.”

On India, Hassan is measured but not dismissive. The current Modi government presents an ideological obstacle, he acknowledges. But India’s own interest in regional power status and a UN Security Council seat means it eventually needs Pakistan on board rather than hostile. “It may not happen in the next one or two years, but it will eventually happen. I’m pretty confident about that.”

The chemotherapy analogy

By the end of the conversation, Muzamil and Hassan have arrived at a shared conclusion: the decision tree always terminates at the same node. Go to the IMF, fail to reform, return to the IMF, eventually face restructuring anyway. “No matter how you look at it, eventually all doors lead to restructuring and reform,” Muzamil says. Hassan agrees: “The market is going to fix itself. It will force itself upon us.”

The question then is only timing — and Hassan’s view is that delay makes the eventual reckoning more painful, not less. He draws on his own experience as a cancer patient. “It was really painful jab mujhe bataya gaya ke you have to do chemotherapy. But that chemotherapy made sure — it was painful for six months, magar after six months I have been, mashallah, healthier and more active than ever.” The surgery Pakistan needs is the same: not comfortable, not optional, but survivable — and followed, if done properly, by genuine recovery.

He ends on a note that is pessimistic about the present but not about the underlying capacity of the country. “Hamari awaam jo hai tayyar hai. Hamari awaam ko anyway suffer karti hai.” The public, he argues, is more ready to sacrifice than the elite gives it credit for. What is missing is not willingness but a clear, honest road map — and a leadership with the mandate and the courage to present one.