In Pakistan, standing in queues at petrol pumps has become a regular occurrence, particularly when people anticipate an increase in fuel prices. Waiting in these lines, one often reflects on the past when petrol used to cost under Rs100 per litre, a time that now seems distant, even though it was less than three years ago.

These queues also serve as a sobering reminder of the potential consequences of a default, as witnessed in Sri Lanka, where drivers had to wait for as much as 10 days just to get a few litres of fuel.

In Pakistan, the high petrol prices played a role in pushing headline inflation to fifty-year highs of 31.5 per cent in February, whereas inflation in Sri Lanka has been hovering in the range of 54pc to 70pc since June. While Pakistan faces an economic slowdown and back-breaking inflation, Sri Lanka’s default serves as a cautionary tale that it can always get worse.

When it comes to Sri Lanka’s crisis, the fuel shortage captured global attention. The country was able to continue functioning despite its financial troubles, but the disappearance of fuel from petrol pumps brought it to a halt.

Sri Lanka’s reliance on imports of expensive refined petroleum products rather than cheaper crude oil that could be refined domestically exacerbated the situation as it only had one oil refinery with a capacity of 50,000 barrels per day.

The middle and lower-income groups will face the full force of repercussions if the country defaults

In contrast, Pakistan has a well-developed oil refining industry, with five refineries capable of processing approximately 420,000 barrels per day of crude oil. However, successive governments have failed to implement favourable policies to support the industry’s long-term growth.

And now, amid letters of credit opening issues, import restrictions, exchange losses, weak demand, and an unfavourable policy environment, the refining sector has joined the chorus of other industries, ranging from automobiles to textiles, which are struggling to maintain operations.

Evidently, a well-established infrastructure is insufficient on its own. The nation requires policies that promote long-term, inclusive growth, fortify domestic industries, and augment human capital to create a resilient economy. In the face of an inevitable economic slowdown, proactive measures are imperative to mitigate the impact of downturns and safeguard the most vulnerable segments of society.

Defaults and economic downturns can impact all sections of the economy, but the vulnerable members of society often bear the brunt of the consequences. While the upper classes may make minor sacrifices, such as cutting back on social gatherings, the lower-income groups may struggle to obtain essential items like medical supplies, as revealed by heartbreaking stories from Sri Lanka.

Several economists, including the Nobel laureate Joseph Stiglitz, have explained how economic turmoil can further increase income inequalities. Ironically, the calls for a hard reset almost always come from those who will be least impacted by a nation’s default.

Proponents of a hard reset argue that Pakistan needs drastic structural reforms to address the deeply embedded problems in the economy. They propose defaulting on loans as the only way to create a fresh start.

However, this strategy ignores the painful consequences that will follow, including higher inflation, capital flight, unemployment, food and energy shortages, and currency devaluation. It’s the middle and lower-income groups who will face the full force of these repercussions.

Recently, the former finance minister, Hafiz Pasha, issued a warning that inflation could surge to 70pc if Pakistan defaults. Given the previous consumer price index numbers from Sri Lanka and Pakistan’s increasing inflation, this suggestion appears alarmingly plausible.

Moreover, the exercise of a hard reset could also prove futile as the country would inevitably have to turn to the International Monetary Fund for a fresh loan to revive the economic engine. But after severely tarnishing the country’s reputation with lenders, obtaining new loans will become more challenging.

Additionally, since we are currently living in a period of rising interest rates where central banks worldwide are increasing policy rates to combat inflation, getting new debt will become not only increasingly difficult but also more expensive.

The consequences of a hard reset extend far beyond the economic realm. Such a move can cause widespread social unrest and chaos.

Even though economists could argue at length on television channels, attributing the economic woes to years of inefficiencies and failure of successive governments to industrialise and liberalise the economy, the masses’ wrath will undoubtedly fall on the incumbent rulers, as demonstrated by the recent mass protests in Sri Lanka, or Argentina’s economic crisis of 2001.

The unrest can last for months or even years, leading to unprecedented political turmoil and disruption, proving that the impact of a hard reset can be devastating and long-lasting.

Policymakers must heed these warning signs by examining the economic histories of countries like Sri Lanka and Argentina and focusing on long-term solutions that foster sustainable economic growth.

Argentina, for instance, experienced a brief period of success after its economy recovered from the collapse of 2001, only to face recurring bouts of economic instability that continue to this day.

The writer focuses on business and economics. He can be reached at sarfarazis@yahoo.com and tweets @sa_cubes

Published in Dawn, The Business and Finance Weekly, April 25th, 2023