Question

1. What economic variables would you need to consider in order to distinguish between a developing country with a short-term balance of payments problem and one in a debt crisis? Explain what data you would need to look at and why.

Answer 1

Countries like Pakistan with high national debt to GDP ratio, lower tax to GDP ratio, high degree of currency volatility, higher CPi Inflation, and high trade deficit is more vulnerable to a country with only short term balance of payment problems like India.

All above data help us understand real value of money under debt, leverage ratio and ability to repay and how does forex reserves help in mitigating above situation.

Pakistan here faces bankruptcy risks and systemic risks due to poor corporate governance and political mishap which are other social factors making it unsustainable for growth in future and may seek help from IMF and World Bank for bailout packages.

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