Although Pakistan has successfully averted the immediate threat of default on repayment of a foreign loan this week, experts have advised the economic managers of the country to reschedule a large part of the debt to avoid a default-like crisis in the long-run.
“According to IMF data, Pakistan’s external debt repayment obligations are $73 billion in the next three-years (from current fiscal year, FY23 to FY25),” said Topline Research Advisor, Saad Hashemy and Analyst Umair Naseer in a joint report on Saturday.
On the contrary, Pakistan’s foreign exchange reserves have depleted rapidly over the past 15-months to reach $7-8 billion at present. Repayment of the huge debt (including the rollover of some debt) with such little reserves seems highly difficult.
“Considering this external debt repayment crisis, we think Pakistan will do a debt rescheduling (base case) with its bilateral lenders, especially China as it forms 30% of government external debt. It is also worth stating that repayments to China are substantial in the next few years,” they said.
“The sooner the government starts the rescheduling process, the better it will be. In case the current coalition government delays it for political reasons, then the new government coming into power after the 2023 elections will have to do it,” according to the joint report.
The huge repayment is due to large external borrowings (external debt and liabilities) that have doubled in the last seven-years from $65 billion in FY15 (24% of GDP) to $130 billion (40% of GDP) in FY22.
Resultantly, Pakistan’s total debt and liabilities (domestic and external) have increased from Rs19.9 trillion (72% of GDP in FY15) to Rs60 trillion as of June, 2022 (90% of GDP).
“Pakistan’s economy is passing through one of the toughest times in its 75-year history,” they said.
“Large external financing gaps, challenging global financial markets, devastating floods and local political instability have collectively increased the risk of default on external debt payments. Depleting foreign exchange reserves and the rising external funding gap are both worrisome trends,” the report added.
Even though the current account deficit (CAD) is coming down after currency devaluation and other tightening measures, “the biggest worry is external debt repayment,” they explained.
“Pakistan must capitalise on its friendly relationship with China and seek IMF-led debt restructuring of at least $30 billion for the next three to five-years. The finance minister has already hinted at bilateral rescheduling of debt,” the report suggested.
On Friday, former finance minister Shaukat Tarin, also advised the Pakistan Muslim League-Nawaz (PML-N) coalition government to get a large part of the external debt restructured to avoid a likely default-like scenario in the future.
The central bank, however, successfully made a $1 billion repayment against a maturing Sukuk on Friday (December 2), three-days ahead of the original date of repayment on Monday (December 5). The timely repayment dismissed and negated the strongly built perception that the country would default on the loan.
Crucially, on Friday, Saudi Arabia extended the period of its deposit worth $3 billion at State Bank of Pakistan(SBP).
According to the government, Pakistan has arranged financing worth $32-34 billion from multilateral and bilateral creditors to fulfil the requirements of the current fiscal year. This includes a rollover of loans worth $21.1 billion. This will help finance the CAD and improve foreign exchange reserves.
New IMF programme:
The new government has to enter into a new and bigger IMF programme to execute the much-needed rescheduling. Commercial lenders, Eurobonds investors, local lenders and others may or may not be affected by this rescheduling, depending upon the negotiations. Similarly, Pakistan’s credit rating that was recently downgraded by Moody’s (from Caa1 from B3) may also be adversely affected.
There is a precedent that other countries like Argentina, Angola and Zambia also undertook restructuring of loans. Even in the past, Pakistan restructured its Eurobond and rescheduled certain portions of the Paris Club payments post nuclear tests in 1998.
“Under the new IMF program, along with debt restructuring, the country will likely witness strict monetary, exchange rate and fiscal policies. Pakistan’s economic growth will remain sluggish. Moreover, the rupee will remain under pressure, while interest rates will remain on the higher side despite inflation receding,” reads the report.
“Under our best-case scenario, if global commodity prices fall 25% from expectations and financial markets improve, that will provide much-needed relief and the country can then move ahead without debt restructuring,” they said. “In contrast, if the debt is not restructured on time, Pakistan’s debt crisis could worsen further which could hamper Pakistan’s ability to pay on time.”
Published in The Express Tribune, December 4th, 2022.
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