With Pakistan’s debt-to-GDP ratio in a danger zone of 70%, and between 40% and 50% of government revenues earmarked for interest payments this year, only default-stricken Sri Lanka, Ghana, and Nigeria are worse off.
Just $500 million of interest or ‘coupon’ payments are due on Pakistan’s international bonds this year, but the chief of the central bank has said $3 billion is needed to meet overall external debt payments.
Pakistan desperately needs the International Monetary Fund to release an overdue tranche of $1.1 billion, leaving $1.4 billion remaining in a stalled bailout programme set to end in June.
“There is just a long-term indebtedness problem,” said Jeff Grills, the head of emerging markets debt at Aegon Asset Management, who held Pakistan bonds until the floods hit.
“It is more a question of when they need to restructure, rather than if.”
Most of Pakistan’s bonds are still trading at less than half their face value.
Such a restructuring of Pakistan’s bonds would represent its first international default since 1999, according to the Bank of Canada-Bank of England Sovereign Default Database.
Pakistan’s former finance minister, Miftah Ismail, who successfully negotiated an extension to last year’s International Monetary Fund programme before being sacked in the political tumult, also thinks the IMF is the only logical option.
“If the IMF doesn’t come in, we’re looking at a default,” Ismail said, adding that another support package, the country’s 24th, would then be needed. “I can’t imagine Pakistan not going on a back-to-back IMF programme.”
With just $8.6 billion worth of such bonds, compared to the $30 billion Pakistan owes to China, Ismail said Islamabad might be better off “just going to those countries that we owe a lot, or to the institutions we owe a lot, and trying and get some more long-term loans.”
Prime Minister Shehbaz Sharif is optimistic that the IMF will resume disbursements. “An agreement with the IMF, God willing, will be done,” he said at an event last week in Islamabad, the capital. “We will soon be out of difficult times.”
Multilateral and bilateral financing pledges for Pakistan’s rebuilding efforts after the floods also depend on a green light from the IMF.
But even domestic analysts believe the government will find matters tough, as the IMF is likely to demand significant belt-tightening that is bound to be unpopular with voters already grappling with decades-high inflation and fewer job prospects.
IMF officials have been eager to support poorer countries and Pakistan promises to be a crucial partner for the West, but paying out gets trickier when a programme is close to its end and a new government could come in and try and tear up a deal.
Published in The Express Tribune, February 2nd, 2023.
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