Loans fall nearly $12b short of estimates

Pakistan received nearly $12 billion less than the budgeted loans in the last fiscal year due to its inability to revive the stalled bailout package, as the International Monetary Fund (IMF) has assessed high risks of default because of elevated external loans’ needs.

According to provisional statistics compiled by the Ministry of Economic Affairs, Pakistan received about $10.8 billion in foreign loans during fiscal year 2022-23 that ended on June 30th. The receipts were $11.8 billion or 53% less than the budgeted estimates of $22.6 billion.

The decrease in disbursements was mainly because of the fact that major international creditors stayed away due to the government’s inability to timely revive the $6.5 billion Extended Fund Facility (EFF). The IMF programme ended with $2.6 billion remaining undisbursed.

Pakistan has now signed a new $3 billion package but it will not completely alleviate its financing problems.

“The overall risk of sovereign stress is high, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserve buffers,” stated the new IMF staff level report released this week.

The gross official foreign exchange reserves stood at $4.5 billion by end June, which is now being built on the back of loans from Saudi Arabia, the United Arab Emirates (UAE), and the IMF. The IMF said that risks are mitigated by the fiscal adjustment safeguarded under the new Stand-By Arrangement and continuing onto the medium term, financial commitments by bilateral partners, and the ability of the banking system to rollover existing domestic debt.

In a footnote to the report, the IMF said that “the risk of sovereign stress is a broader concept than debt sustainability. Unsustainable debt can only be resolved through exceptional measures (such as debt restructuring)”.

The IMF report further noted that medium-term risks “are assessed as high” and the risks include uneven programme implementation, political risks, and access to adequate multilateral and bilateral financing in view of the high gross financing needs. According to the report, Pakistan needs $12.3 billion worth fresh loans just for the July-December period of this fiscal year to meet the requirements of the maturing loans. Overall, for this fiscal year, the IMF has estimated the gross financing needs at $28.3 billion, which is equivalent to 22.2% of the GDP.

The IMF said that if the new programme worth $3 billion is implemented consistently and macroeconomic prudence continues for the medium term, the debt path is expected to remain on a downward trajectory.

It said that the gross financing needs “although high” would be covered by official bilateral and domestic financing. However, the underlying vulnerabilities and risks are very high, including because of the significant sovereign exposure of domestic banks, and the scope for policy flexibility is extremely limited, it added.

As a whole, the IMF has assessed public debt “as sustainable in the baseline scenario underpinned by steadfast implementation of the SBA policies”.

But it said that elevated gross financing needs continue to pose high risks to debt sustainability, particularly as fiscal and reserve buffers have been depleted. The IMF said that timely disbursements of committed bilateral and multilateral support are critical in the period ahead.

Data compiled by the Ministry of Economic Affairs showed that during the last fiscal year against estimates of $7.6 billion, Pakistan received $5.2 billion in loans from the multilateral creditors, 31% less than the estimates.

The Asian Development Bank (ADB) remained the largest creditor and extended $2.3 billion. But it was only equal to 71% of the budgeted loans. The World Bank disbursed $2.1 billion in loans against the annual estimates of $2.6 billion. The Islamic Development Bank gave $161 million for oil financing against the estimates of $1.2 billion.

Against an annual estimate of $7.5 billion, Pakistan received $2.2 billion in foreign commercial loans in the last fiscal year, 71% less than the budgeted amount. In June, Pakistan received $1.3 billion foreign commercial loans from China. Poor credit ratings and failure to revive the stalled programme led to low disbursements by the foreign commercial banks. The planned $2 billion sovereign bond-based borrowing did not materialise due to poor credit ratings and expected high-interest costs.

The government also expected to receive $3 billion from the IMF, later increased to $3.5 billion, but only got $1.2 billion till the end of this fiscal year. The remaining amount lapsed with the programme expiry in June.

Furthermore, the government received only $789 million under the Naya Pakistan Certificates against the annual estimates of $1.63 billion. The government had increased the interest rates on the Naya Pakistan Certificates to attract more loans. The bilateral creditors disbursed $1.5 billion as against the estimates of $970 million. The higher disbursements were because of the Saudi Arabian oil facility. Against the budgeted amount of $800 million, Pakistan received $1.2 billion equal oil from Saudi Arabia.

Published in The Express Tribune, July 21^st, 2023.

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