A government think tank has opposed public debt restructuring despite serious questions about the sustainability of the debt burden and external financing requirements, which are projected to be a minimum of $72 billion for the next three years.
The Pakistan Institute of Development Economics (PIDE), funded by the government, has voiced its opposition to debt restructuring, deeming it difficult and time-consuming, as stated in its reforms agenda unveiled this week.
The government has long avoided this path, despite significant challenges such as low foreign exchange reserves, rising interest payments, and subdued economic growth prospects under the International Monetary Fund (IMF) programme.
Pakistan’s gross official foreign exchange reserves remain at $8 billion, with the country set to spend around Rs8.5 trillion on interest payments, while economic growth is expected to remain muted under the new IMF programme. According to the PIDE report, Pakistan’s external financing requirements are estimated at $72 billion for fiscal years 2025 to 2027, with a minimum of $22 billion needed in the next fiscal year alone.
Instead of debt restructuring, the PIDE has proposed focusing on enhancing economic growth, increasing exports, improving productivity, boosting investment, fostering growth in listed corporates, and developing domestic markets.
The alternatives proposed by the PIDE are known, but the country lacks the enabling environment to implement them.
The PIDE stressed that the external financing requirements for the next fiscal year amount to 171% of the estimated foreign exchange reserves, indicating the country’s economic dependence on the IMF programme, which it sees as a necessity.
The IMF considers Pakistan’s debt sustainable as long as the country meets its financing needs with the help of bilateral and multilateral creditors. However, this strategy keeps Islamabad dependent on these lenders, often leading to compromises on political and commercial issues. Out of the estimated $22 billion needed, Pakistan requires $12 billion in rollovers from Saudi Arabia, China, and the United Arab Emirates annually.
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A finance ministry official stated that debt restructuring was not the only way forward.
The PIDE argued that to reduce its debt burden, Pakistan needs a growth rate of 7% to 8%, requiring an investment rate of 28.8%, which is unattainable due to severe fiscal and external conditions.
The World Bank’s Pakistan Development Update report forecasted economic growth rates of no more than 2.3% in the next fiscal year and 2.7% in the following year, with low growth leading to higher unemployment and poverty. The Special Investment Facilitation Council (SIFC) has yet to broker any major foreign investment deals. Prime Minister Shehbaz Sharif, on Tuesday, reviewed the implementation status of Memorandums of Understanding (MoUs) signed with Gulf countries, but these initial understandings have not translated into concrete agreements.
The SIFC initially aimed to complete the Reko Diq deal by March of this year, but ongoing feasibility studies and price discovery issues may delay the project’s completion.
The World Bank warned that Pakistan is expected to face liquidity pressures over the medium term, with significant gross financing needs due to maturing short-term domestic debt, multilateral and bilateral repayments, and Eurobond maturities.
The World Bank report highlighted depleted policy buffers, high debt levels, and tight foreign exchange reserves. The primary deficit is expected to grow to 0.3% of GDP during next two fiscal years and a deeper fiscal consolidation over the medium term will be necessary to restore fiscal and debt sustainability, it added.
The World Bank report stated that with 72% of domestic debt composed of floating-rate instruments, high policy rates (of 22%) directly impact domestic debt servicing, leading to a significant increase in interest payments on domestic debt – which grew by 63.5% during the first half of this fiscal year.
Efforts for fiscal consolidation have been hindered by mounting interest payments, projected to reach Rs9.5 trillion for the next fiscal year without corrective measures.
The PIDE proposed fiscal consolidation beyond tax collection, advocating for a uniform tax rate across all sources of income, abolition of presumptive tax regimes, turnover tax, and alternative corporate tax, along with uniformity in sole proprietor and corporate tax rates, elimination of withholding taxes, and transitioning to an advanced income tax regime.
Published in The Express Tribune, April 4th, 2024.
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