$100b debt repayment looms in four years

Funding to be met by securing rollovers from bilateral creditors

ISLAMABAD:

Deputy Finance Minister Ali Pervaiz Malik on Thursday disclosed that in four years Pakistan will have to repay a startling $100 billion external debt, which would largely be funded by securing rollovers from bilateral lenders.

The $100 billion external debt repayments by the federal government are 10 times more than the current $9.4 billion gross official foreign exchange reserves.

In yet another disclosure by none other than Finance Minister Muhammad Aurangzeb that despite signing a $7 billion International Monetary Fund new programme, Pakistan's external financing requirements were still not fully met. The IMF has identified a $5 billion financing gap for the 2024 to 2026 period, the Finance Minister told the National Assembly Standing Committee on Finance.

"Pakistan's external debt repayments for four years are $100 billion", said Ali Pervaiz Malik, the Minister of State for Finance while speaking during a meeting of the National Assembly Standing Committee.

Ali Pervaiz Malik ducked a question whether the government was considering the debt restructuring. PPP's MNA and former Finance Minister Syed Naveed Qamar chaired the committee meeting.

The $100 billion external debt repayments from 2024 to 2027 are exclusive of any payments on account of the liabilities booked at the balance sheet of the central bank and the requirements for financing the current account deficit.

The statement made by the Minister of State for Finance Ali Pervaiz Malik underscores that the government does not have a viable plan of paying back these loans except requesting the lenders every year to defer the payments for one more year.

"The debt stock can easily be financed through rollovers or replacement of the existing debt with new one", said Ali Pervaiz Malik.

The Director General Debt, Mohsin Chandna told the committee that only for the fiscal year 2024-25, the external debt repayments amounted to $18.8 billion, excluding repayments of the debt that is the responsibility of the central bank.

"The $18.8 billion would be paid in the same manner it had been paid in the past, which is the rollovers", said the Minister of State for Finance while responding to a question asked by MNA Nafisa Shah.

The DG Debt said that the cash deposits were in fact $12.7 billion, as Kuwait had also given a $700 million loan in the past. The rollovers that Pakistan will be seeking to repay the cumulative $100 billion in four years are mainly from Saudi Arabia ($5 billion), China ($4 billion), UAE ($3 billion) and Kuwait ($700) million, said Chandna.

Before addressing the issue of the stock of the public debt, the government wants to quell the flow, said Ali Pervaiz.

PPP's MNA Nafisa Shah had inquired whether the Ministry of Finance had any strategy to pay back the loans other than getting rollovers and was the government willing to restructure the debt.

The sources said that the Chinese authorities had also asked Pakistan the same question when during his recent visit the Finance Minister requested debt rollover for three years.

The economy remains in the Intensive Care Unit (ICU) because we do not plan from medium to long-term, said Hina Rabbani Khar, former Foreign Minister.

The government's strategy to remain afloat by securing the rollovers has already started firing back and also led to a significant delay in securing the board meeting date. The IMF board is now scheduled to approve a 37-month Extended Fund Facility programme worth $7 billion on coming Wednesday after these creditors finally assured to rollover the debt but only for one year.

Aurangzeb informed the committee that the IMF has estimated the three-year external financing gap at $5 billion. This includes $2 billion for this fiscal year against which the government secured $600 million, the most expensive loan in the country's history.

For the next fiscal year 2025-26, the estimated external financing gap is also $2 billion and $1 billion gas is estimated for the fiscal year 2026-27.

On the question of taking the most expensive $600 million loan in Pakistan's history, the Finance Minister said that the government would not draw down the money.

Muhammad Aurangzeb told the standing committee behind closed doors that Pakistan had to give firm commitments to the IMF for not giving any further subsidy after the Punjab government gave electricity subsidies for two months.

The Punjab government had to retreat this month when it prematurely withdrew the subsidy for the consumers of Islamabad Capital Territory.

The Finance Minister Muhammad Aurangzeb also told the committee that after the Punjab government's decision to give electricity subsidy, Pakistan had to give a firm commitment that no federal or provincial government would give any subsidy during the 37-month programme period.

The committee also inquired from the Finance Minister about the IMF's plan to increase agriculture income tax to 45% and align it with the federal tax rates.

Pakistan's debt profile is exposed to interest rate risks and fluctuation in crude oil prices, said Omar Ayub Khan, the leader of the opposition in the National Assembly. He said that there may also be pressure on rupee-dollar parity due to the political situation in the Middle East and Ukraine and a new perfect storm is gathering again.

The capacity to absorb any shock is higher than before due to $9.5 billion foreign exchange reserves, said Ali Pervaiz but admitted that the cushion was still not enough to give comfort.

Ali Pervaiz said that this time the IMF programme will have a six-month review. Earlier, there were quarterly reviews of the IMF programme.

 

DG Debt struggles

 

The Director General Debt Office, Mohsin Chandna struggled to answer even simple questions raised by the members of the committee. He did not have any clear answer to the question about the savings that the government would make due to the 3% cut in the interest rates by the central bank.

The 80% of the domestic debt is on the floating rates and the impact of the interest rate reduction would be visible on it after six months, said Chandna.

He said that the this fiscal year's allocation for interest payments is made on the basis of 17.25% average interest rate and any benefit would be accrued only when the rates come below this rate. However, earlier the Ministry of Finance had said that the budget has been made on the basis of 18.5% average interest rate.

Chandna also did not have the answer to the question about the interest rates on the sovereign bonds that Pakistan had floated and would mature in coming months. The first such payment of $500 million of sovereign bonds is in September next year, followed by $1.3 billion in April 2026 and $1.5 billion in December 2027, said Chandna.

The DG debt said that due to 0.5% reduction in the interest rates by the US Federal Reserve, the debt instruments of emerging markets will become attractive for the lenders.

"Pakistan needs to enhance the maturity profile of its debt and reduce the gross financing needs", said the DG debt.