Plan silent on debt restructuring

Pakistan unlikely to float bonds in global markets this year due to poor ratings

ISLAMABAD:

Pakistan does not see early prospects of floating at least $700 million worth of sovereign bonds due to poor credit ratings and it has also not included public debt restructuring in its new under-consideration home-grown economic reform plan.

The October draft of the prime minister's "Home-grown Reform Agenda for Growth with Stability" reveals that the government can carry any international transaction of green bonds, Eurobonds or International Sukuk at the earliest in fiscal year 2025-26, starting from July next year.

However, it has budgeted $1 billion in international sovereign bond transaction for this fiscal year – 2024-25. The one-year delay will result in a financing gap which has to be bridged by some other means.

The government had struggled to secure commitments for $2 billion worth of additional financing before the International Monetary Fund (IMF) executive board meeting. It had to accept the most expensive loan offer but eventually backed off after public criticism. Ministry of Finance spokesman Qumar Abbasi did not respond to a question on whether the government shelved plans to float $1 billion of sovereign bonds.

The PM had hired services of UK economist Stefan Dercon for preparing the "home-grown economic plan". After finding flaws in the Dercon plan, the job was assigned to Deputy Prime Minister Ishaq Dar.

The PM had wanted to launch the plan on August 14, but it was delayed to the first week of September. Still, the plan remains unannounced, although background work has been done.

Sources said that the draft plan showed that the government was hopeful that it would be able to float $300 million worth of Panda bonds in Chinese markets by December 2024. But this too is contingent upon many external factors.

The government needs to sign a deal with the Chinese counterparts and appoint a credit rating agency and a legal adviser. It also needs to engage an AAA-rated Chinese guarantor and pre-deal engagement with the National Association of Financial Market Institutional Investors.

However, the draft states that any credit rating downgrade will make investors less inclined towards Panda bonds.

In recent weeks, international credit rating agencies have marginally improved Pakistan's rating but did not assign investment grade, which is a prerequisite for floating bonds in international markets at competitive rates.

Under the plan, the government wants to diversify sources of foreign loans and increase foreign exchange reserves to levels equal to at least three to three and a half months of import cover by fiscal year 2027.

The plan also includes securitisation of foreign remittances by the third quarter of current fiscal year. The idea of pledging remittances with Gulf creditors to raise more debt had been floated in the past as well but it was never implemented.

However, the plan is silent on public debt restructuring without which, many believe, Pakistan cannot come out of its current debt crisis. Pakistan is relying on the goodwill of Gulf and Chinese creditors to roll over its maturing bilateral and commercial debt of $16.7 billion every year. It is resisting the debt restructuring.

The draft plan showed that the finance ministry was largely relying on medium-term goals for debt management. It stated that over the medium term, the government's objective is to bring and maintain its public debt-to-GDP ratio to sustainable levels through effective resource mobilisation, rationalisation of current expenditure, and efficient utilisation of debt. According to the plan, the government will reduce the debt-to-GDP ratio to 60% by fiscal year 2029 – in a goal that suggests that the nation will bury under the debt pile in the times to come and the finance ministry will remain dependent on domestic commercial banks.

Under the $7 billion IMF deal, Pakistan is required to buy back its Rs1.2 trillion debt from commercial banks. Half of the central bank's projected profit of Rs2.5 trillion this year will be utilised to buy back treasury papers from the commercial banks. It has already conducted one transaction last week.

The plan states that the government is committed to achieving the objectives outlined in the Fiscal Responsibility and Debt Limitation Act 2005, through meeting gross financing needs at the lowest cost, extending maturity profile of the domestic and external debt portfolio in line with the Medium-Term Debt Management Strategy.

But the plan also reveals that the government will remain in violation of this Act at least till 2029.

According to another goal, the government will develop and implement an institutional role matrix for debt management between the Finance Division and the Economic Affairs Division by March next year. Debt recording remains fragmented between the Ministry of Finance, the Ministry of Economic Affairs and the State Bank of Pakistan (SBP).

From 2024 to 2026, the Ministry of Finance will develop a debt management plan to gradually create fiscal space, according to the draft plan. It will implement the first debt plan to minimise debt servicing for two and three years, starting from next fiscal year.

According to another important target, by March next year, the central bank will introduce asset-light Sukuk aimed at providing some more space to the Ministry of Finance to borrow through domestic Sukuk.

SBP Governor Jameel Ahmad said last month that the Ministry of Finance had already exhausted all the available assets and borrowed Rs4.7 trillion under Islamic financing facilities. However, he said, the religious scholars were not ready to accept the asset-light Sukuk as an alternative to the current Islamic borrowing model.

The PM's plan states that the finance ministry will maximise borrowing from the stock market and it will also shift the existing Ijara Sukuk to Pakistan Stock Exchange in January. Likewise, all treasury bills will be listed at the stock market by December next year. For debt-related risk reduction, the Ministry of Finance will increase the average time of maturity of domestic debt from the current very low level of three years and three months and the external debt maturing period from the current six years and three months. The plan does not give any specific targets for the maturity.

The government will also increase the share of Islamic instruments in its debt to 15% from the current level of 11%, according to the draft plan.