Business

Pakistan’s risk of defaulting on its debt ‘real’, warns US think-tank

Published

2 months ago

Farwa

Report says if Pakistan defaults, there will be a “cascade of disruptive effects”.
From April 2023 to June 2026, Pakistan needs to repay $77.5bn in external debt.
“Given Pakistan’s demographic profile, crisis could go in unexpected directions,” it states.

A Washington-based think tank, the United States Institute of Peace (USIP), has warned that there is “a real danger that Pakistan could default on debt”, which might further intensify political turmoil amid already surging terrorism.

The author of the analysis published on Thursday warned that amid skyrocketing inflation, political conflicts, and rising terrorism, the country is facing the risk of a default due to its massive external debt obligations.

The cash-strapped nation is reeling with the repercussions of a deepening political crisis — which initially began in April last year when former prime minister Imran Khan was ousted through a vote of no-confidence motion — and the derailment of the $6.5 billion International Monetary Fund (IMF) programme.

Islamabad has been hosting an IMF mission since late January to negotiate a series of policy measures to secure $1.1 billion in funding for the cash-strapped economy, which is on the verge of collapse.

The funds are part of a $6.5 billion bailout package the IMF approved in 2019, which analysts say is critical for Pakistan to avert defaulting on external payment obligations.

The deal will also unlock other bilateral and multilateral financing avenues for Pakistan to shore up its foreign exchange reserves, which have fallen to four weeks’ worth of import cover, and help it steer out of a balance of payment crisis.

The USIP report highlighted four factors that are important to consider if authorities want to pull Pakistan out of the economic abyss; these include:

Composition of Pakistan’s overall external debt
Repayment pressure on the debt in both short- and medium-term
Potential inflows that can offset debt outflows
Pakistan’s external debt management strategy

1. Debt composition

Pakistan holds external debt and liabilities worth $126.3 billion — as of December 2022 — out of this nearly 77% amounting to $97.5 billion is directly owned by the government to various creditors. Meanwhile an additional $7.9 billion is owned by government-controlled public sector enterprises to multilateral creditors.

It should be noted that Pakistan’s creditors fall under four broad categories:

Multilateral debt
Paris club debt
Private and commercial loans
Chinese debt

2. Short- and medium-term debt repayment pressure

The country’s large external debt comes with considerable repayment pressure. The US think tank report mentioned that from April 2023 to June 2026, Pakistan needs to repay $77.5 billion in external debt, which is a “hefty amount” for a $350 billion economy.

It should be noted that the major repayments in the next three years are to Chinese financial institutions, private creditors and Saudi Arabia.

The country faces near-term debt repayment pressure as the external debt servicing burden is $4.5 billion from April to June 2023.

The major repayments are due in June when a $1 billion Chinese SAFE deposit and a roughly $1.4 billion Chinese commercial loan would mature. Pakistani authorities hope to convince the Chinese to refinance and roll over both debts, something the Chinese government and commercial banks have done in the past.

However, even if Pakistan manages to meet these obligations, the next fiscal year will be more challenging, as the debt servicing will rise to nearly $25 billion. This includes:

1. $15 billion of short-term loans; which include:

$4 billion Chinese SAFE deposits
$3 billion Saudi deposits
$2 billion UAE deposits

2. $7 billion in long-term debt; which includes:

$1 billion repayment on a Eurobond in the fourth quarter
$1.1 billion of long-term commercial loans to Chinese banks

The report forecast that in 2024-25, Pakistan’s debt servicing is likely to be around $24.6 billion, which includes $8.2 billion in long-term debt repayments and another $14.5 billion in short-term debt repayments; this includes major repayments to Chinese lenders of $3.8 billion.

In 2025-26, the debt servicing burden is likely to be at least $23 billion; that year Pakistan is to pay back $8 billion in long-term debt, including repaying $1.8 billion for a Eurobond and $1.9 billion to Chinese commercial lender.

3. Repayment calculus

The US think tank suggested that in order to repay its debt and avoid a sovereign default, Pakistan’s earnings from exports, foreign direct investment (FDI) and remittances inflows are vital.

However, inflows from these three sources are projected to stay subdued compared to the import bill as well as the mounting debt repayment pressure.

Shipping containers are seen stacked on a ship at a sea port in Karachi on April 6, 2023. — AFP

Over the next three years, imports are likely to be higher than the total dollar amount of exports and remittances, which will lead to a current account deficit requiring external financing.

Meanwhile, FDI is projected to remain subdued as well. In recent years, investment has averaged a dismal $2 billion annually due to the challenging business environment and frequent policy changes; similar levels of investment are the best case for the next few years.

Investor sentiment has also been impacted by the government’s recent restrictions on the movement of capital outside the country.

4. Options to manage external debt

The report suggested that the economic managers of Pakistan has only two options to address its external debt burden. The first is to take fresh loans and seek rollovers of debt — however, the country’s ability to access the sovereign financing market is limited due to downgrades by international credit rating agencies.

Therefore, if the country seeks to avoid default the leadership will depend on Middle Eastern partners and China, not just for existing rollover but also fresh loans.

It should be noted that the details of these will depend on negotiations with the IMF. If the stalled IMF programme is revived, the amount will be smaller than the one it would seek if the programme collapses.

And in case the bailout programme is revived and completed over the summer, Pakistan will need a new IMF programme, in addition to new loans and rollovers from its Middle Eastern and Chinese partners, due to its external debt burden over the new three years.

The second option that the country has is that it seeks pre-emptive restructuring of debt as it will help reduce the repayment pressure and spare scarce dollars in the economy to finance the country’s current account deficit.

What will happen if Pakistan defaults?

The US think tank report mentioned that if Pakistan ultimately defaults, there will be a “cascade of disruptive effects”.

Primarily, the country’s imports could be disrupted, which could lead to a shortage of essential goods and commodities.

The nation of 220 million people, which is already seeing intense political conflict between the Pakistan Democratic Movement-led government and Pakistan Tehreek-e-Insaf (PTI), may also see the economic crisis creating more political turmoil.

“And given Pakistan’s demographic profile and surging terrorism threats, the resulting crisis could go in unexpected directions,” it stated.

Business

APCC to meet today to decide budget outlay, targets

Published

2 days ago

Farwa

APCC will meet at the Ministry of Planning today.
Govt considering allocation for Diamer Basha Dam in budget.
Total PSDP size would be proposed at Rs1,000bn.

ISLAMABAD: The Annual Plan Coordination Committee (APCC) is likely to recommend around Rs900-1,000 billion macroeconomic framework and size of the federal development outlay for the upcoming budget for the next fiscal year 2023-24, The News reported Friday.

In the federal budget, against the revised estimates of Rs111 billion in the outgoing financial year, the government is all set to recommend a Rs90 billion proposed allocation for the controversial Sustainable Development Goals Achievement Programme (SAP) for parliamentarians.

Now the arrangements are underway for further jacking up the allocation of the SDG Achievement Programme from Rs111 billion to Rs116 billion for the outgoing fiscal year.

Well-placed sources in the Cabinet Division told The News that parliamentarians belonging to Balochistan and Sindh provinces largely presented flood-related schemes under the SDG Achievement Programme in the current fiscal year.

The World Bank and Asian Development Bank (ADB) were also providing $3 billion in loans for flood-related schemes in the aftermath of the severe floods, so at least there should be some kind of mechanism to avoid overlapping at the cost of the national exchequer.

There were 50 to 60% of small development schemes in Sindh and Balochistan related to floods in the outgoing financial year.

There are reports that one political party, which is one of the major allies of the ruling coalition at the federal level, placed a condition that all funds on behalf of their parliamentarians should be handed over to the political leader, who would disburse their share to each parliamentarian belonging to the party.

All major allies of the Pakistan Democratic Movement-led government are beneficiaries of this SAP programme, as its funding has gone up from Rs68 billion at the initial level to Rs116 billion in the ongoing financial year.

The APCC, which is scheduled to meet in the Ministry of Planning today (Friday), will consider approval of the macroeconomic framework, including a real GDP growth rate of 3.5% and CPI-based inflation at 21% for the upcoming budget 2023-24.

According to the working paper prepared by the Ministry of Planning on Thursday, the Ministry of Finance gave an indicative budget ceiling for the Public Sector Development Programme (PSDP) to the tune of Rs700 billion for the next budget for 2023-24 but the Minister for Planning hoped that it would be jacked up to Rs800 billion under the directives of Prime Minister Shehbaz Sharif.

Now that the government has proposed an allocation of Rs200 billion for the Viability Gap Fund (VGF) executed through public-private partnerships (PPP), the total PSDP size would be proposed at Rs1,000 billion at the federal level for the next financial year.

The share of the National Highway Authority (NHA) in the proposed PSDP would be reduced, ranging from Rs90 billion to Rs100 billion for the next budget, mainly because the NHA remained unable to utilise the major chunk of the total allocated amount in the ongoing financial year.

The government is all set to propose allocations for flood mitigation and reconstruction efforts in the coming financial year. The government is also considering making an allocation for the Diamer Basha Dam in the coming budget for 2023-24.

Business

Is Pakistan launching digital currency?

Published

2 days ago

Farwa

KARACHI: After making impressive progress in digital banking, the State Bank of Pakistan (SBP) is planning to launch a digital currency in the future, The News reported Friday.

Central Bank’s Digital Financial Services Group Additional Director Shoukat Bizinjo said that a large number of central banks around the world, including Pakistan’s, are studying CBBCs (callable bull/bear contracts) in order to launch digital currency in their respective countries.

Bizinjo — while speaking at the 16th international conference on Mobile Commerce 2023 — said: “Pakistan’s central bank is reviewing and consulting with other central banks in this regard (CBBCs and digital currency).”

They are leveraged investments that track the performance of the underlying assets without requiring investors to pay the full price required to own the actual assets. Bizinjo said that the SBP is also in consultation with local industrial players to introduce digital currency.

He said that Electronic Money Institutions (EMIs) have made remarkable progress in e-banking through the launch of e-money wallets for consumers and merchants, and other digital payment instruments such as prepaid cards and contactless payment instruments.

Currently, the country has four live commercial EMIs, including NayaPak, Finja, CMPECC, and Sada Tech Pakistan. EMIs have an outstanding e-money balance of Rs2 billion, managing 1.6 million e-money wallets and 2.4 million payment cards as of March 31, 2023.

There are around 12 EMIs at different stages of acquiring licenses from the central bank. There are also dozens of companies that are in constant talks with the SBP to become EMIs.

Business

Pakistan rules out Plan B rumours in case of IMF programme failure

Published

2 days ago

Farwa

Budgetary framework has been shared with IMF, says minister.
Dr Pasha says IMF did not accept external financing gap of $4.5bn.
Adds there is a trust deficit because of PTI govt.

ISLAMABAD: Minister of State for Finance Dr Aisha Ghaus Pasha has ruled out any possibility of contemplating upon any other option — Plan B — in case Pakistan fails to woo the International Monetary Fund (IMF) to revive the stalled loan programme, The News reported Friday.

“Let me say with clarity there were no other options that we are contemplating upon under Plan B in case of no revival of the Fund programme as the government was committed to reviving the IMF programme by completing the pending ninth review,” she said.

During a briefing of the National Assembly Standing Committee on Finance at the Federal Board of Revenue (FBR) headquarters, MNA Ali Pervez Malik questioned Dr Pasha about Plan B in case of failure to revive the IMF programme and said that there was talk about a dollar amnesty scheme to improve dollar liquidity.

The minister further revealed that the Fund did not accept the external financing gap of $4.5 billion assessed by Pakistan.

Dr Pasha disclosed that the IMF was still sticking to its projection of a financing gap of $6 billion for the ongoing financial year against Islamabad’s assessment of $4.5 billion on which assurances extended to the IMF by multilateral as well as bilateral creditors.

She went on to say that the government has shared the budgetary framework for the next fiscal year to satisfy the IMF. However, Pakistan has been waiting for the IMF’s response to share its recent steps to bridge the gap between interbank and open market rates on exchange rates, and assurances on external financing gaps.

It should be noted that a broader agreement on these three major conditions could only pave the way for striking a staff-level agreement.

The minister clarified that the sharing of budgetary numbers is not the part of ninth review as it will be part of the 10th review but Prime Minister Shehbaz Sharif has decided to share the numbers for the revival of the Fund programme.

A senior official of the State Bank of Pakistan informed the NA panel that the permission granted for credit cards from exchange companies to interbank rate would require $70 million to $100 million on average on a monthly basis and recommended the FBR for raising taxes on transactions through credit cards in foreign exchange in the upcoming budget to compress demands for increased foreign exchange requirements.

Dr Pasha said that there was a trust deficit, not because of the incumbent regime, but blamed the last PTI-led government for breaching the IMF agreement by doling out un-targeted fuel and electricity subsidies just before leaving the government in the last financial year.

She said that Saudi Arabia had granted assurances of $2 billion in additional deposits, while $1 billion have been committed by the United Arab Emirates (UAE).

The World Bank committed $450 million through the RISE-II programme loan and $250 million through Asian Infrastructure Investment Bank (AIIB).

The remaining are expected through Geneva pledges in the aftermath of flood assistance.

Pakistan, she said, secured financing assurances of $4.5 billion. Initially, it was planned that out of $6 billion, the government would get assurances on $3 billion before signing the staff-level agreement. She said that the government paid back $3 billion to commercial banks with the understanding that it would get re-financed these loans once the SLA is done.

“We also expect that after the revival of the IMF programme, other avenues of securing dollars will also open up” she added.

The ongoing IMF programme is going to expire on June 30 therefore the time is limited for completion of the pending 9th review under the $6.5 billion Extended Fund Facility (EFF).

If the staff-level agreement is reached by evolving a broader consensus on three contentious issues including external financing, budgetary framework, and sticking to the free market exchange rate then the programme will be revived otherwise the programme will be met with failure.

However, the sources said that Pakistan would be left with no other option but to seek another IMF programme next fiscal year keeping in view debt external repayments of $25 billion.

It does not include the current account deficit and if it is projected in the range of $7-8 billion for the next fiscal year then the total external financing requirements will be stretched up to $32-33 billion in 2023-24.