G20 loan relief: Much needed

Pakistan is one of the many countries qualifying for debt relief from G20 countries. Indeed, it is a sign of relief; but the question is will this be enough. The external debt repayment for Pakistan was about to become impossible in the aftermath of COVID-19. The country was coming out of an external debt crisis and was working on creating market based investment and debt buffers to repay the existing loans. That strategy is out; as global flows are now averse of emerging economies.

There is no way that Pakistan could provide for its debt obligations (mainly principal) in next 3-36 months. The country needs relief for longer period and by broader spectrum of lenders. The G20 states include Paris Club, China and Middle Eastern loans to Pakistan. However, the definition of bilateral loans is not clear. Even without this, Pakistan’s top bilateral lender (China) was showing a soft heart to repayments. The deposits by KSA, UAE and Qatar could have been prolonged without it. The main achievement is the delay in Paris Club payments.

The relief is till the end of this year which may get extended to December 2020. The debt relief in this period is to be paid after June 2022. But that is not enough for Pakistan. There would be deliberation to extend this easing to June 2021. Pakistan would be needing at least a 3-year relief.

Pakistan reported debt servicing is $28 billion in the next three years (excluding deposits by friendly countries). Around one third is Chinese and two third of Chines loan is commercial. Pakistan needs to sit with Chinese authorities to work on renegotiation on all form of loans. This will address one third of loans payments in 3 years.

Similarly, one third of loan servicing is due to IMF, WB and ADB. The word is that these institutions will follow the same line of G20 by deferring of servicing and repackaging. It is hard to get anything beyond the time period decided by G20. The push to G20 is from these multilaterals, and they all probably will follow the same line. The good news is that IMF is giving $1.4 billion to Pakistan and around $700-800 million each is to come from ADB and WB in a few weeks. These will be enough to cover the evaporation of hot money.

Pakistan’s short-term debt problem (till Dec20) is being resolved. That will ease some pressure on the currency. The PKR/USD is said to be in equilibrium based on REER and current account slippages, at around 154-155 level.

The Covid related outflows put pressure on currency and it has slipped to 167. Another way of looking at currency valuation is based on financial and capital accounts flow. These are largely going to be dealt with this G20 decision which is likely to be adopted by multilaterals. Now the currency is likely to slowly come back to its equilibrium value of 155-160.

The current account is likely to be in surplus while Pakistan is in lockdown. Both exports (due to lockdown of buyers) and imports (due to lockdown in Pakistan) will fall substantially. The remittance flow decline would be less in the short term as there are families to support by those who send back money. But once the dust settles, remittances are likely to be hit the hardest.

There is a window of relief for Pakistan and the country needs to focus on import substitution and looking for more exports markets once the life comes back to normalcy. Oil prices are likely to remain low (below $40/barrel) even after opening up. That will help reduce the oil import bill and help currency to sustain based on current account flow. The currency valuation, thereafter, will depend upon extent of relaxation on financial and capital accounts through debt/loans rescheduling.