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KARACHI: A large external financing gap, challenging global financial markets, devastating floods, and political instability have increased the risk of defaulting on external debt payments, an analyst has said.

Muhammad Sohail, leading analyst and the chief executive officer of Topline Securities, has said that Pakistani economy is passing through one of the toughest periods in its 75-year history.

Declining foreign exchange reserves and rising external funding gap are worrisome. Although current account deficit is coming down after currency devaluation and other tightening measures, the biggest worry is external debt repayment, he added.

According to IMF data, Pakistan’s external debt repayment obligations are US$73 billion in three years (FY23-25) compared to prevailing foreign exchange reserves of $7-8bn. This huge repayment requirement is due to large external borrowings (external debt and liabilities) that have doubled in seven years from $65bn in FY15 (24 percent of GDP) to $130 billion (40 percent of GDP) in FY22.

Resultantly, Pakistan’s total debt and liabilities (domestic and external) have increased from Rs19.9 trillion (72 percent of GDP in FY15) to Rs60 trillion as of June, 2022 (90 percent of GDP).

“Considering this external debt repayment crisis, we think Pakistan will do a Debt Rescheduling (Base Case) with its bilateral lenders, especially China as it forms 30 percent of government external debt and the repayment to China is huge in next few years,” M. Sohail said.

Pakistan must capitalise on its friendly relations with China and must seek IMF-led Debt Restructuring of at least $30 billion for next 3-5 years, he said. The finance minister has already hinted at bilateral rescheduling.

The sooner the government starts this process the better it will be. In case, current coalition government delays it for political reasons then government coming into power after 2023 elections will have to do this, he said.

Moreover, the new government will have to enter into a new and bigger IMF programme to execute this much-needed rescheduling. Commercial lenders, Eurobond investors, local lenders and others may or may not be affected by this rescheduling, depending upon the negotiations.

Similarly, Pakistan’s credit rating that was recently downgraded (Moody’s downgraded to Caa1 from B3) may also be adversely affected.

“We have seen precedence from other countries like Argentina, Angola, and Zambia that also undertook restructuring of loans. Even in the past, Pakistan restructured its Eurobond and rescheduled certain portions of the Paris Club payments post nuclear tests in 1998,” he said.

Under the new IMF programme along with Debt Restructuring, country will likely witness strict monetary, exchange rate and fiscal policies. The country’s economic growth will remain slow. Moreover, PKR will remain under pressure, while interest rate will remain on higher levels despite a receding inflation.

“Under our Best-Case scenario a decline in commodity prices of 25 percent from expectations and an improvement in financial markets will provide the much-needed relief and the country can then move without Debt Restructuring. In contrast, if the debt is not restructured on time, Pakistan’s debt crisis could worsen further which could hamper Pakistan’s ability to pay on time.”

Copyright Business Recorder, 2022

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