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Deal or default: Pakistan’s economy set for an endgame

  • Distressed by debt, many analysts expect 'reprofiling' rather than mass write-off of payments
Published February 1, 2023
Photo: Reuters
Photo: Reuters

ISLAMABAD/LONDON: Pakistan’s full-blown economic turmoil, from its biggest ever currency fall to a rash of emergency spending cuts, offers the clearest sign yet that the nuclear-armed nation faces the risk of a default unless it receives massive support.

Pushed to the brink by last year’s devastating floods, the South Asian nation has reserves of just $3.7 billion remaining, or barely enough for three weeks of essential imports, while hotly contested elections are due by November.

There is just a long-term indebtedness problem. It is more a question of when they need to restructure (debt), rather than if: Jeff Grills, head of emerging markets debt at Aegon Asset Management, who held Pakistan bonds until the floods hit

It desperately needs the International Monetary Fund (IMF) to release an overdue tranche of $1.1 billion, leaving $1.4 billion remaining in a stalled bailout programme set to end in June.

Although an emergency IMF mission has arrived in Pakistan, there are no guarantees amid a growing number of headaches after November’s suspension of disbursements from the current package, which was topped up to $7 billion after the floods.

A devaluation of 15% in the Pakistani rupee and a rise last week in fuel prices could help eliminate some key snags, particularly as tax measures are apparently imminent. Yet pressure is building as the bailout programme cannot be extended beyond June and the elections loom.

“If they don’t get those (IMF) funds, default risk increases materially,” said Kathryn Exum, the co-head of sovereign research at distressed debt specialist fund Gramercy, which expects more of a debt “reprofiling” rather than mass write-off.

Govt team tries to persuade IMF to unlock lending

Pakistan’s former finance minister, Dr Miftah Ismail, who successfully negotiated an extension to last year’s programme before being sacked in the political tumult, also thinks the IMF is the only logical option.

“If the IMF doesn’t come in, we’re looking at a default,” Ismail said, adding that another support package, the country’s 24th, would then be needed.

“I can’t imagine Pakistan not going on a back-to-back IMF programme.”

Prime Minister Shehbaz Sharif’s main election challenger is former cricket star Imran Khan, who was removed from the job last April but retains popularity. Each blames the other for the crisis, although finances have long been strained.

With Pakistan’s debt-to-GDP ratio in a danger zone of 70%, and between 40% and 50% of government revenues earmarked for interest payments this year, only default-stricken Sri Lanka, Ghana, and Nigeria are worse off.

“There is just a long-term indebtedness problem,” said Jeff Grills, the head of emerging markets debt at Aegon Asset Management, who held Pakistan bonds until the floods hit. “It is more a question of when they need to restructure, rather than if.”

Fitch says PKR to further weaken

Most of Pakistan’s bonds are still trading at less than half their face value.

Difficult times

Such a restructuring of Pakistan’s bonds would represent its first international default since 1999, according to the Bank of Canada-Bank of England Sovereign Default Database.

With just $8.6 billion worth of such bonds, compared to the $30 billion Pakistan owes to China, Ismail said Islamabad might be better off “just going to those countries that we owe a lot, or to the institutions we owe a lot, and trying and get some more long-term loans.”

PM Shehbaz is optimistic that the IMF will resume disbursements. “An agreement with the IMF, God willing, will be done,” he said at an event last week in Islamabad, the capital.

“We will soon be out of difficult times.”

Multilateral and bilateral financing pledges for Pakistan’s rebuilding efforts after the floods also depend on a green light from the IMF.

But even domestic analysts believe the government will find matters tough, as the IMF is likely to demand significant belt-tightening that is bound to be unpopular with voters already grappling with decades-high inflation and fewer job prospects.

IMF officials have been eager to support poorer countries and Pakistan promises to be a crucial partner for the West, but paying out gets trickier when a programme is close to its end and a new government could come in and try and tear up a deal.

IMF revises GDP growth projections downward

If the disbursements do not arrive by June, there could be a six-month gap before the new government takes office during which Pakistan would be starved of funds, effectively pushing its population of 220 million to the brink.

The lack of reserves will make it to tough to stay afloat. Just $500 million of interest or ‘coupon’ payments are due on Pakistan’s international bonds this year, but the chief of the central bank chief has said $3 billion is needed to meet overall external debt payments.

The political timing is also critical. After the government’s tenure ends in August, a special caretaker government will take charge for up to 90 days to ensure free and fair elections.

Gold price sees biggest one-day decline, retreats to Rs201,500 per tola in Pakistan

However, the caretaker government is not empowered to sign an IMF pact, raising the question of whether the government and opposition can cooperate on a joint pledge to push through any IMF demands in order to avert a default.

“If something happens with the disbursement and then the elections get in the way, they might have a problem,” Gramercy’s Exum added.


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Rana Altaf Feb 01, 2023 06:47pm
Fact Sheet. The Good news in these bad news is that tharmal Coal price is falling very fast. Pakistan have opportunity to generate electricity from three coal power plants at cheaper imported coal for the transition period from Thar Coal. But Ultimate Objective must be ZERO Imported Energy from Coal, LNG and Fuel. Thre will also no need to import expensive LNG imports. The Price of LNG is also expected to fall in Febrauary and companies will start to provide LNG from March and honour their long term Contracts with Pakistan Govt from Force Mejore. The reason for falling prices is that Winter is almost gone particularly early ending of Cold in Europe. This is very good news for Pakistan. Now it should wait for full fall of Prices which will be expected at the end of Febrauary. There will be Surplus tharmal Coal in the market after March and companies. The contracts price be negotiated after the end of Febraury. This will provide opportunity to Pakistan to go for all electric and say good by to all Combussion Engines Transportation. The Solar Power alongwith Government Buildings, the Motor ways and Ring Road Side Areas are also best places and Electric Charging Station be established every where. This will provide the complete turn arround of fuel import bill to zero. No need to invest in Refinery. This solution is along with Thar Coal Power plants. RANA AMIR +61490867813
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Muhammad Talha Feb 01, 2023 11:02pm
@Rana Altaf, what about the impact of currency depreciation and lack of foreign exchange reserves to support the coal imports?. No doubt that international coal prices are fallen in recent times, but we may not able to grab this opportunity because of massive depreciation of currency, which will still make the imports expensive. Moreover, no one is ready to finance LC's due to depleting foreign exchange reserves that gonna be another hurdle to finance imports, and installing solar at large scale required substantial amount of time, which is not an option at this particular emergency situation, but yes in long run definitely it would be affective provided that our government have enough surplus to fund these megaprojects.
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Muhammad Talha Feb 01, 2023 11:24pm
@Rana Altaf, what about the impact of the currency depreciation and lack of foreign exchange reserves to support imported coal? Although the coal prices have fallen in recent times, due to recent massive currency devaluation the imports will still remain relatively expensive in my opinion. Moreover, due to depleting foreign exchange reserves it is not feasible neither practical for banks to open LC,s to support the import financing, which also make the import of commodity difficult at the moment. Installation of solar system at larger scale can be an option, but again it required substantial amount of time and huge amount of financing, and we all know that generating funds is the biggest problem for the government at this particular point of time.
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