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Debt reprofiling viable option for Pakistan under IMF watch: report

  • Arif Habib Limited says Pakistan has a long way to go to address macroeconomic vulnerabilities
Published February 7, 2023

Reprofiling of bilateral debt remains a viable option under the International Monetary Fund (IMF)‘s watch, according to a report by Arif Habib Limited, as Pakistan remains in talks with the Fund’s mission for the resumption of the stalled ninth review of the Extended Fund Facility (EFF).

“We believe reprofiling of $13 billion of short-term bilateral and commercial debt from friendly countries is a less disruptive option to effectively create some breathing space to put our financial house in order,” said brokerage house Arif Habib Limited (AHL) in a report titled ‘Pakistan Economy: Debt reprofiling or restructuring?’, released on Tuesday.

“That said, such a transaction shall only be possible once Pakistan signs up to new long-term agreement like SBA (Standby Agreement) likely post General Elections (due in Oct),” it added.

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Pakistan is facing a series of economic challenges, with its central bank’s foreign exchange reserves decreased to $3 billion, barely enough to cover three weeks of imports. Experts have termed the resumption of the IMF programme crucial for economic sustainability.

Technical-level talks with the Fund are said to have concluded on Monday while policy-level discussions will start from Tuesday (today).

AHL said that while the return of the IMF, albeit after much delay, is positive, Pakistan has a long way to go in order to address its macroeconomic vulnerabilities.

“In the midst of the precarious FX reserves situation and sizeable external repayment obligations over the next 3 years, talks of debt restructuring have gathered momentum once again. We, however, view the discussions as a little premature given the costs attached with any such move.

“Moreover, if we take a more granular look at Pakistan’s future external debt obligations, the major area of concern relates to USD 13bn annual rollover of short-term bilateral and commercial debt,” it said.

The report also highlighted that the rupee is expected to remain volatile in the short term, and would stabilize as the IMF review concludes and other bilateral and multilateral flows start pouring in.

“Given the significant deterioration in external reserves position and repayments of more than USD 2bn of commercial debt previously anticipated to be rolled over, we now expect Jun-23 and Dec-23 PKR/USD closing rate of 275 and 290 respectively,” said the report.

The brokerage house also expects economic growth to remain subdued amid massive fiscal tightening, while the government is expected to implement most of the additional taxation and administrative measures.

“Fiscal tightening and impact of PKR depreciation is expected to keep inflation elevated which is likely to rise above 30% over the next few months and average 27% in FY23.

“In this backdrop SBP shall maintain a tight monetary policy and raise rates by another 100-200 bps before Jun-23 with gradual easing from 4Q2023 as inflationary pressures subside. In the backdrop of a further monetary and fiscal tightening, we estimate FY23E GDP growth to decline to 1.1% (FY22: 5.97%),” AHL noted.

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