External debt: Time to negotiate

According to UNCTAD, developing countries like Pakistan will be hit hardest by the COVID-19 triggered economic crisis. One the of the concern is mounting debt. Pakistan is facing a challenge of domestic public debt. The fiscal deficit will only grow in days of crisis where government is giving stimulus and the tax collection is to be compromised as well. Concurrently, external debt could become a headache; especially the debt repayment in next 3 to 12 months.

Pakistan is getting an access to IMF’s RFI (rapid finance instrument) that is designed for such kind of unexpected events. The country will get $1.4 billion which is likely to be disbursed in April. Its process is to be expedited to cut the red tape. Similarly, WB and ADB are speeding their promised disbursements. The government is expecting $1 billion to come in from WB in the next few weeks -$300 million is the new facility while remaining is already approved but was supposed to be disbursed slowly. Likewise, ADB will release remaining 80 percent of its $1.2 billion commitment.

This will ease some external pressure and give rightly needed fiscal stimulus. The economy is not likely to recover in FY21. But the external financing is high in next 12 months. Around $13.5 billion is to be paid in 2020. It was expected that foreign portfolio investment may create buffers for debt repayment. That is no more the case. This not a time to issue bonds. There are multilateral, bilateral and commercial loan repayments. These are to be restructured and interest payments are to be deferred.

Pakistan’s external debt is growing and is at $110 billion. Annual debt servicing cost is estimated at $10-12 billion. With exports falling and remittances slowing down, this cannot be financed solely by import saving. Loans are to be renegotiated. There is a global push for debt right offs and debt reliefs. Ministry of Finance is seemingly taking toll of the rally.

Authorities have to sit down with the IMF on country specific case. Pakistan is now in a better position to negotiate and get its due share in unprecedented times. Economy was doing well prior to the crisis, there were considerable efforts to curb twin deficits. After this shock, earlier tightening therapy might not work. It is time to get back in drawing board with the IMF to reassess the situation and recalibrate the quantitative binary targets for coming quarters.