This article is in continuation of the writer’s earlier article on the same subject carried by this newspaper on July 25, 2023. The comments and observations in this part are therefore to be read in that perspective.
On Table 3b of page 36 of the IMF Report of 2023 a detailed analysis of requirements for external finances and their arrangement has been made. In the following Table, the specific kind of presentation by the IMF has been placed under simple understandable form.
This analysis reveals the following:
============================================================================================================================S. No Particular 2023-24 2024-25 2025-26 2026-27 2027-28 Total============================================================================================================================ Foreign Currency required by Pakistan1 Current account deficit 6.424 6.462 7.139 7.285 7.945 32.2552 Repayment of Government Sector Loans 14.499 13.223 18.081 13.970 16.255 76.0283 Repayment of Private Sector Loans 5.779 5.945 6.102 6.263 6.423 30.5124 IMF Repayment 1.659 1.538 .574 1.372 2.232 7.3755 (1+2+3+4) Total $ required 28.361 27.168 31.897 28.890 32.855 149.170 To be acquired from6 FDI .173 1.526 1.861 2.250 2.689 8.4997 Equity and debt portfolio 7.338 9.023 10.004 10.437 12.143 48.9458 Syndicated Loans and Eurobonds 2.325 9.031 11.031 8.031 9.331 39.7499 (7+&) Private Sectors 9.663 18.054 21.035 18.468 21.474 88.69410 Government Loans11 Chinese .135 .132 .049 .047 .04112 Non Chinese Loans and borrowings including rollover 19.997 11.206 10.108 9.167 9.10713 (11+12) Total Government Loans 20.132 11.338 10.157 9.214 9.148 59.98914 Others .300 157 .097 .078 .030 . 66215 (6+9+13+14) Total Available resources 30.268 31.075 33.150 30.010 33.341 157.84416 (5-15) 1.907 3.907 1.253 1.120 486 8.673============================================================================================================================(1) There is substantial change in the ‘composition’ of debts/borrowings by Pakistan; (2) there is, also an expectation of substantial equity and debt inflow into Pakistan; and (3) Pakistan will most likely continue to walk a very tightrope.
The first aspect is startling. The aforesaid table shows that over the period, there will be a net increase in loans and debts by USD 27 (150-123) billion, however, government debts from multilaterals and friendly countries will reduce. There is a repayment of USD 76.028 billion as against new borrowing of USD 59.989.
This depicts that Pakistan is not able to obtain funds from friendly countries and multilaterals; and rollover is not expected for all such debts due. On account of these reasons, there is a net repayment of USD 19.443 billion over the period of five years.
This is not a good sign for the country. Furthermore, there is no inflow from China. This also implies that Pakistan is not able to obtain full rollover as was desired.
As per the estimates given in the table, there is another net inflow of USD 58.182 billion during this period of five years. Out of which USD 48.945 billion has been titled as ‘Includes equity and debt portfolio inflows, and borrowing by banks and other sectors’. This heading is under ‘Private Creditors’.
This heading requires further disclosure. In addition to the above, there will be another demand of around USD 9 billion. This staggering amount of around USD 60 (58.182 billion) is expected to be arranged from ‘Private Creditors’.
Private credit is obtained on the basis of international credit rating. According to Moody’s, investment grade bonds comprise the following credit ratings range from Aaa to Baa3.
The lowest investment grade for bonds is a rating of BBB- (on the Standard & Poor’s and Fitch scale) or Baa3 (on Moody’s); or better are considered “investment-grade.” Bonds with lower ratings are considered “speculative” and often referred to as “high-yield” or “junk” bonds.
At the moment, Moody’s credit rating for Pakistan is Caa3. This is a rating within speculative grade as Moody’s Long-term Corporate Obligation Rating. Obligations rated Caa3 are judged to be of poor standing and are subject to very high credit risk. Rating one notch higher is Caa2.
Whether or not Pakistan will be able to obtain the required loans/debts from the international market depends on the credit rating that can be achieved during the period. The writer does not see any apparent reason for improvement from Caa2 to Baa3 at least during this period.
Historically, average yields on junk bonds have been 4% to 6% above those for comparable U.S. Treasuries. U.S. bonds are generally considered the standard for investment-grade bonds because the nation has never defaulted on a debt. But we have no choice.
Pakistan will be compelled to borrow from the market a sum of around USD 60 billion during this period of five years. This is a worrying feature for us. This cash flow in USD tells us that Pakistan will be in a very difficult situation in these five years. Any external shock such as a sharp increase in prices of commodities or a major hike in the international market interest rates will have a debilitating impact on the economy.
Nevertheless, in summary, the writer considers that this is the best possible scenario under the present circumstances. This table appears to assure our creditors that a default in the following five years would not be happening. It is good to this extent and is the only solution.
Nevertheless, if this country and its people want to have economic development, then the reality would have to be completely different from what has been stated. In this scenario there will be a contraction of the economy, loss of employment and high inflation.
We need to overcome and reverse all these negatives. This reversal is not the job of the IMF. They have brought us back from the ventilator. It is up to us to be fit and proper as soon as possible.
Copyright Business Recorder, 2023