The United States Institute of Peace (USIP), a Washington-based think tank, warned that “there is a real risk that Pakistan could default”, adding to the political crisis amid already growing terrorism. Can speed up.
The author of the analysis published on Thursday warned that the country faces the risk of default on its huge external debt obligations amid skyrocketing inflation, political strife and rising terrorism.
The cash-strapped country is reeling from the effects of a deepening political crisis – which began in April last year when former Prime Minister Imran Khan was ousted by a no-confidence motion – and a $6.5 billion international monetary crisis. The fund was derailed. (IMF) program.
Islamabad has been hosting an IMF mission since late January to negotiate a series of policy measures to secure $1.1 billion in funding for the struggling economy, which is on the brink of collapse. is on
The funds are part of a $6.5 billion bailout package approved by the IMF in 2019, which analysts say is critical for Pakistan to avoid defaulting on external payment obligations.
The agreement will also open up other bilateral and multilateral financing opportunities for Pakistan to boost its foreign exchange reserves, which have fallen to four weeks of import cover, and help it out of the balance of payments crisis. will get
The USIP report highlights four factors that must be considered if the authorities want to pull Pakistan out of the economic abyss. These include:
- Composition of Pakistan’s Gross External Debt
- Debt repayment pressure in the short and medium term
- Potential inflows that can offset debt outflows.
- External Debt Management Strategy of Pakistan
- Debt composition
Pakistan has external debt and liabilities worth $126.3 billion – as of December 2022 – about 77 percent of which $97.5 billion is directly owned by the government with various creditors. Meanwhile an additional $7.9 billion is held by government-controlled public sector enterprises with multilateral lenders.
It should be noted that Pakistan’s lenders fall into four broad categories:
- Multilateral loan
- Paris club loan
- Personal and commercial loans.
- Chinese debt
- Short and medium term debt repayment pressure
The country’s large external debt comes with considerable repayment pressure. A report by a US think tank said that between April 2023 and June 2026, Pakistan would have to pay off $77.5 billion in external debt, a “huge amount” for a $350 billion economy.
It should be noted that major payments will be made to Chinese financial institutions, private lenders and Saudi Arabia over the next three years.
The country is facing near-term debt servicing pressure as the external debt service burden is $4.5 billion from April to June 2023.
Major payments are due in June when $1 billion in Chinese safe deposits and about $1.4 billion in Chinese commercial debt mature. Pakistani officials hope to convince the Chinese to refinance and roll over both loans, something the Chinese government and commercial banks have done in the past.
However, even if Pakistan manages to meet these obligations, the next fiscal year will be more challenging, as the debt provision will reach around $25 billion. This includes:
- $15 billion of short-term loans; These include:
$4 billion in Chinese safe deposits
3 billion dollar reserves of Saudi Arabia
UAE reserves of $2 billion - $7 billion in long-term debt; which includes:
A $1 billion payment on Eurobonds in the fourth quarter
$1.1 billion in long-term commercial loans to Chinese banks
The report predicts that in 2024-25, Pakistan’s debt provision is likely to be around $24.6 billion, with $8.2 billion in long-term debt repayments and another $14.5 billion in short-term debt repayments. Included. This includes large payments of $3.8 billion to Chinese creditors.
In 2025-26, the debt service burden is projected to be at least $23 billion. This year, Pakistan is due to repay $8 billion in long-term debt, including $1.8 billion to Eurobonds and $1.9 billion to Chinese commercial lenders.
- Calculation of payment
The US think tank suggested that Pakistan’s earnings from exports, foreign direct investment (FDI) and remittances are crucial to repay its debt and avoid sovereign default.
However, inflows from all three sources are likely to remain low compared to the growing pressure to service the import bill as well as debts.
Over the next three years, imports are likely to exceed the total dollar amount of exports and remittances, leading to a current account deficit that will require external financing.
Meanwhile, FDI is also likely to remain subdued. In recent years, investment has averaged $2 billion annually due to a challenging business environment and frequent policy changes. A similar investment is the best case for the next few years.
Investor sentiment has also been affected by the government’s recent restrictions on the movement of capital out of the country.
- Options to manage external debtThe report states that Pakistan’s economic managers have only two options to deal with the external debt burden. The first is to take on new loans and seek debt rollovers – however, downgrades by international credit rating agencies have limited the country’s ability to access sovereign financial markets.
Therefore, leadership will depend on Middle Eastern partners and China, not just for existing rollovers but for fresh loans, if the country tries to avoid default.
It should be noted that their details will depend on the negotiations with the IMF. If the stalled IMF program is reinstated, the amount will be less than what would have been received had the program collapsed.
And if the bailout program is revived and completed in the summer, Pakistan will face a new three-year debt burden in addition to new loans and rollovers from Middle Eastern and Chinese partners. MF program will be required.
Another option the country has is to seek early debt restructuring as this will help ease the payment pressure and inject fewer dollars into the economy to offset the country’s current account deficit. will save.
What will happen if Pakistan defaults?
A report by the US think tank said that if Pakistan eventually defaults, there will be a “catastrophic cascade of effects”.
Essentially, the country’s imports may be disrupted, leading to shortages of essential goods and commodities.
The nation of 220 million people, which is already witnessing intense political conflict between the Pakistan Democratic Movement-led government and the Pakistan Tehreek-e-Insaf (PTI), could also see the economic crisis fuel further political turmoil.
“And given Pakistan’s demographic profile and growing terrorist threats, the resulting crisis could take unexpected directions”.
