KARACHI: The cost of insuring Pakistan’s five-year sovereign debt rose by 1,224 basis points over the weekend to a record high of 92.53 percent, data from a brokerage showed on Monday. JEE News reported.
Rates at these levels reflect a certain default. Analysts say that unless the political deadlock between the government and the Imran Khan-led PTI ends, the country’s sovereign dollar bonds will remain unsecured.
“The situation on the ground is challenging but not as dire as current credit default swap (CDS) rates indicate,” an analyst said. “The margin for any misadventure was certainly slim.”
Pakistan’s economy is in decline, and its foreign exchange reserves are rapidly depleting. The central bank’s foreign exchange reserves stood at $7.959 billion as of November 11 and are sufficient for less than six weeks of imports.
Despite the recent rollover of Chinese debt and fresh infusions from the World Bank (WB) and Asian Development Bank (ADB), foreign exchange reserves are dwindling.
As talks with the International Monetary Fund (IMF) on the ninth review of the debt facility stall, its external financing pressure continues to mount.
Friendly countries have not made any firm pledges of funding. Remittances are the second largest source of income after exports, but they are also declining.
Along with deteriorating economic fundamentals, Pakistan’s political instability has led foreign debt markets to view its bonds as a risky and politically volatile sovereign for months.
According to former finance minister Dr. Salman Shah, political instability has added to worries for Pakistan and, as a result, the debt insurance premium for the country’s bonds has increased.
Shah claimed that the market was waiting for the government to make a move to change how foreign investors viewed Pakistani bonds.
“First and foremost, the army chief should be named as soon as possible and without any controversy. This will further stabilize the political environment in the country,” Shah said.
“Secondly, the payment of $1 billion on sukuk on December 5 must be made as scheduled. Thirdly, a road map for elections that is acceptable to all political parties needs to be announced. It was adopted, ” They said.
If not, everything will go out of control, the former finance minister said, adding that the IMF is not providing significant support to Pakistan at the moment.
“Since Pakistan needs to get external financing to meet its external debt obligations, the economy needs full attention. It is therefore important that the IMF program is implemented in its truest sense.” Structural reforms should be carried out, especially in the energy sector, and the investment climate in the country should be enhanced,” Dr Shah said.
Fahad Rauf, head of research at Ismail Iqbal Securities, said a major event would be the upcoming $1 billion payment on sukuk, which would give confidence to the market.
“Pakistan is likely to remain in the IMF program even after the termination of the current program, which will help Pakistan manage its debt repayments.”
“However, serious reforms are needed to reduce the rising level of indebtedness in the economy i.e. i) energy conservation, ii) increase in tax base, iii) focus on exports, and iv) attracting FDI. ” said Rauf.
