Team Neemopani
The United States Institute of Peace (USIP) in Washington warns that “Risk of Pakistan Defaulting on its debt is Real” could escalate political upheaval and terrorism.
The Thursday research cautioned that the country’s large foreign debt commitments might lead to a default amid growing inflation, political strife, and terrorism.
The cash-strapped country is suffering from a widening political crisis that started in April last year when former prime leader Imran Khan was removed by a vote of no-confidence and the derailment of the $6.5 billion International Monetary Fund (IMF) programme.
Since late January, Islamabad has hosted an IMF team to discuss policy steps to win $1.1 billion in finance for the cash-strapped economy, which is near collapse.
Analysts believe Pakistan needs the IMF’s 2019 $6.5 billion bailout to avoid defaulting on foreign payments.
Pakistan’s foreign currency reserves have plummeted below four weeks’ import cover, but the arrangement would open up bilateral and multilateral finance channels to help it avoid a balance of payment crisis.
If Pakistan wants to escape its economic crisis, the USIP research recommended four factors:
- Pakistan’s foreign debt composition
- Short- and medium-term debt repayment pressure
- Possible debt-offsetting inflows
- Pakistan’s foreign debt strategy
Debt structure
As of December 2022, Pakistan’s foreign debt and liabilities are $126.3 billion, with the government directly owing $97.5 billion to creditors. Government-owned public sector firms owe multilateral creditors $7.9 billion.
Pakistan has four main creditors:
- Global debt
- Paris club debt
- Business loans
- China owes
Debt repayment pressure
The country’s enormous foreign debt puts repayment pressure. Pakistan must repay $77.5 billion in foreign debt from April 2023 to June 2026, a “hefty sum” for a $350 billion economy, according to the US research tank analysis.
The next three years will see substantial repayments to Chinese financial institutions, private creditors, and Saudi Arabia.
From April to June 2023, the nation must pay $4.5 billion.
A $1 billion Chinese SAFE deposit and a $1.4 billion Chinese commercial loan maturity in June, requiring hefty repayments. Pakistani officials want to persuade the Chinese to refinance and roll over both obligations.
Even if Pakistan meets these commitments, the following fiscal year would be worse since payments will climb to over $25 billion. It includes:
Short-term loans of $15 billion include:
$4 billion Chinese SAFE deposits
$3 billion Saudi deposits
2 billion UAE funds
Long-term debt: $7 billion
$1 billion Eurobond repayment in Q4
$1.1 billion long-term commercial loans to Chinese banks
Pakistan will repay $8.2 billion in long-term debt and $14.5 billion in short-term debt in 2024-25, including $3.8 billion to Chinese lenders, according to the research.
In 2025–26, Pakistan must repay $8 billion in long-term debt, including $1.8 billion to a Eurobond and $1.9 billion to a Chinese commercial lender.
Calculating repayment
Pakistan needs exports, FDI, and remittances to service its debt and avert a sovereign default, according to the American research group.
Compared to the import bill and repayment pressure, these three sources are expected to remain modest.
On April 6, 2023, a ship in Karachi stacks shipping containers. — AFP
On April 6, 2023, a ship in Karachi stacks shipping containers. — AFP
Imports will likely exceed exports and remittances during the next three years, creating a current account deficit that will need external funding.
FDI will also stay low. Due to the difficult economic climate and frequent legislative changes, investment has averaged $2 billion yearly in recent years. The best scenario for the next several years is comparable investment.
The government’s capital export limits have also affected investor confidence.
Manageable external debt
Pakistan’s economic managers have two choices to reduce foreign debt, according to the research. The first is to accept new loans and seek debt rollovers, however owing to international credit rating agency downgrades, the government cannot access the sovereign finance market.
So, to prevent default, the leadership will rely on Middle Eastern allies and China for rollover and new loans.
They rely on IMF discussions. If the stalled IMF programme is resurrected, it will seek less than if it falls.
Due to its foreign debt load over the next three years, Pakistan will require a new IMF programme and fresh loans and rollovers from its Middle Eastern and China partners if the bailout is renewed and finished during the summer.
Pre-emptive debt restructuring reduces repayment pressure and frees up limited cash to cover the country’s current account deficit.
international response to the Israeli attack on the Al-Aqsa Mosque
Pakistan defaults—what happens?
The American think tank research predicted a “cascade of disruptive impacts” if Pakistan fails.
First, imports might be hindered, causing a lack of crucial supplies and commodities.
The economic crisis may exacerbate the political strife between the Pakistan Democratic Movement-led government and Pakistan Tehreek-e-Insaf (PTI) in the 220 million-person country.
“And given Pakistan’s demographic composition and growing terrorist concerns, the following crisis might swing in unanticipated directions.”
