Pakistan must seek rescheduling of bilateral debt: Report

KARACHI: Pakistan should go for rescheduling its bilateral debt as soon as possible because debt repayment obligations have gone very high and difficult to manage at current low level of foreign reserves, analysts said on Saturday.

This suggestion follows the nation's payment for a $1 billion international bond, which eliminated the possibility of a short-term default. However, unless the government secures much-needed external funding, the ability to pay long-term debt obligations remained questionable. The International Monetary Fund’s (IMF) next loan tranche negotiations have also been delayed. Due to the damage caused by the severe floods, Moody’s Investors Service and Fitch ratings downgraded the country’s credit ratings in October.

A local brokerage house, Topline Securities, citing data from the IMF, said in a report that Pakistan’s external debt repayment obligations have risen to $73 billion in 3 years (FY2023-25) compared with prevailing foreign exchange reserves of $7-8 billion.

Saad Hashemy, a Topline Securities advisor, and Umair Naseer, this firm’s director of research, collaborated to produce this report.

This huge repayment is due to large external borrowings (external debt and liabilities) that have doubled in 7 years from $65 billion in FY2015 (24 percent of GDP) to $130 billion (40 percent of GDP) in FY2022, the report said.

Resultantly, Pakistan’s total debt and liabilities (domestic and external) have increased from Rs19.9 trillion (72 percent of GDP in FY2015) to Rs60 trillion as of June, 2022 (90pc of GDP), it added.

“Considering this external debt repayment crisis, we think Pakistan will do a Debt Rescheduling (Base Case) with its bi-lateral lenders especially China as it forms 30 percent of government external debt and the repayment to China is huge in next few years,” it said.

“Pakistan must capitalise on its friendly relationship with China and must seek IMF led Debt Restructuring of at least $30 billion for next 3-5 years. Finance minister has already hinted at bi-lateral rescheduling without any haircuts.”

Pakistan must also look into reducing its commercial debt as rollover of commercial debt in the current global interest rate environment will be very expensive and not possible to service given current external account situation, Hashemey told The News.

“Pakistan may be able to successfully do both through a bigger IMF programme of $15-20 billion,” Hashemy added.

Sooner the government starts the process of bilateral debt rescheduling the better it would be. In case, the current coalition government delays it for political reasons than the new government coming to power after 2023 elections would have to do this.

Moreover, the new government has to enter into a new and bigger IMF programme to execute this much needed rescheduling. Commercial lenders, Eurobonds investors, local lenders and others may or may not be affected from this rescheduling depending upon the negotiations, according to the report.

Similarly, Pakistan credit rating that was recently downgraded (Moody’s downgraded to Caa1 from B3) might also be adversely affected, it noted.

“We have seen precedence from other countries like Argentina, Angola, Zambia etc that also undertook restructuring of loans. Even in past, Pakistan restructured its Eurobond and rescheduled certain portion of Paris Club payments post nuclear tests in 1998,” it said.

According to the report, in addition to debt restructuring under the new IMF programme, the government would likely experience stringent monetary, exchange rate, and fiscal policies. Pakistan's economy would continue to grow slowly. Additionally, even though inflation is declining, the rupee will continue to be under pressure and interest rates will stay high.

Under the best-case scenario if commodity prices fall 25 percent from expectations and financial markets improve that will provide the much-needed relief and the country can then move without debt restructuring. “In contrast, if the debt is not restructured on time, Pakistan’s debt crisis could worsen further which could hamper Pakistan’s ability to pay on time,” the report warned.

The risk of timely external debt payments has grown due to the large external financing gap, difficult global financial markets, disastrous floods, and local political instability. Worrisome trends include declining foreign exchange reserves and a growing external funding gap. The largest concern is the repayment of external debt, even though the current account deficit is decreasing as a result of currency depreciation and other tightening measures.