Pakistan expected to take $10-15bln breather on debt repayments

KARACHI: Pakistan’s struggling economy is expected to get $10 to $15 billion of one year breather on interest and principal payments to foreign bilateral, multilateral and commercial creditors under the G-20 debt relief package for poor countries, analysts said on Friday.

Faizan Ahmed, head of research at BMA Research said approximately $15.8 billion of debt repayments – principal plus interest – are due within the next one year and of which over 90 percent is owed to G20 countries or institutions.

“Almost all of the $15.3 billion of total repayments falling due in the next one year will be eligible for relief,” Ahmed said.

Grouping of 20 developed economies announced freezing of external loan repayments for one year for 77 countries and territories, including Pakistan, members of the World Bank’s International Development Association, to support them in the difficult and unusual times amid the coronavirus pandemic.

The debt suspension period is expected to start from 1 May 2020 and continue till 1 December 2020. The debt servicing obligations during this period would be packaged into a new loan and their repayments would not start until June 2022. Afterward, the frozen amounts will be paid over the subsequent three years period with a grace period of one year.

Analyst Atif Zafar at Topline Research estimated relief from an expected debt restructuring at $7 to billion, seeing a positive impact on current account position favoured by 50 percent decline in international oil prices.

Though Zafar said decline in exports and remittances would nullify most of the benefits, “overall, we believe these measures and flows would stabilise Pakistan’s balance of payment in the near term, where by December 2020 we estimate the State Bank of Pakistan’s reserves to rise to around $12 to $14 billion from presently $11 billion”.

“We expect these developments to provide strength to rupee in the near term, where we keep our Jun-2020 estimate intact at 168-170,” he said.

Analyst Noman Ahmed at Insight Securities said detailed breakup of G20 debt relief is yet to be announced. The country was projected to pay $11.8 billion, $6.2 billion, $7.8 billion and $5.8 billion in FY20, FY21, FY22, and FY23, respectively.

“Pakistan is seeking to reschedule / defer $12 billion of loans, 17 percent of government external debt and if this happens, this will be a great breakthrough as Pakistan is likely to remain net beneficiary of decline in imports/exports/remittance,” Ahmed said, citing external debt that stands at 31.1 percent of GDP or $87.5 billion.

Pakistan got its debts rescheduled 10 times since 1970s with major restructuring of $12.5 billion approved by Paris Club in December 2001. This time around major chunk of repayment is due to non–Paris club creditors and $6.7 billion repayments are scheduled in FY21.

Saad Khan, analyst at IGI Securities said suspension of G20 debt servicing cost around the time of Covid-19 is welcoming. “SBP foresees less stress on exchange rate as these funds will help protect a severe drawdown on country’s FX reserves,” Khan said.

Another analyst said further monetary action from the central bank is expected given the sharp decline in economic activity, benign inflationary backdrop and improved external account position following G20 debt relief and funding commitments from multilaterals. The central bank cut the policy rate by cumulative 425 basis points to 9 percent over the last month. The emergency rate cut came on the back of worsening global and domestic economic outlook due to COVID-19 and improved inflation outlook following a plunge in commodity prices.