Pakistan facing the toughest time of its history

According to a report by Pakistan’s leading brokerage house, Topline Securities, falling foreign exchange reserves and rising external funding gap is worrisome. Though, current account deficit is coming down, the biggest worry is external debt servicing.

Pakistan economy is passing through one of the toughest times in its 75-year history. Large external financing gap, challenging global financial markets, devastating floods and local political instability has increased the risk of timely external debt payments.

According to IMF data, Pakistan’s external debt repayment obligations are estimated US$73 billion over the next three years (FY23-25) as against prevailing foreign exchange reserves hovering US$8 billion at present.

The huge repayment are due to large external borrowings that have doubled in 7-years from US$65 billion in FY15 (24% of GDP) to US$130 billion (40% of GDP) in FY22.

Resultantly, Pakistan’s total debt and liabilities (domestic & external) have increased from Rs19.9 trillion (72% of GDP in FY15) to Rs60 trillion as of June, 2022 (90% of GDP).

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

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

The Sooner the government starts this process the better it will be. In case, current coalition Government delays it for political reasons than new Govt. coming to power after 2023 Elections will have to do this. The new government will have to enter into a new and a bigger IMF program 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.

Pakistan credit rating that was recently downgraded (Moody’s downgraded to Caa1 from B3) may also be adversely affected. 

The brokerage house claims to have seen precedence from other countries like Argentina, Angola, and 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.

Under the new IMF program along with debt restructuring, Pakistan will have to follow stringent monetary, exchange rate and fiscal policies. The economic growth is anticipated to remain slow. On top of all, while PKR will remain under pressure, interest rate may spike to higher levels despite receding inflation.

According to the brokerage house, under the Best-Case scenario if commodity prices fall 25% and financial markets improves that will provide the much-needed relief and the country may not require debt restructuring.

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.