Pakistan Needs Effective Debt Restructuring

Pakistan’s leading brokerage house, Topline Securities, in its report titled “Pakistan’s Debt Restructuring - External Debt Repayment Crisis” dated December 03, 2022, had highlighted Pakistan’s external debt repayment obligations of US$24 billion annually and the need to address these in a sustainable way. The brokerage house opined these external debt repayments are too high and should ideally be rescheduled and reduced to sustainable levels.

The brokerage house further highlighted that current foreign exchange crisis was mainly driven by external debt obligations and not trade unlike Pakistan’s previous foreign exchange crisis of 2008. Therefore, despite ongoing import controls, Pakistan’s foreign exchange reserves continue to dwindle to 9-year low at US$4.6 billion only as debt repayments continue to come due and are serviced.

Falling foreign exchange reserves, delay in IMF review and slow policy actions are adding to Pakistan’s distress. Resultantly, despite of more than US$10 billion pledges, Pak Rupee (PKR) black market premium is continuously rising and has increased from 10% a few weeks back to 15% now when compared to the official interbank rate.

The brokerage house highlights that the true culprit of the current debt conundrum is short term rollovers that have increased by 9 times to over US$12 billion since 2015. It is of the view that external debt restructuring is an eventuality, and the mode of restructuring, that is orderly or disorderly, will test Pakistan’s economic vulnerabilities.

The brokerage house believes that Pakistan should ideally try to convert its short term external loans with long term with the help of friendly countries like China, Saudi Arabia, United Arab Emirates etc, if that is not doable than Pakistan should try G-20 common framework of debt restructuring. These are less painful and will help recovery soon without affecting credit ratings. 

If the Government of Pakistan does not opt for orderly and amicable restructuring and continues to rely on short term funding from friendly nations or relief in the form of low cost loan vis-a-vis for floods to manage the country’s external accounts, the country could move towards a disorderly and coercive restructuring that will be very painful and may trigger a further credit rating downgrade.

After brokerage house’s earlier report, many other experts, trade bodies and polls suggest that Debt Restructuring is the most viable solution that can help reduce debt burden and will lead to relatively faster economic recovery.

The Monetary Policy Announcement of January 23, 2023 underscores the need for debt restructuring as US$8 billion of debt still needs to be dealt with in next 5 months till June 2023 while the country’s reserves are half of that. Even if the bulk of this amount is rolled over as the SBP is alluding to, the meter will again reset on July 1 when the rollovers will restart for FY24.

A few countries including Angola, Greece, Argentina, Ghana, Sri Lanka and Zambia among others have gone through debt restructurings. Based on their experience, the brokerage house found that orderly and timely debt rescheduling is relatively less painful and provide better chances of quicker economic recovery.