Deal or default: Pakistan’s economy ready for endgame
ISLAMABAD/LONDON: Pakistan’s full-blown economic turmoil, from its biggest currency collapse ever to shocks of emergency spending cuts, provides the clearest indication that the nuclear-armed nation risks default unless it receives massive support. have to face.
Pushed to the brink by last year’s devastating floods, the South Asian nation has only $3.7 billion left in reserves, or barely enough for three weeks’ worth of essential imports, while hotly contested elections are due by November.
There is only the problem of long-term indebtedness. It’s more a question of when they need restructuring, not if: Jeff Grylls, head of emerging markets debt at Aegon Asset Management, who held Pakistan’s bonds until the flood
It desperately needs the International Monetary Fund (IMF) to release an overdue tranche of $1.1 billion, the remaining $1.4 billion in the stalled bailout program set to end in June.
While an emergency IMF mission to Pakistan has arrived, there are no guarantees amid mounting headaches following the suspension of November disbursements from the existing package, which reached $7 billion after the floods.
A 15% devaluation in the Pakistani rupee and a hike in fuel prices last week could help offset some of the key headwinds, especially with tax measures apparently imminent. Yet pressure is building as the bailout program cannot be extended beyond June and elections loom.
“If they don’t get that (IMF) fund, then the default risk goes up materially,” said Catherine Axum, co-head of sovereign research at distressed debt specialist Fund Gramercy, who writes off the mass rather than “reprofiling.” expects loan. -off.
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Pakistan’s former finance minister, Dr Miftah Ismail, who successfully negotiated an extension of the program last year before being ousted in political turmoil, also feels the IMF is the only logical option.
“If the IMF doesn’t come in, we’re looking at a default,” Ismail said, adding that the country would need a 24th support package.
“I can’t imagine Pakistan not going on back-to-back IMF programs.”
Prime Minister Shehbaz Sharif’s main electoral challenger is former cricket star Imran Khan, who was sacked last April but remains popular. Each blames the other for the crisis, although finances have long been strained.
With Pakistan’s debt-to-GDP ratio in the danger zone of 70%, and between 40% and 50% of government revenue earmarked for interest payments this year, only default-stricken Sri Lanka, Ghana and Nigeria are worse.
“There is just one long-term indebtedness problem,” said Jeff Grylls, head of emerging markets debt at Aegon Asset Management, which held Pakistan’s bonds until the flood. “It’s more a question of when they need to restructure, rather than whether.”
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Most of Pakistan’s bonds are still trading at less than half of their face value.
hard times
According to the Bank of Canada-Bank of England sovereign default database, such a restructuring of Pakistan’s bonds would represent its first international default since 1999.
Ismail said that with just $8.6 billion in such bonds, compared to Pakistan’s $30 billion owed to China, Islamabad may be better off, “just going to the countries we owe a lot, or To those institutions that owe us a lot, and try and get some more long-term loans.
PM Shehbaz is optimistic that the IMF will resume disbursements. “God willing, an agreement will be reached with the IMF,” he said at an event in the capital Islamabad last week.
“We will soon get out of the difficult times.”
Multilateral and bilateral funding pledges for Pakistan’s post-flood reconstruction efforts also depend on a green light from the IMF.
But even domestic analysts believe the case will be tougher for the government, as the IMF could demand significant belt-tightening, which will appeal to voters already grappling with decades of high inflation and low job prospects. bound to be unpopular with
IMF officials have been eager to support poor countries and Pakistan promises to be an important partner for the West, but payments become difficult when a program nears its end and a new government may come in And may try to break an agreement.
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If disbursements do not come by June, there could be a gap of six months before a new government takes office, during which Pakistan will be short of funds, effectively pushing its population of 220 million to the brink.
Due to the lack of reserves, it will be difficult to maintain it. Pakistan has just $500 million in interest or ‘coupon’ payments due on its international bonds this year, but the head of the central bank has said $3 billion is needed to meet total foreign debt payments.
Political timing is also important. After the government’s term ends in August, a special caretaker government will take over for 90 days to ensure free and fair elections.
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However, the caretaker government does not have the authority to sign the IMF agreement, raising the question of whether the government and opposition can cooperate on a joint pledge to meet any IMF demands to avert a default.
“If something happens with disbursements and then the election gets in the way, they could have a problem,” Gramercy’s Exum said.
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