ISLAMABAD: The International Monetary Fund (IMF) has estimated that Pakistan’s external gross financing needs will peak to $41.8 billion at the end of this government’s five-year term, which concludes in the fiscal year 2023-24.
In the same breath, the lender of the last resort strongly suggested enforcing a rigorous fiscal discipline regime, boosting cash flow management via a treasury single account, constituting a central debt management office, etc to ease the burden of surging gross financing needs on economy in the medium term.
These assessment were a part of an IMF staff report that followed the approval of sixth review and release of $1 billion tranche for Pakistan under the Extended Fund Facility (EFF) programme.
The IMF revised eternal financing needs upwards to $30 billion for the current fiscal year 2021-22. The figure will further go up to $35.06 billion in the next fiscal year (2022-23), touching a peak of $41.88 billion in FY2024.
Independent economists say now the question is as to how the government will manage such massive levels of external financing needs when the ongoing IMF program will end by September 2022.
National Security Policy has advised the government to refrain from borrowing from the IMF, World Bank, Asian Development Bank, and others; however, in case Pakistan somehow managed to say goodbye to the IMF permanently, it doesn’t have an alternate plan so declaring independence from debt will remain a daydream, according to economists.
The IMF in its report states Pakistani authorities have remained engaged with external creditors to secure financing to meet the programme debt sustainability objectives.
China has maintained its exposure by renewing (and augmenting) the $4.6 billion swap ($3 billion at the time of EFF approval), as well as by renewing maturing commercial loans, though some at shorter maturity, the report says and adds that China also provided an additional $1 billion in July 2020 through State Administration of Foreign Exchange, raising its deposits to $4 billion.
Recently, Pakistan has also secured a $3 billion deposit at the central bank and a deferred oil financing facility from Saudi Arabia. The G20 Debt Service
Suspension Initiative (DSSI)—recently extended by a third-round until December 2021—has helped reduce short-term financing risks and provided around $3.8 billion in total (1.3 percent of FY2021 GDP) of debt service suspension and rescheduling to outer years.
“Nonetheless, near-term financing risks remain elevated, reflecting the large size of public sector amortisation needs,” the IMF report said.
On Debt Sustainability Analysis (DSA), the IMF states Pakistan’s public debt continues to be judged as sustainable, consistent with the DSA published at the time of the second-fifth reviews in March 2021.
Debt ratios have since been revised down due to a slightly stronger-than-projected exchange rate at end-FY2021 and a higher growth outturn.
While the extension of the DSSI until the end-December 2021 (covering about $1 billion of debt service in FY 2022) continues to provide relief in the short term, the forward-looking path for gross financing needs (GFN) has been revised upwards due to larger-than-expected reliance on short-term domestic issuance since late March 2021. Nevertheless, public debt and GFN to GDP are projected to firmly decline over the medium term, supported by the EFF programme fiscal adjustment path and efforts to enhance cash and debt management.
Over the near-term horizon of the DSA, public debt levels are lower than projected at the time of the second-fifth reviews in March 2021, and they continue to be on a clear downward path. This owes mainly to an upward revision to FY2021 real growth from 1.5 percent to 3.9 percent, and a stronger exchange rate path (around 7.5 percent revision at end-FY 2021).
Total debt is estimated at 88.6 percent of GDP at end-June 2021 (4.6 percentage points lower than at end-FY2020), reversing the increase associated with the Covid-19 crisis and falling below end-FY2019 levels before the start of the EFF programme. The trajectory of debt is expected to continue to decline to 70.4 percent of GDP by end-FY2026, supported by a favorable interest rate-growth differential outlook, and fiscal adjustment efforts in the context of the EFF programme.
Although slower than previously projected, the maturity structure of debt is expected to continue to improve, thus lowering GFN over the medium term, on account of multi-pronged efforts. The successful reprofiling of government debt held by the SBP (State Bank of Pakistan) into longer-term instruments in June 2019 has supported debt sustainability. Since then, the authorities succeeded in lengthening the average time to maturity (ATM) of domestic debt held by the market by 0.6 years to 2.6 years at the end-FY2020.
As a result, GFN has been brought down from 36.6 percent of GDP in FY2019 to an estimated 27.7 percent of GDP in FY2021. Although the latter figure is lower than previously projected for FY2021—due to better economic performance—the GFN path in the following years has been revised upwards due to a higher reliance on short-term domestic financing than previously projected and due to a higher primary fiscal deficit path. As a result, GFN is expected to increase in FY2022 despite the extension of the DSSI as the authorities failed to meet their commitments to lengthen the maturity profile of domestic debt in FY2021, as reflected in the Indicative Target added at the time of the second-fifth reviews.
However, a better alignment with this objective in FY 2022 would help the GFN resume a downward path to 19.1 percent of GDP by end-FY2026.
Efforts that will lower gross financing needs over the medium term include fiscal discipline, better cash flow management through a treasury single account, and establishment of a central Debt Management Office, and successful implementation of the Medium-Term Debt Strategy, in particular by continuing to lengthen the maturity profile of debt and diversifying instruments and investor base especially by scaling up Shariah-compliant instruments.
“With SBP financing no longer available, the government has been nevertheless successful in securing financing primarily from domestic commercial banks, through the issuance of short-term T-Bills and long-term PIBs denominated in domestic currency, as well as from successful international Eurobond issuances,” the IMF report concluded.