Monday January 30, 2023

Pakistan needs orderly, timely debt restructuring: report

January 25, 2023

KARACHI: Falling foreign exchange reserves and increasing external debt repayments underscore urgency for “orderly debt restructuring” efforts for Pakistan, as delaying debt restructuring with a stalled IMF bailout programme would have disastrous results, a brokerage report stated on Tuesday.

“The current foreign exchange crisis is mainly driven by external debt obligations and not trade unlike Pakistan’s previous foreign exchange crisis of 2008,” said Topline Research in a report titled ‘Pakistan Debt Restructuring; Effective Management of External Debt is Critical.’

The report noted that despite ongoing import controls, the country’s forex reserves had continued to dwindle to a nine-year low at $4.6 billion only as of January 13, “as debt repayments continue to come due and are serviced”.

A recent monetary policy announcement of raising the rate by 100 basis points also highlights the need for debt restructuring as $8 billion of debt still needs to be dealt with in next five months till June 2023, while the country’s reserves are half of that, according to the report.

Even if the bulk of the amount was rolled over as the State Bank of Pakistan alludes to, the meter would again reset on July 1 when the rollovers would restart for FY2024, it added.

“We highlight that the true culprit of the current debt conundrum is short-term rollovers that have increased by 9 times to over $12 billion since 2015. We are 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.”

It emphasised that Pakistan should try to convert its short-term external loans into long term with the help of friendly countries like China, Saudi Arabia, and UAE, etc. If that was not doable, then the country should try the G-20 common framework of debt restructuring, the report suggested. “These are less painful and will help recovery soon without affecting credit ratings.”

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 said, “We found that orderly and timely debt rescheduling is relatively less painful and provide better chances of quicker economic recovery.”

If the government continued to manage the country's external accounts by relying on short-term funding from friendly countries or relief in the form of low-cost loans due to floods, the country could move towards a disorderly and coercive restructuring that would be painful and might lead to a further credit rating downgrade, it warned.

The report believes if Pakistan delays the negotiation process of debt restructuring

a time when the IMF review is getting pushed back, the consequences will be very painful. “It’s because delay in policy action and debt restructuring has resulted in default in many countries.”

Post default, debt restructuring could have far reaching negative implications than the orderly restructuring route, the report feared. “As seen in few countries, restructuring post-default results in hyperinflation, higher interest rates, sharp currency devaluation, food/fuel shortages, local debt restructuring, etc.”

SBP’s governor Jameel Ahmad at the latest post-monetary-policy analyst’s briefing said at the start of FY2023, the financing requirement was around $33 billion, which included $10 billion of current account deficit and $23 billion principal debt repayments.

Currently, due to import compression and better-than-expected current account gap numbers for six months of the current fiscal year, the deficit is expected to be below $9 billion, lower than the initially estimated $10 billion.

Out of $23 billion debt repayment, $15 billion had already been settled as $6 billion was rolled over and $9 billion repayment was done, Ahmad said, adding that out of the remaining $8 billion, the central bank was hopeful that a rollover of around $5 billion would be made and the actual repayment would be around $3 billion for which financing needed to be arranged.