Bilateral debt reprofiling a feasible option under IMF watch

KARACHI: Pakistan can manage its external debt commitments by reprofiling short-term bilateral and commercial debt from friendly countries under the monitoring of the International Monetary Fund (IMF), a brokerage report said on Tuesday.

Since Pakistan has been experiencing the worst economic crisis, everyone agrees that debt restructuring or reprofiling were essential for the country to avoid default.

“We believe reprofiling of $13 billion of short-term bilateral and commercial debt from friendly countries is a less disruptive option to effectively create some breathing space to put our financial house in order,” said a local brokerage house, Arif Habib Limited, in a report titled "Pakistan Economy Debt reprofiling or restructuring?"

“That said, such a transaction shall only be possible once Pakistan signs up to a new long-term agreement like SBA (Standby Agreement) likely post general elections (due in October),” it said.

Pakistan’s bilateral creditors have it made abundantly clear that Pakistan needs to remain under an IMF watch before they commit any additional funding and/or external support, it added.

According to the report, persistent delays in restarting the IMF programme have worsened the macroeconomic fundamentals, causing foreign exchange reserves to drop to an alarmingly low level of $3.1 billion, which was only enough to cover three weeks’ worth of imports. While the return of the IMF albeit after much delay is positive, Pakistan has a long way to go in order to address its macroeconomic vulnerabilities, the report said, and added that in the midst of the precarious forex reserves situation and sizeable external repayment obligations over the next three years, talks of debt restructuring have gathered momentum once again.

“We however view the discussions as a little premature given the costs attached with any such move. Moreover, if we take a more granular look at Pakistan’s future external debt obligations, the major area of concern relates to $13 billion annual rollover of short-term bilateral and commercial debt,” it said.

A major focus of IMF’s staff-level discussions is addressing the fiscal gaps including additional revenue measures such as the increase in petroleum development levy on petroleum products, flood levy on imports, and additional taxes on banks, etc. Moreover, addressing Rs675 billion worth of subsidy overruns and resolution of power and gas circular debts remain other key demands of the Fund. “While we expect the government to implement most of the additional taxation and administrative measures, given limited time between now and the year-end, fiscal deficit is likely to remain elevated at 6.8 percent of GDP (well above 4.9 percent budgeted),” it noted.

Fiscal tightening and the impact of the rupee depreciation are expected to keep inflation elevated which is likely to rise above 30 percent over the next few months and average 27 percent in FY2023. Against this backdrop, the report expects the State Bank of Pakistan will maintain a tight monetary policy and raise rates by another 100-200 basis points before June 2023 with gradual easing from Q42023 as inflationary pressures subside.

“In the backdrop of a further monetary and fiscal tightening, we estimate FY2023 GDP growth to decline to 1.1 percent,” the report said.