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September 17, 2018

The debt mix


September 17, 2018

The PTI government will need to take key decisions on how to bridge the finance gap within the next three months. With around $2.522 billion in loan repayments due between September and November, the government faces a challenge in how to ensure that Pakistan’s foreign currency reserves remain stable. Having seen a $600 million decline in foreign currency reserves in the last 15 days, the challenge of paying up to Pakistan’s creditors and bond holders will be taxing on the economy. New dollar inflows are needed to stem the current tide, despite the fact that new financing will come with strings attached. The question of whether to knock on the door of the IMF or go to friendly countries remains open for now. Finance Minister Asad Umar has not ruled out either option for now, but with an IMF delegation arriving for talks at the end of September, one can be certain that preliminary conversations have been initiated. The government also plans to launch around $3 billion in Euro and Sukuk bonds as well as a separate Pakistani diaspora bond to generate between $1 billion and $2 billion.

Neither option is a solution to the crisis; rather, it is a strategy to ensure it does not happen immediately. Debt re-financing could be a crucial part of a short-term strategy, but it is important to fix the fundamentals. Without repairing the current account deficit, Pakistan will need to keep finding sources to cover the shortfalls. The entire amounts will keep piling on as debt that will need to keep being repaid. Already, Pakistan will be repaying obligations to the IMF, the World Bank, ADB, China, Saudi Arabia, bond holders and other consortiums in the next three months. The debt mix makes clear that none of the external funding options offer an ideal situation. Avoiding the IMF is traditionally considered to be better option since it would come with less strings attached, but with the PTI seemingly already committed to an IMF-style reform in the country, perhaps this should be less of a dilemma. The bigger concern is whether the IMF is willing to finance Pakistan amidst growing hesitance from the US, one of the principle financiers. How it chooses to finance the growing foreign exchange deficit will be a crucial decision for the current government, and will determine the kind of flexibility available to them moving forward.

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