June 14, 2023 (MLN): Since the situation of the debt repayment is not fully under control, timely and orderly debt restructuring is the need of time, the latest report issued by Topline Securities emphasized.

If Pakistan delays the negotiation process of debt restructuring or reprofiling at a time when the IMF review is getting pushed back, then the consequences will be very painful, the report warned.

The recent press discussions and statements by the Federal Minister for Finance and Revenue Senator Ishaq Dar reflect that Pakistan is on the brink of default as the Minister started talking about debt restructuring. Thus, the country is considering external debt reprofiling of bilateral debt.

“Pakistan is currently facing a liquidity crisis and not a sovereign crisis, we think,” the report read.

This is because Pakistan’s overall external debt is not huge but reliance on short-term foreign loans is creating issues with repayment.

Pre-emptive restructuring is quicker to complete and secure higher creditor participation, according to experts. It provides faster access to international capital markets, as per the empirical evidence.

The report also believed that the new IMF Program will most likely come with the condition of this debt reprofiling or debt restructuring.

“We have also seen IMF supporting Debt Restructuring both in the case of Ghana and Sri Lanka,” it said.

In order to the formal process of debt restructuring should start but the issue is who will initiate this formal process of debt reprofiling/restructuring in full spirit in Pakistan.

The current coalition government term will be over in the second week of August-2023. Then there will be an interim government for 2-3 months and if the election is held on time in Oct/Nov then the new government will be taking charge in Nov/Dec 2023, it said.

There are slim chances that the present coalition government (PDM) might get its office term extended beyond August-2023. The government might invoke Article 232 of the constitution under the garb of ‘Emergency’ in the country on the pretext of security concerns or/and financial crisis, it added.

 Whosoever is in charge of the Finance Ministry the delay in initiating this transaction is risky and increases the chance of disorderly default that has far-reaching consequences as mentioned earlier.

Ideally, Pakistan should start active work on this Debt Restructuring and if needed should hire legal experts and consultants.

Sri Lanka hired leading financial and legal advisory firms Lazard and Clifford Chance LLP in May-2022 and the IMF board approves $3bn under the new Extended Fund Facility (EFF) exactly 9 months after that.

 In 1999 when Pakistan announced a debt moratorium it hired experts to assist them in negotiations with different lenders.

Pakistan cannot afford any further delay in negotiation with IMF for a new loan along with hiring experts for Debt Restructuring.

Inaction has already cost the country and further delays may cause an abrupt default; the report noted.

At present, the total external public debt is $96bn (28% of GDP) as of March 2023 while the external debt and liabilities are at $126bn.

Multilateral debt (owed to International Financial Institutions) accounted for the bulk at 46% or $45bn out of $96bn.

Bilateral debt is currently at $38bn or 39% of which Paris Club is $9bn and Non Paris Club is $29bn. On the other hand, Commercial Debt has fallen close to $6bn while Bonds and Sukuks are $8bn constituting only 15% of total external debt.

According to the estimates provided in a report, China’s lending to Pakistan stands between $25-30bn including bilateral loans and commercial loans through Chinese institutions.

Similarly, Saudi Arabia has provided Pakistan with an estimated amount of $5-10bn.

In the next 12 months, Pakistan has to pay $23bn according to SBP Governor. Out of that as per our estimate, 30-40% is due to China and Saudi Arabia.

The net amount payable after the expected rollover is $9-11bn in FY24. Rollover is again a risk in prevailing economic conditions.

Thus, China along with Saudi Arabia can help Pakistan come out of this crisis. There is an urgent need for Pakistan to engage with China and capitalize on its historical ties to get this less painful orderly debt reprofiling at reasonable terms and conditions.

It has been reported that China seems unwilling to participate in debt restructuring unless the other lenders including World Bank and other regional development banks also agree to write down their own loans, it said.

However, World Bank dismisses that demand, arguing that development bank financing already comes with low-interest rates and does not add significantly to a country’s debt burden.

 In Sri Lanka, China’s delayed assurances to agree on a plan for Debt Restructuring was seen as the last hurdle in securing the IMF bailout, it further highlighted.

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Posted on: 2023-06-14T18:47:22+05:00