Pakistan may declare default
2023.02.01 04:07
Pakistan may declare default
By Kristina Sobol
Budrigannews.com – The most evident indication yet that the nuclear-armed nation is at risk of defaulting unless it receives massive support comes from Pakistan’s full-blown economic turmoil, which includes the largest currency devaluation it has ever experienced and a rash of emergency spending cuts.
The South Asian nation’s reserves are just $3.7 billion, or barely enough for three weeks of essential imports, after it was pushed to the brink by the devastating floods that occurred last year. Elections that are expected to be hotly contested are scheduled for November.
It is absolutely necessary for the International Monetary Fund to release a $1.1 billion overdue installment, leaving $1.4 billion in a stalled bailout program that is scheduled to end in June.
Despite the arrival of an emergency IMF mission in Pakistan, there are no guarantees given the increasing number of problems that have arisen since November’s suspension of payments from the current package, which was increased to $7 billion by the floods.
A 15 percent devaluation of the Pakistani rupee and an increase in fuel prices last week could help resolve some major issues, especially since tax measures appear to be imminent.
However, pressure is growing due to the impending elections and the fact that the bailout program cannot be extended beyond June.
Kathryn Exum, co-head of sovereign research at Gramercy, a distressed debt specialist fund, stated, “If they don’t get those (IMF) funds, default risk increases materially.” Gramercy anticipates a debt “reprofiling” rather than a widespread write-off.
Miftah Ismail, the former finance minister of Pakistan who negotiated an extension to the program last year before being fired amid political turmoil, also believes that the IMF is the only logical option.
Ismail stated:
“We’re looking at a default if the IMF doesn’t come in,” adding that the nation would require the 24th support package. I can’t imagine Pakistan not participating in two consecutive IMF programs.”
Imran Khan, a former cricket star who was removed from office in April but maintains popularity, is the primary election challenger to Prime Minister Shehbaz Sharif. Despite their long-standing financial difficulties, neither side takes responsibility for the crisis.
Only Sri Lanka, Ghana, and Nigeria are worse off than Pakistan, where the debt-to-GDP ratio is dangerously high at 70% and between 40% and 50% of government revenues are set aside for interest payments this year.
Aegon’s head of emerging markets debt, Jeff Grills, stated, “There is just a long-term indebtedness problem.” Pakistan bonds were held by Asset Management until the floods struck.
“It is more of a question of when they need to restructure than if,” says the author.
The majority of Pakistan’s bonds continue to trade at less than half face value.
According to the Bank of Canada-Bank of England Sovereign Default Database, Pakistan’s first international default since 1999 would result from such a restructuring of its bonds.
Ismail suggested that Islamabad might be better off “just going to those countries that we owe a lot, or to the institutions we owe a lot, and trying to get some more long-term loans” with just $8.6 billion worth of such bonds as opposed to the $30 billion Pakistan owes China.
Sharif believes that the IMF will resume making payments. “If God wills it, we will reach an agreement with the IMF,” he said at an event last week in Islamabad, the capital. The difficult times will soon pass.
The IMF’s approval is also required for multilateral and bilateral financing pledges for Pakistan’s flood-ravaged reconstruction efforts.
However, the IMF is likely to demand significant belt-tightening, which will undoubtedly be unpopular with voters already struggling with decades-high inflation and fewer job opportunities, according to domestic analysts.
Pakistan has promised to be a crucial partner for the West, and IMF officials have been eager to support poorer nations. However, paying out becomes more difficult when a program is nearing its end and a new government could try to break a deal.
Pakistan’s 220 million people could be on the verge of starvation for six months before the new government takes office if the payments do not reach them by June, effectively putting them at risk.
It will be difficult to stay afloat due to the lack of reserves.
Pakistan’s international bonds only have to pay $500 million in interest or “coupon” payments this year, but the chief of the central bank has said that $3 billion is needed to pay off the entire external debt.
Additionally crucial is the political timing. In order to guarantee free and fair elections, a special caretaker government will take over for up to 90 days after the government’s term ends in August.
However, the caretaker government does not have the authority to sign an IMF agreement, which raises the question of whether the government and opposition can work together to meet any IMF demands to avoid default.
Gramercy’s Exum added:
“They may have a problem if something happens with the disbursement and then the elections get in the way.”
