Pakistan reports that it must pay back foreign debt and interest totaling over $22 billion over the course of the next 12 months, despite efforts to avert the impending risk of default.
Upon the successful restart of the International Monetary Fund (IMF) program, the cash-strapped government is anticipated to begin negotiations with creditors to restructure its foreign debt.
The country’s debt obligations are currently much more than the incoming funds it anticipates receiving in the upcoming years.
SBP figures on Foreign Debt
According to data from the State Bank of Pakistan (SBP), Pakistan must pay back a total debt of $21.95 billion in one year, including $2.60 billion in interest on top of $19.34 billion in principal.
However, according to information provided by the Pak-Kuwait Investment Company (PKIC), the central bank has not anticipated any inflows of foreign debt for the following 12 months.
According to the data breakdown, the nation must repay $3.95 billion within a month. It must restore $4.63 billion in the following three months and another $13.37 billion in the final eight months of the time period under consideration.
Samiullah Tariq, the PKIC’s head of research, said in a statement to the local news agency, “Pakistan is passing through an extraordinary financial crisis. Accordingly, it needs to take extraordinary measures.”
“The country needs thoughtful planning to sail out of its current financial crisis and enter into a definite future. It should work on all the available options to control foreign expenditure and boost income,” he added.
In order to improve its foreign exchange reserves, Pakistan must carefully prepare, Tariq remarked, “The country needs to boost the confidence of overseas Pakistanis and make the domestic economy attractive in order secure increased Roshan Digital Account (RDAs) inflows.”
“The government has recently revised the rate of return on Naya Pakistan Certificates to attract higher inflows from non-resident Pakistanis,” he recalled.
“Apart from the this, the government should restructure its existing debt, enter the new IMF program after the current one ends in June 2023, cut imports, boost export earnings and workers’ remittances through official channels,” suggested Tariq.
Tariq expressed his expectation that after the conclusion of the current talks in Islamabad, the country would successfully restart the stalled IMF loan program.
He recalled that the former finance minister, Miftah Ismail, was in favor of taking additional loans rather than reorganizing the current debt.
“We are expected to achieve staff level agreement with the IMF in a couple of days, after which the IMF Executive Board will approve the program and release a $1.1 billion loan tranche,” he explained.
Over the next three and a half years, Pakistan must repay over $80 billion in foreign debt (from February 2023 until June 2026).
However, the nation’s foreign exchange reserves have plummeted to an alarming level of $3.1 billion, which is currently less than a three-week import cover.
Arif Habib Limited (AHL) Head of Research, Tahir Abbas said, “The government should opt for re-profiling its foreign debt instead of restructuring. Re-profiling will help the government get an extension of about four to five-years to repay debt from bilateral and commercial creditors, including friendly-countries like China, Saudi Arabia and the United Arab Emirates.”
He added that the country has been restructuring for some time, and that it will only enable the debt to be postponed for a year or so.
“The re-profiling will end uncertainty on debt repayment in the short-term and help shift the government’s focus towards much needed economic reforms,” he explained.
According to Abbas, the government may reprofile $13 billion in debt. This is anticipated to happen after the next administration takes office following the parliamentary elections in October 2023.
He emphasized that the fiscal deficit is projected to remain high at 6.8% of GDP (much higher than the targeted 4.9%).
Inflation is predicted to remain high and possibly go to around 30% over the next few months before averaging 27% in FY23 as a result of fiscal tightening and the impact of the depreciation of the rupee.
“In this backdrop, the SBP shall maintain a tight monetary policy and raise rates by another 100-200 basis points before June 2023 with gradual easing from the fourth quarter of 2023 as inflationary pressures subside,” predicted Abbas. “In the backdrop of further monetary and fiscal tightening, we estimate GDP growth to decline to 1.1% in 2023, compared to 6% in the previous year (FY22).”
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