As political upheaval prompted by the detention of former prime minister Imran Khan threatens to postpone an IMF bailout deal, Pakistan is inching closer to a default.
Eng Tat Low, an emerging-market sovereign analyst at Columbia Threadneedle Investments in Singapore, stated that, “It looks increasingly difficult for Pakistan to avoid a default in the absence of fresh funding support deal coming in.”
“I am also growing more skeptical whether an IMF deal is going to come through. Their heavy debt amortization against precarious reserves would suggest default is imminent,” he added.
Impact on IMF Deal Due To Khan’s Arrest
Following Khan’s arrest, violent riots broke out in Pakistan on Tuesday, leaving dozens injured across multiple cities and protesters attacking military structures.
On Wednesday, the 70-year-old politician was scheduled to appear before an anti-corruption panel amidst increased security.
As the government bargains with the IMF to begin a $6.5 billion bailout package that it needs to avoid defaulting, unrest has broken out.
Columbia Threadneedle estimates that the cost of servicing external debt will be around $22 billion in fiscal year 2024.
On Wednesday, the price of dollar bonds due 2031 dropped to 33.85 cents on the dollar, the lowest price since November.
Investors are now demanding an additional yield of over 34%, which is nearly the record set late last year, in order to keep Pakistani dollar bonds as opposed to US Treasury securities.
As its financial alternatives beyond June remain uncertain, Pakistan may default without an IMF loan bailout, according to a report released this week by Moody’s Investor Service.
“It’s a sure thing that IMF will delay the bailout as social stability is one of IMF’s conditions,” said Haoxin Mu, an economist at Natixis SA in Hong Kong. “The bailout may even be delayed to after the election should the issue get further escalated.”
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