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Sunday, April 14, 2024

Pakistan’s economic challenges: Struggling to manage debt and boost reserves

Pakistan faces risk of default as it struggles to repay foreign debt & interest worth $22bn over the next year.

Pakistan is currently facing an imminent risk of default as it is due to repay foreign debt and interest worth almost $22 billion over the next 12 months. This is a concerning situation as the country’s debt obligations currently stand significantly higher than the inflows it expects to receive in the coming years.

Debt Obligations and Foreign Debt Inflows

Data from the State Bank of Pakistan (SBP) suggests that Pakistan is to repay a total debt of $21.95 billion in one year, comprising of $19.34 billion in principal and another $2.60 billion in interest on the total debt. However, the central bank has projected no foreign debt inflows for the next 12 months.

The breakdown of data shows that Pakistan is to pay off $3.95 billion within one month, $4.63 billion in the next three months, and another $13.37 billion in the last eight months of the period under review.

Extraordinary Measures Needed to Navigate Financial Crisis

According to PKIC Head of Research, Samiullah Tariq, Pakistan needs to take special steps to overcome its financial crisis. Tariq suggests that the government should plan carefully to increase foreign reserves, control foreign spending, and increase income. This can be done by restructuring existing debt, reducing imports, increasing exports, and encouraging remittances. The government should also attract overseas Pakistanis and make the economy more attractive to them to increase RDAs inflows.

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Revival of IMF Loan Programme

The government plans to restructure its foreign debt by resuming talks with creditors, once the IMF programme is successfully resumed. Tariq hopes that Pakistan will revive the IMF loan programme after ongoing talks in Islamabad, which will release a $1.1 billion loan tranche. Pakistan aims to return $80 billion in foreign debt over the next three-and-a-half years (from February 2023 until June 2026).

Depletion of Foreign Exchange Reserves

Despite the looming financial crisis, the country’s foreign exchange reserves have depleted to an alarming level of less than a three-week import cover at $3.1 billion at present. This highlights the urgent need for the government to take appropriate measures to navigate the crisis.

Re-profiling Debt Instead of Restructuring

Tahir Abbas, Head of Research at Arif Habib Limited, suggests that instead of restructuring, the government should opt for re-profiling its foreign debt to get a four to five-year extension to repay debt from creditors, including China, Saudi Arabia, and the UAE. Abbas believes that restructuring will only roll over the debt for a brief period of time, around a year. He recommends re-profiling debt worth $13 billion after the 2023 elections.

Read More: Pakistan’s ever-growing debt

Comparison with Other Countries

Greece, Argentina, and Turkey have faced financial crises. Greece’s debt-to-GDP ratio peaked at 180% and received a bailout package from the EU and IMF with austerity measures. Argentina defaulted several times and faced a currency crisis in 2018, requiring an IMF loan with austerity measures. Turkey had a currency crisis in 2018 and struggled to stabilise the economy. Pakistan’s debt-to-GDP ratio is lower than Greece and Argentina, but it faces a critical foreign exchange reserve situation, high fiscal deficit, and inflation. Pakistan turned to the IMF, requiring similar austerity measures.

Pakistan’s financial crisis is a complex issue that requires urgent attention and effective measures to prevent default. The government must take extraordinary steps to increase foreign reserves, control foreign spending, and increase income. The revival of the IMF loan program and restructuring or re-profiling of foreign debt can also be helpful in managing the crisis. Pakistan can learn from the experiences of other countries that have faced similar crises and implement effective policies to stabilise the economy.