- 42% of Pakistan’s overall debt, amounting to $50 billion, is going to mature in 2016
- The global sell off has set off fears that the country could default on its debt
- Economic growth and clamping down on terrorism have helped improve investor outlook
- However, Pakistan already spends an obscene amount on servicing current loans and debts and can’t afford these costs to rise
- Pakistan is among the 10 least politically stable countries in the world and that’s worrisome for investors
As a major portion of Pakistan’s debt, roughly around $50 billion, draws closer to maturing, bets are starting to rise that the country will default. The recent volatility in the international markets has impacted Pakistan severely with its credit default swaps (CDR) rating rising to indicate the highest risk since January 2015, triggering anxiety.
This is an unwelcome development for an economy that has seen marked improvements due to a reduction in terror attacks and increasing foreign confidence in the Pakistani market.
In 2013, the Sharif government secured a $6.6 billion loan from IMF to avoid an external payments crisis. Since then, improvements have been seen with the current growth forecast being an 8 year high at 4.5%.
Worryingly, since the loan in 2013, Pakistan’s debt due by the end of 2016 has risen by a staggering 79%. Certain conditions of the loan, like the privatization of national companies, have also faced opposition as evidenced by the strike at PIA.
The main concern right now is that with $30 billion due in the later half of this year, Pakistan cannot afford an increase in the borrowing costs. Right now, more than 77% of our $124 billion national budget for fiscal year 2015-16 is marked to be spent on servicing our interest and principal repayment on loans.
While things sound gloomy, an imminent disaster is not expected. Pakistan’s external liabilities are relatively modest, the increase in foreign currency reserves, willingness of the IMF to help meet maturing loans as well as incoming CPEC investment are positive points.
Pakistan basically borrows more money to pay earlier debts and this infinite loop has reached an alarming stage
Industry outlook suggests that Pakistan has a quite good chance of completing its IMF macroeconomic stability program. $8.3 billion of Pakistan’s 2016 bond and loan repayments will need to be in foreign currency, which is roughly 40% of the country’s foreign exchange reserves.
The issue is that the reserves aren’t static. While they have been among the steepest risers last year in Asia, over half include debt and grants that could disappear if the global economic outlook deteriorates. This could have a negative effect on our currency, which is 20% over valued according to IMF despite being quite stable in the face of a volatile market.
Political instability is also a wild card in Pakistan. General Raheel Sharif has lead a publicly appreciated campaign against terrorists in the wake of the APS tragedy. Retiring later this year, his departure could prove to be testing for the country’s political climate, adding uncertainty to what already promises to be testing time period for Pakistan.