Pakistan Will Not Default for These 3 Reasons

The financial markets are jittery due to a delay in International Monetary Fund (IMF) program which could lead to a debt restructuring or a default.

A recent report “Pakistan Outlook 2023: No Easy Way Out” published by Ismail Iqbal Securities has analyzed default episodes of five countries and compared them with Pakistan’s current situation to get a sense of the possibility of default.

The countries, all of which had a combination of political, fiscal, and debt sustainability issues, include Ghana (Dec-22), Sri Lanka (Apr-22), Zambia (Nov-20), Argentina (May-20), and Greece (Jun-15).

Ghana

Ghana was running high fiscal deficits and financing them through issuing Eurobonds in international capital markets. The outbreak of Russia Ukraine war, deteriorating local macros and fed rate hikes shut it out of international capital markets, leading to a default.

Sri Lanka

Sri Lanka’s external account suffered due to lower tourism dollar inflows on account of the global Covid lockdown and a fall in exports due to the failure of the tea crop.

Zambia

Zambia’s debt was spiraling owing to issues predating the Covid-19 pandemic, while further exacerbating during the pandemic when the copper prices plummeted resulting in failure to make payments on its $11 billion debt.

Argentina

Argentina faced sharp currency devaluation due to FED monetary tightening. At the same time, commodity exports decreased due to the worst drought in fifty-year history. These developments undermined investor confidence and drove them to start selling Argentina Eurobonds.

Greece

Greece due to sheer mismanagement of the public finances was living beyond its means and could not keep up with the fiscal deficit target set by the EU. The country was posed with the risk of failure in debt servicing multiple times post the great financial crisis.

How Pakistan’s case is different?

The report says that Pakistan is less likely to default due to three key factors:

1. Less reliance on external borrowing
2. Lower dependency on Eurobonds
3. A manageable external financing gap of FY23

Pakistan has lower external debt to GDP of 31 percent compared to the sample of default countries (avg external debt to GDP of 59 percent). High external debt exposes the country’s public finances to exchange rate shocks whereas dependency on Eurobond makes refinancing debt very challenging. The absence of both factors makes Pakistan’s debt mix less vulnerable.

The report estimates the FY23 financing gap of $5.3 billion. It assumes that Pakistan will remain committed to the IMF program, all multilateral flows apart from conditional RISE II and PACE loans will materialize, and bilateral deposits will be rolled over. On the commercial side, it has been assumed that $3.3 billion in loans pertaining to China will be rolled over. Due to Pakistan’s poor sovereign debt rating and global macroeconomic issues, it also assumes zero inflows from Eurobonds.

The report estimates inflows of $25.4 billion against the requirement of $30.6 billion ($23 billion debt repayment + $7.6 billion CAD).

Pakistan is likely to finance this gap through a $3 billion deposit from Saudi Arabia, $600 million from an additional Saudi oil facility, and a $1.45 billion Chinese swap facility, the report adds.