Pakistani and Sri Lankan dollar bonds advanced on Friday with sentiment for distressed debt getting a boost after Zambia clinched a debt deal with bilateral creditors following years of negotiations, reported Bloomberg.
Pakistan’s 8.25 percent 2024 bond was seen climbing half a cent to about 50 cents on the dollar. Meanwhile, Sri Lanka’s 7.55 percent 2030 bond is indicated trading at 38.7 cents on the dollar, the highest in over a year.
The bailout of the Zambian economy has set a precedent for the growing list of countries like Pakistan struggling to service their liabilities.
Pakistan’s full-fledged economic upheaval, from its largest-ever currency devaluation seen recently to a slew of emergency spending cuts, is the strongest indication that the nuclear-armed country could default on its debt repayments unless substantial support is offered by multilateral creditors.
After being pushed to the brink by last year’s terrible floods, Pakistan now has only $3.5 billion in reserves or barely enough for three weeks of necessary imports, with elections looming in just a few months.
Pakistan desperately needs the International Monetary Fund (IMF) to discharge a late tranche of $1.1 billion, leaving $1.4 billion in a stalled rescue plan set to expire this month.
Although talks with the lender have continued despite the deadlock on the staff-level agreement since February, there are no assurances of a revival anytime soon due to a mounting list of issues following the November 2022 suspension of disbursements under the current Extended Fund Facility, which was increased to $7 billion after flash floods last year.
Also, the depreciation of the Pakistani rupee and a spike in taxes and fuel prices were expected to clear major stumbling blocks to the IMF’s bailout, but nothing has happened so far.
The bailout package cannot be prolonged beyond June and general elections are fast approaching, thus pressure is mounting.
In an ideal scenario, the default gossip in Pakistan could be laid to permanent rest if, like in Zambia’s case, external private and government lenders extend debt repayment deadlines beyond maturities scheduled for the remainder of the calendar year 2023.
Macros could improve even further if the federal government succeeds to negotiate a new program with the IMF right after the new budget, with a bigger bailout in exchange for more stringent tax collection measures.
