The Finance Division’s ongoing debt reprofiling process is at risk of not being thorough enough and may spell potential default in the coming years, with recent Kuwait-UAE investments expected to further widen the cash-strapped nation’s $130 billion debt spiral.
The International Monetary Fund (IMF) has set punitive targets for the country, arguing that the country’s debt to average maturity in 2023 is estimated at 33.8 percent of GDP. There would be a total gross financing need of about 23.7 percent of GDP in 2023. However, Pakistan’s public debt is unsustainable due to exchange rate depreciation, fiscal deficit, and negative real GDP growth in the long run.
The lender is planning a new and 24th bailout for Pakistan which is expected to be longer and much bigger compared to prior rescues. Will it be the last one?
IMF Wants to Help But At What Cost?
While the IMF says it is committed to helping restore debt sustainability, public debt stands at Rs. 62.3 trillion, while gross financing risks remain exceptionally high arising from large public sector external rollover needs, the still sizable current account deficit ($5.7 billion projected for current FY), the difficult external environment for sovereign bond issuance given recent downgrades and high spreads, and limited forex reserve buffers to help cover the financing needs in case of delays in scheduled inflows.
The IMF has forecasted the size of Pakistan’s GDP at Rs. 105.9 trillion (current Rs. 84.6 trillion) by June 2024, which is lower than the July forecast since it has reduced Pakistan’s growth expectation for the current fiscal year to 2 percent.
The IMF is focusing on gross financing needs instead of the net present value of Pakistan’s spiraling debt situation. This model suggests that Pakistan’s debts are sustainable as long as it keeps gross financing needs below 10 percent of GDP. However, Pakistan’s basic problem has historically been its low ability to collect taxes and misreport financial data. Revenues have averaged just 8.5 percent of GDP and the lender wants this figure to double at the very least.
The IMF sees Pakistan’s tax collection to rise to around 14 percent of GDP by June 2024, a skinny revenue base for such a country with a gross public debt of over 72 percent of GDP.
If Pakistan spends about a third of its revenue on interest payments alone in years to come, this might work as long as Islamabad manages Rs. 13.1 trillion (or 15.5 percent of GDP) which has been a long-standing pressing point of the IMF to achieve by FY25.
Notably, in the high-interest rate era of the past 2 years, Pakistan’s average debt servicing costs hovered just above 8%.
A 24th Program Will Hurt the Worst
If the recently approved USD 710 million in IMF funding materializes next month, most believe Pakistan will manage its foreign reserves just in time for a 24th IMF lifeline which authorities are planning right at this moment.
However, this writer sees the IMF’s current targets for Pakistan as too difficult to play with in the long run, with the World Bank predicting the country’s GDP to decrease by up to 20 percent by 2050.
Pakistan’s current and future targets are/will be a result of threshold effects induced by the sharp difference between the IMF’s debt profile of the country, and a low-income economy with constrained access to global markets.
The market-access model is not effective in setting debt restructuring targets for lower-middle-income countries like Pakistan with volatile revenue and poorly managed export bases. Additionally, the debt sustainability model encourages using domestic debt as a variable of adjustment, which is the main reason why a 24th bailout will add a few more years to Pakistan’s plight in managing its foreign reserves.
At its recent review of the $3 billion Standby Arrangement, a team led by Finance Minister Dr. Shamshad Akhtar presented a plan that only encompassed debt, raising energy rates and an extension to the unholy love affair with the lender, but following demands from Gulf lending partners, it is now undergoing a comprehensive reprofiling debt exercise. This exercise aims to reduce the total volume of domestic loans (Rs. 40 trillion) but without any real vulnerability, allowing Pakistan to maximize debt service to creditors within the IMF’s generous targets. This exercise addresses the non-existent vulnerability, preventing Pakistan from defaulting on time due to its inability to roll over bills held by the State Bank of Pakistan.
The IMF has not altered its targets for Pakistan and has left everything for it to decide, as other external creditors, including bondholders and World Bank’s resilient projects, are likely to push for inflationary adjustments.
Pakistan Has A Choice
Pakistan must insist that the IMF targets cannot be the baseline scenario and reach a deal that reduces the stock of external debt and limits future servicing burden, while also making sure that the next program will be the last one. Currently, Pakistan is negotiating and inking blue-chip deals with various UAE, Kuwaiti, and other Middle Eastern countries, including private Chinese banks up north, a few private bondholders globally, and domestic debt-hell raisers in the T-Bill and Sukuk markets.
Coordinating multiple comparable reprofilings is challenging, but Pakistan should insist on ensuring the IMF will say goodbye this time.
Value-recovery instruments like GDP linkers should be compensation for real debt relief, not a sweetener on top of an already too-rotten a deal.
Lessons for Pakistan include not letting complex debt traps trump common sense, setting separate program targets on external debt and revenue, bidding farewell to lenders, and setting targets for public relief instead of more burden via energy bills to generate pressure for unnecessary domestic debt restructurings in the long run.
The views expressed here do not necessarily reflect ProPakistani or its owners.