Pakistan's Existential Economic Crisis
PAKISTAN'S EXISTENTIAL ECONOMIC CRISIS
There is a real danger that Pakistan could default on its
debt, which could lead to intensifying political turmoil amid already surging
terrorism.
1 - Introduction
Pakistan's stability increasingly depends on the outcome of
an ever-worsening economic crisis. Amid skyrocketing inflation, political
instability and surging terrorism, the country is facing the risk of a default
due to its massive external debt obligations.
This burden has been exacerbated by the derailment of the
96.5 billion International Monetary Fund (IMF) program Pakistan entered in
2019, as the international lender is unsatisfied with Pakistan's commitment to
reform and ability to arrange for funds to meet external financing
requirements.
Troublingly, Pakistan's official foreign exchange reserves
are hovering around $4 billion which is insufficient to finance even a
one-month of the country's import bill.
2 - Pakistan's Debt Composition & the Terms on the
Debt - Dec 2022
|
Pakistan's
External Debt & Liabilities |
$126.3 billion |
|
Directly
owned by the GOP (77% of Total Debt) |
$97.5 billion |
|
Owned by
government-controlled public sector enterprises to multilateral creditors |
$7.9 billion |
|
Multilateral Creditors of Pakistan |
|||
|
Multilateral
Debt |
Paris club Debt |
Private &
Commercial Loan |
Chinese Debt |
2.1 - Multilateral Debt
A major share of Pakistan's debt is owed to multilateral
institutions, amounting to roughly $45 billion.
|
World Bank |
($18 billion) |
|
The Asian
Development Bank |
($15 billion) |
|
The IMF |
($7.6 billion) |
Pakistan owes smaller amounts to the Islamic Development
Bank and the Asian Infrastructure Investment Bank as well.
The terms of most loans are largely concessional with a
repayment timeline spanning 18 to 30 years; most repayments are spread in many
small transactions.
In 2022-23, Pakistan repaid a total $4.5 billion debt to
multilateral creditors.
2.2 - Paris Club Debt
Pakistan owes $8.5 billion to the Paris Club, a group of 22
major-creditor countries.
This debt is scheduled to be repaid over 40 years with less
than 1% interest rate, and is mostly owed to Japan, Germany, France, and the
United States.
2.3 - Chinese Bilateral Debt
Pakistan holds around $27 billion of Chinese debt.
|
Bilateral
Debt |
$10 billion |
|
Chinese Govt.
to Pak Public Sector |
$6.2 billion |
|
Chinese
Commercial Loan |
$7 billion |
|
SAFE
Deposited Foreign Reserves in State Bank of Pak |
$4 billion |
The bilateral debt is on concessional terms with a maturity
period of 20 years.
2.4 - Private Debt and Commercial Loans
Pakistan holds a large amount of private debt; much of this
is in the form of private bonds, such as Eurobonds and global Sukuk bonds,
amounting to $7.8 billion.
In FY 21-22, Pakistan raised $2 billion by floating
Eurobonds of 5, 10, and 30 years at an interest rate ranging from 6 percent for
5-years & 8.87 percent for 30 years.
|
Majority of
Foreign Commercial Loan by Chinese financial institutions |
$7 billion |
3 - Short- and Medium-Term Debt Repayment Pressure
Pakistan's large external debt comes with considerable
repayment pressure. From April 2023 to June 2026, Pakistan needs to repay $77.5
billion in external debt. For a $350 billion economy, this is a hefty burden.
From April to June 2023, the external debt servicing burden
is $4.5 billion.
The next fiscal year will be more challenging, as the debt
servicing will rise to nearly $25 billion.
In 2024-25, Pakistan's debt servicing is likely to be around
$24.6 billion, which includes $8.2 billion long-term debt repayments and
another $14.5 billion short-term debt repayments.
In 2025-26, the debt servicing burden is likely to be at
least $23 billion.
4 - Exports, Investments and Remittances — and Pakistan's
Repayment Calculus
Pakistan's earnings from exports, foreign direct investment
and remittance are projected to not keep pace with the import bill as well as
the mounting debt repayment pressure.
Over the last three years, Pakistan's export earnings and
remittances were a total of $164 billion, compared to $170 billion worth of
imports of goods.
|
Reasons for Low Foreign Direct Investment &
Remittances |
|||
|
Rising Cost
of Business |
Uncertainty
in the Country |
Frequent
Policy Changes |
Govt. undue
interference in business environment |
5- Options to Manage External Debt
TWO OPTIONS
o
Take fresh loans and
seek rollovers of debt.
·
Due to downgrades by
international credit rating agencies, Pakistan's ability to access sovereign
financing market is limited.
·
Pakistani leadership
depends on Middle Eastern partners and China.
·
Negotiate & start a
fresh program with IMF.
o
Pre-emptive
restructuring of debt.
·
Will reduce the repayment
pressure and spare scarce dollars in the economy.
·
Officials are reluctant as
a restructuring process will be both painful and long.
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