Pakistan's ex finance chief Miftah warns against any kind of debt restructuring

KARACHI: Former finance minister Dr Miftah Ismail advised against any kind of debt restructuring, cautioning that such an attempt will have far-reaching repercussions on Pakistan’s economy, already reeling from one of its worst crisis in history.

“The cons outweigh the pros,” Ismail told Business Recorder during an interview in Karachi. “It has taken a while for countries – Sri Lanka, for example – that opted to take this route to complete it. During the first year, Sri Lanka’s GDP shrunk by 10%. If we do this, and it takes 2-3 years, our GDP will shrink.”

Ismail, a two-time finance chief, said Pakistan’s interest payments on dollar-denominated debt are low, and a majority of the loans, due to the nature of their creditors, cannot be restructured.

“Commercial debt, which is not that much, is the only (component) that can be restructured. Then you are locked out of the commercial debt market. How much of a benefit or haircut can you take?”

Ismail’s comments come as talks of debt restructuring gather pace with many analysts recommending effective management of upcoming payments.

Pakistan needs to repay about $3 billion of debt by June, while $4 billion is expected to be rolled over, central bank governor Jameel Ahmad said last week, according to Bloomberg.

Its foreign exchange reserves currently sit at $4.3 billion, courtesy loan inflows of $500 million from Industrial and Commercial Bank of China (ICBC) and $700 million from China Development Bank. Pakistan expects another $800 million from ICBC after it renewed its $1.3-billion facility, which the country had repaid earlier.

Still, the import cover is around one month with February’s bill clocking in at $4 billion, according to data available with the Pakistan Bureau of Statistics.

Pakistan’s worries are also compounded by an incessant delay in reviving its bailout programme with the International Monetary Fund (IMF), a facility that has been stalled since November last year. It had not been revived until the filing of this report.

Ismail, the finance minister to successfully negotiate the combined seventh and eighth reviews with the IMF before being unceremoniously removed to make way for Ishaq Dar, said Pakistan has the added worry of getting its creditors that include China and Western institutions on one table.

“How will you get China, the Western countries and their institutions to sit on one table? This is a difficult ask. Already, we are looking to manage China versus the West.”

US State Department Counselor, Derek Chollet, had last month remarked that Washington was concerned about debt owed to China by Pakistan and other countries, saying that it was in talks with Islamabad about the “perils” of a closer relationship with Beijing. Chollet added, however, that Washington would not ask Pakistan to choose between the two major powers.

Since then, relations between China and the US have moved more towards hostility with President Xi Jinping condemning what he branded an American-led “suppression of China”.

“Debt burden in the local currency and interest payments are higher. Haircut in this case is troublesome. It is my considered view that debt restructuring is not the way,” added Ismail.

A Rothschild & Co delegation comprising Eric Lalo, who joined the firm’s Global Advisory business as its managing director and head of sovereign advisory in September 2019, also visited Islamabad late in February. Official communication, however, did not convey the reason for its visit.

Pakistan has been faced with a barrage of woes in recent months with a perceived default risk and downgrade by international ratings agencies reflecting the state of the economy that has also had to bear major political turmoil and frequent change in key leadership.

Last year, the country was also devastated by record monsoon rains and melting glaciers that submerged nearly a third of the country, displacing some 8 million people and resulting in at least 1,700 deaths in a catastrophe blamed on climate change.

IMF programme

Ismail, who has been campaigning for a major overhaul in Pakistan for some time including the privatisation of loss-making state-owned entities, education sector revamp as well as population control, stressed that the focus needs to be on stabilising the economy.

He said the IMF programme’s revival was now contingent on the support of ‘friendly nations’ as Pakistan has completed the items on its to-do list.

“Whatever measures the government needed to take, it has taken them. Now there’s some investments or deposits left from friendly nations. The IMF is probably waiting for it. However, our domestic measures are complete.”

His comments came just as political turmoil deepened in Pakistan with authorities looking to arrest former prime minister Imran Khan that resulted in repeated clashes between his supporters and law-enforcement personnel for two successive days before the court intervened.

Persistent turmoil and delayed reactions to economic developments have also played on the minds of foreign investors and creditor nations that seemed to have taken a step back in committing capital.

While the UAE announced a rollover of an existing loan of $2 billion and an additional loan of $1 billion in January, the IMF reiterated earlier this month Pakistan will be required to give an assurance that its balance of payments deficit is fully financed for the remaining period of the bailout that ends in June.

“I have read that the gap left now is $6 billion, and the government has arranged $2-3 billion. There’s some distance left,” said Ismail, stressing that this is still a significant issue.

The former Board of Investment chairman said these assurances were given back when he was the finance chief.

“We managed to do it six months ago. We managed to get the IMF these assurances from Qatar, Saudi Arabia and the UAE. That is how we got the programme revived.

“The risk here then increased and they retreated a little. But no country wants Pakistan to be in deeper trouble. We lacked a bit of consistency. Now we have it. We just need to make them confident that Pakistan is serious about putting its house in order.”

Issue of energy sector’s circular debt

Ismail said the government’s strategy to reduce the energy sector’s circular debt was first through dividend payouts.

“I saw the plan when I was the minister. I liked the plan.

“The IMF said these are book-entries, ‘keep this aside’. The IMF wanted tariffs that helped you recover the cost. With this latest increase in tariffs, there shouldn’t be too much of an increase in circular debt, especially for electricity,” said Ismail, who still advocated that the plan should go ahead.

Copyright Business Recorder, 2023