EDITORIAL: The IMF board’s meeting is likely to take place very soon, marking almost two-and-a-half months since the signing of the Staff-Level Agreement (SLA). This delay was primarily due to the need for incremental external financing, totalling $2 billion.
Of this amount, $600 million remained short as friendly bilateral countries did not contribute the requisite funds despite IMF’s involvement.
Consequently, the government had to seek loans from private markets, guaranteed by the Asian Development Bank (ADB), at exorbitant rates. This raises critical questions about debt sustainability.
Interestingly, sources have revealed that the IMF’s Debt Sustainability Analysis (DSA) excludes repayments to Chinese Independent Power Producers (IPPs). This might explain why China has not provided any additional funding.
Furthermore, the incremental financing of $3 billion (for FY26 and FY27) is expected to come from the Chinese Exim Bank—that being essentially a rollover. This situation suggests considerable leniency from the IMF towards Pakistan.
For countries under debt stress, having the IMF on board is typically a prerequisite for securing support from other financiers. IMF’s programmes are designed to ensure debt sustainability so long a recipient or loanee remains on the programme.
However, recent trends indicate a change, evidenced by delays of over six months in countries such as Sri Lanka and Zambia. Therefore, the delay in Pakistan’s case is not entirely surprising.
And yet, these trends imply that IMF assurances are no longer sufficient for traditional lenders, especially in bilateral cases like Pakistan’s.
Although, Pakistan owes the largest share of its external debt to multilaterals such as the World Bank and ADB, the institutions that are closely aligned with the IMF, bilateral lenders, primarily China and Saudi Arabia, have their own concerns.
Sources suggest that they, particularly China, are underscoring the need for political stability in Pakistan. They may perceive the recently achieved macroeconomic stability—indicated by the strictly disciplined fiscal policy and an increase in central bank’s foreign exchange reserves—as fragile because it is not backed by political stability. This concern is shared by the domestic private sector as well, which, therefore, is hesitant to invest under current conditions.
The government recently secured a costly loan at around 11 percent, which is essentially a trade finance fully guaranteed by ADB. This is not a promising sign, to say the least.
While some argue that commercial bank loan rates are tied to the country’s debt rating, Pakistan has obtained loans at lower rates even during periods of poor ratings. So, why it can’t be done now?
This situation underscores the challenge of acquiring further financing to build foreign exchange reserves to a level that would allow for pro-growth policies. It raises concerns about external debt sustainability, which hinges on securing the IMF programme.
Moreover, IMF leniency appears to be unsettling for bilateral creditors, particularly given the IMF DSA’s exclusion of payments against Chinese IPPs, which is also making Saudi Arabia uncomfortable.
The crux of the problem is that any significant growth in the GDP could trigger fears of debt default. Pakistan cannot remain trapped in a cycle of low growth indefinitely, as this would have severe socioeconomic consequences.
In response, the authorities are working on restructuring energy contracts with a fresh round of negotiations underway with all IPPs, excluding those under the CPEC (China Pakistan Economic Corridor) and those that are owned by the government itself.
Payments to Chinese IPPs are being delayed indefinitely, and the government has requested China to reprofile debt in these IPPs.
Additionally, the government is mulling holding talks with Qatar with a view to revisiting its long-term RLNG contract.
Not only is this deal expensive, it also currently exceeds the demand. Interestingly, a portion of a recent commercial loan was used to finance RLNG from Qatar.
The signs are clear: the government has initiated debt restructuring efforts in various forms.
Domestic debt is also unsustainable as hefty servicing costs force the government to raise tax revenue from existing pool of payers. These corporates, firms, and individuals are already taxed at rates comparable to Scandinavian countries without receiving identical or even near-identical benefits.
In sum, while the IMF’s involvement is a positive development, it may not be sufficient to place Pakistan on a sustainable growth path.
The country must address political stability, debt sustainability, and economic restructuring to avoid long-term pitfalls.
Copyright Business Recorder, 2024
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