The International Monetary Fund (IMF) could release funding to Pakistan by June under a bailout package, a Bloomberg report on Tuesday stated, but warned the country could be heading towards default if this does not happen.
"Our base case is that the IMF will deliver the remaining $2.6 billion in aid under the current bailout program by June -- helping Pakistan wiggle through the immediate crisis -- as the country has fulfilled most of the IMF's conditions," wrote Bloomberg economists Ankur Shukla and Abhishek Gupta.
"If the aid does not arrive, though, we think China will help plug the gap to head off a default," they added.
The economists, however, warned that “Pakistan is careening toward a potential default as soon as June unless it secures aid from the IMF” and noted that the South Asian nation would require another IMF programme to avoid default in the next fiscal year.
"The country will probably need to seek another IMF bailout program or more external aid from allies to avoid default next fiscal year. If the assistance fails to materialize, we think China will step up again," wrote the economists.
Currently reeling from one of its worst economic crises in history, Pakistan has been faced with a barrage of woes 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.
Pakistan remains in talks with the international lender for the resumption of the IMF’s Extended Fund Facility (EFF), which has been stalled since last year.
The bailout programme’s revival has been deemed crucial to stabilise the economy that has been hit by a severe dollar shortage in recent months with reserves held by the central bank treading at critically low levels.
Bloomberg economists on Tuesday said Pakistan announcing a default would not bode well for China, a key strategic partner of the South Asian nation.
“If it defaults, China would have much to lose -- far beyond a financial hit. Broader strategic considerations might tip the odds toward China playing a constructive role in helping Pakistan weather the crisis."
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Pakistan is an important geopolitical ally of China in the region – the world's second largest economy has invested billions of dollars in major infrastructure projects under the multi-billion dollar China-Pakistan Economic Corridor (CPEC) project, which is seen as the main plank of China’s ambitious Belt and Road Initiative (BRI).
“A stable Pakistan is in China's interest, in our view. Any turmoil in the economy and associated social unrest that could result from a default would threaten that stability,” wrote the economists.
Apart from investments, China has also rolled over its funds, providing much-needed cushion to the depleted foreign exchange reserve position, which amounted to $4.3 billion as of March 10.
Last week, Pakistan received a loan tranche from China of $500 million . The latest transfer is the second disbursement of US$500m for Pakistan as part of a US$1.3b rollover facility from China’s ICBC
“Even so, that's not enough for Pakistan to clear its funding crunch - it has $7 billion in external debt repayments due by June and a $1.2 billion hole in its current account to fill over March to June,” wrote Bloomberg economists.
“The government assumes that it will be able to roll over $4 billion of its debt- and squeeze by with its small reserve cushion. Trouble is, there's no guarantee that other creditor nations including Saudi Arabia that have pledged to support Pakistan will agree to roll over their loans,” the economists added.