Ans: Since its inception, pakistan has been struggling with balance of payment crisis. The recent skyrocketing inflation, extremely high interest rates, surging unemployment, moribund economic growth, and steep decline in Foreign investment speak volume about the gravity of situation on economic front. In this article, I intend to focus on debt crisis that Pakistan faces.
Presently, Pakistan is in a IMF program, to which Pakistan entered into in 2019. Its one of the 18 IMF programs Pakistan had with IMF over the period of last 40 years. This current program–6.5 billion dollars– is shrouded in mystery and uncertainty as International lender is not sure about Pakistan’s commitment to reforms. On the other hand, Pakistan’s official foreign exchange reserves are hovering around $4 billion, not sufficient for even one-month import bill.
OF about 130 bn dollars debt, 77% is directly owned by Pakistan gov, that amounts to nearly 100 bn dollars. Additionally, some 10 bn dollars are owned by government-controlled public sector enterprises to multilateral creditors.
A major share of Pakistan debt is owed to Multilateral institutions like the World Bank, the Asian Development Bank, the IMF etc. Islamabad’s main multilateral creditors include the World Bank ($18 billion), the Asian Development Bank ($15 billion) and 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.
Similarly, Islambad owes almost 8.5 bn dollars to the Paris Club– A group of 22 creditor nations. This debt is scheduled to be paid in 30 to 40 years, with interest rate at 1%.
In addition to it, 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. Some of this debt is recent: In the last fiscal year, Pakistan raised $2 billion by floating Eurobonds of 5, 10, and 30 years at an interest rate ranging from 6 percent for five years and 8.87 percent for 30 years.
Pakistan holds foreign commercial loans to the tune of nearly $7 billion, which is likely to increase to nearly $9 billion by the end of the current fiscal year. Much of Pakistan’s commercial loan stock is owed to Chinese financial institutions, as Pakistan has repaid major non-Chinese commercial loans of institutions.
A significant portion of the nation's debt is owed to China. Pakistan holds around $27 billion of Chinese debt. This includes around $10 billion of bilateral debt and $6.2 billion in debt provided by the Chinese government to Pakistani public sector enterprises, and Chinese commercial loans of around $7 billion. In addition, China’s State Administration of Foreign Exchange (SAFE) has placed $4 billion worth of foreign deposits with Pakistan’s central bank. The bilateral debt is on concessional terms with a maturity period of 20 years. In addition to the $27 billion in debt, Pakistan also has a currency swap facility with the Chinese. Immediate threat to ward off:: 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. The major repayments in the next three years are to Chinese financial institutions, private creditors and Saudi Arabia.
From April to June 2023, the external debt servicing burden is $4.5 billion. Even if Pakistan manages to meet these obligations, the next fiscal year will be more challenging, as the debt servicing will rise to nearly $25 billion. This includes $15 billion of short-term loans and $7 billion in long-term debt, including a vital $1 billion repayment on a Eurobond in the fourth quarter.
A million dollar question that comes to the fore is that can Pakistan's exports, foreign investments and remmitance can help avert the looming debt threat?? 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. Unfortunately, On the export side, the IMF had projected nearly $36 billion exports for 2022-23. That has now been revised with a new estimate of $28-29 billion, partly due to the rising cost of business and economic dislocation resulting from the uncertainty in the country. Similarly, foreign investments is on decline due to higher cost of doing business. In recent years, investment has averaged a dismal $2 billion annually due to challenging business environment and frequent policy changes; similar levels of investments are the best case for the next few years. Investor sentiment has also been impacted by the government’s recent restrictions on the movement of capital outside the country.
There is a real danger that nuclear-armed Pakistan with a population of nearly 230 million people may be unable to meet its external debt obligations — which will trigger a sovereign default. To avert this scenario, Pakistan needs IMF’s continued support as well as help from Chinese and Middle Eastern partners. Economic pundits recommend serious dialogue between IMF and Pakistan on war footings, the sooner the better. Pakistani leadership has been asking the United States to intercede with the IMF, but that effort hasn’t borne fruit in the way they hoped for. Moreover, political tensions and polarization is also adding to the economic woes of the country.