Islamabad/London: Pakistan’s economic woes, from The biggest currency devaluation ever Because of the emergency spending cuts, it offers the clearest sign yet that the nuclear-armed nation faces the risk of default unless it finds widespread support.
It reached the brink of destruction due to last year’s disastrous floods. Foreign reserves Pakistan is ending. The country is left with just $3.7 billion in reserves, or barely enough for three weeks of essential imports, with hotly contested elections due in November.
It desperately needs the International Monetary Fund to release an outstanding $1.1 billion tranche, leaving $1.4 billion in a bailout program that ends in June.
Although an emergency IMF mission has arrived in Pakistan, there are no guarantees amid a growing number of headaches after the suspension of the current package, which had reached $7 billion after the floods, in November.
A 15% devaluation of the Pakistani rupee and a hike in fuel prices last week could help clear some key hurdles, especially as tax measures appear imminent.
Even so, pressure is mounting as the bailout program cannot be extended beyond June and elections are approaching.
“If they don’t get those (IMF) funds, the risk of default increases materially,” said Catherine Exum, co-head of independent research at distressed-debt specialist fund Gramercy, which instead of writing broadly Expects more “reprofiling” of debt. – Off
Former Pakistani finance minister Miftah Ismail, who successfully negotiated an extension to the program last year before being fired amid political turmoil, also believes the IMF is the only logical option.
“If the IMF doesn’t come, we are looking at default,” Ismail said, adding that the country’s 24th support package would then be needed. “I can’t imagine Pakistan not going back to the IMF program.”
Prime Minister Shehbaz Sharif’s main challenger is former cricket star Imran Khan, who was sacked last April but remains popular. Each blames the other for the crisis, even though finances have long been strained.
Pakistan’s debt-to-GDP ratio is in the danger zone of 70%, and between 40% and 50% of government revenue is allocated to interest payments this year, ahead of only Sri Lanka, Ghana and Nigeria. The situation is worse.
“There’s only one long-term leverage issue,” said Jeff Grills, head of emerging markets debt at Aegon Asset Management, who held Pakistan bonds until the flood.
“It’s more a question of when they need to restructure, rather than if.”
Most of Pakistan’s bonds are still trading at less than half their value.
Hard times
Such a restructuring of Pakistan’s bonds would represent its first international default since 1999, according to the Bank of Canada-Bank of England sovereign default database.
With such bonds worth only $8.6 billion, compared to $30 billion owed by Pakistan to China, Ismail said Islamabad would be better off “just going to countries that owe us a lot.” is, or institutions that owe us a lot, and try and get some more long-term loans.”
Sharif is hopeful that the IMF will resume lending. “An agreement with the IMF will happen, God willing,” he said at an event in the capital Islamabad last week. “We’ll soon be out of trouble.”
Multilateral and bilateral financial commitments for Pakistan’s post-flood reconstruction efforts are also contingent on a green light from the IMF.
But even domestic analysts believe things will be tough for the government, as the IMF could potentially call for a tightening of the ballot, which voters already see as decades-higher inflation and lower spending. It will be unpopular to suffer from job prospects.
IMF officials have been eager to help poor countries and Pakistan has pledged to be a key partner for the West, but payments become difficult when a program is nearing its end and a A new government comes in and may try to terminate the agreement.
If the money doesn’t arrive by June, there could be a six-month gap before the new government takes office, during which Pakistan will be starved of funds, effectively pushing its population of 220 million to the brink. will
Due to lack of reserves, it will be very difficult to stay afloat.
Only $500 million in interest or “coupon” payments are due on Pakistan’s international bonds this year, but the central bank chief has said $3 billion is needed to cover overall external debt payments.
Political timing is also important. After the government’s term ends in August, a special caretaker government will take charge for 90 days to ensure free and fair elections.
However, the caretaker government does not have the authority to sign the IMF agreement, which raises the question of whether the government and the opposition will cooperate on a joint commitment to advance any IMF demands to prevent default. can do
“If something happens with the payout and then the election gets in the way, they could have a problem,” Gramercy’s Exum added.