Pakistan is at risk of default

[epebble]

Between debt and the deep blue sea

FOR each of the next five years, Pakistan owes the world $25 billion in principal repayments. It will also need at least $10 billion to finance the current account deficit, bringing total external...

www.thenews.com.pk

FOR each of the next five years, Pakistan owes the world $25 billion in principal repayments. It will also need at least $10 billion to finance the current account deficit, bringing total external financing needs to $35 billion a year between now and 2027. We have foreign exchange reserves of just $3 billion. For each of the next five years, the government needs to pay 5 percent of GDP to service the debt it owes to residents and foreigners. Our total tax take is only 10 percent of GDP.

Let both those facts sink in. And then quickly realise that the Centre cannot hold. For starters, there is no way we can meet our external financing needs without incurring more government debt. This is because, unlike proper emerging markets, we do not attract any meaningful FDI and our private sector does not generate inflows from abroad. However, at 78 percent of GDP, our government debt is already approaching levels considered excessive for an emerging market. As a result, borrowing abroad at a reasonable cost is getting increasingly difficult and the overhang from this debt is weighing on domestic investment, which remains stuck at 15 percent of GDP. Equally, there is no way the government can devote half its tax take to debt servicing and have enough left over to meet other critical expenses, including public wages and pensions, investment, social spending, and defence.

We could, of course, delude ourselves that everything will work out fine and try to kick the can down the road. We can pretend that we will magically grow our exports, remittances and taxes overnight while shrinking our imports and spending. In their desperation for a bail-out and to avoid admitting past mistakes on debt accumulation, there is real danger that this is what our policy makers will agree with the IMF this week. But that would be a recipe for disaster. It has not worked anywhere else in the world and it will not work in Pakistan. It would impose unbearable austerity on an antagonised population already laid low by a major cost of living crisis and political dysfunction. It would be foolish and reckless. It could spark a major social revolt.

Instead, it would be far better to call a spade a spade and accept that government debt in Pakistan is no longer sustainable. So where would this admission leave us? Our airwaves are currently dominated by a false choice between default and paying all our debts on time, even at the cost of endless austerity. But there is a third option. It involves pre-emptively restructuring our government debt, in a way that immediately and adequately frees up resources to be deployed to cushion the current slowdown and implement much needed structural reforms. We would not miss any debt repayment (the definition of a default) but would renegotiate the terms of our existing debt with our creditors such that these repayments become less onerous. While this could take some time and may lead to arrears, the IMF and financial markets would be forgiving as long as these negotiations were being conducted in good faith and would help to make our debt sustainable again.

Let us consider how this might work. My thoughts below have benefited from the excellent omnibus “Sovereign Debt: A Guide for Economists and Practitioners” edited by my friend Ali Abbas, a debt expert at the IMF. Today, Pakistan’s domestic government debt is around 50 percent of GDP and mainly held by our banks. At the same time, Pakistan’s external government debt stands at around 28 percent of GDP or $100 billion. Around fourth-fifths of this external debt is owed to the official sector, split roughly evenly between multilaterals (like the IMF, World Bank and ADB) and bilaterals (countries like China, Saudi Arabia and the United States). The remaining one-fifth is commercial, again roughly evenly split between Eurobond/Sukuk issuances and borrowing from Chinese and Middle Eastern banks. By region, we owe roughly one-third of our external debt to China and 10 percent to the old-boys network of the Paris Club, which includes Europe and the US.

In considering how a debt restructuring can be implemented, there are always two key considerations. First, which creditors to include. Second, how to distribute the debt relief evenly across these creditors, including whether to impose a haircut (a cut in the nominal value of the debt) or a lighter re-profiling (a lengthening of maturities, with no change in the principal or interest payments).

With regard to the first consideration, a key issue will be whether to include domestic debt. While it is external debt that is most difficult for us to service since it requires foreign exchange, we could create much more fiscal space by including domestic debt in the restructuring effort. This is tricky, as it would involve domestic banks and could risk their balance sheets if done in too cavalier a fashion. Moreover, the burden of domestic debt can also be reduced by alternative means, including by maintaining low interest rates, inflating it away, and imposing additional taxes on the banking sector. That said, if we do choose to go down this route, there are successful precedents, including Jamaica (2010, 2013) and Uruguay (2003). As discussed in Ali’s book, these were largely voluntary debt exchanges, featuring diverse strategies including haircuts, reductions in coupons and maturity extensions. Indeed, judging from the position that China has taken in other ongoing debt restructuring efforts, we may need to include domestic debt. Beyond this, there will also be pressure to include all external creditors. On the official side, the IMF will be excluded due to its senior creditor nature. However, others like the World Bank and Asian Development Bank have a more murky status and could be pushed to at least roll-over debt service falling due to them and possibly even provide additional long-term concessional funds, as part of a comprehensive debt renegotiation with all of Pakistan’s external creditors.

Next, our $20 billion of commercial debt would need to be addressed through either haircuts or re-profiling. These negotiations can take longer but the ability to convene creditor committees and invoke “collective action clauses” mean that they no longer can be dragged out indefinitely. Without including private debt in the debt restructuring, official bilateral creditors will never come on-board. But once they do, it is heartening to note that official bilateral debt has been frequently restructured across the world, with the Paris Club often accepting larger haircuts than that imposed on private creditors.

The major issue on the official bilateral side will be how to convince China to join the effort. As a newcomer to the debt game, China is still learning the ropes. To date, it has remained wary of both existing Western-dominated mechanisms for official debt restructuring like the Paris Club, as well as fall-out at home from being perceived as having made bad loans in its extensive lending operations around the world. But it is imperative for China to show global leadership at this critical juncture. As explained above, bringing domestic debt and multilaterals into a comprehensive operation may help coax China to join the overall debt restructuring effort.

In addition, given Pakistan’s special relationship with the Chinese, diplomatic channels can also be leveraged beyond purely economic and technocratic discussions. If all else fails, in order to address China’s concerns related to confidentiality and creating a precedent for other indebted countries, a side deal could be cut with China alone without the need to involve other creditors. Provided the operation is ambitious enough, this could work on its own given that almost one-third of our external debt is owed to China. So there you have it. For such a debt restructuring to work, the government will need to be proactive and hire professional services. Done well, it could be a game-changer for Pakistan, freeing up vital financing space in the order of $30-40 billion over the next 2-3 years and preventing mindless austerity. Delayed or executed poorly, it could backfire. The stakes are high and the hour is getting late.

Former acting governor of State Bank of Pakistan
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Qatar agrees to buy OGDCL, PPL shares

ISLAMABAD: Qatar has reportedly agreed to consider Pakistan’s offer to buy shares/ stakes of Oil and Gas...

www.brecorder.com

ISLAMABAD: Qatar has reportedly agreed to consider Pakistan’s offer to buy shares/ stakes of Oil and Gas Development Company Limited (OGDCL) and Pakistan Petroleum Limited (PPL) and sell Mirage-2000 fighter aircrafts to Pakistan.
@epebble @Lava820 @migflug

However you slice it, one invariant is absence of fresh capital inflows to Pakistan. Pakistan is looking at a long period of enforced self-sufficiency and it is time it started making lemonade out of lemon - more small and medium local industries to serve local market, increased agricultural efficiency and skill to grow more and better crops, self-sufficiency in services - medical, technical, tourism, etc.,

 

[epebble]

There is no 'risk' of default. It will definitely default.

To avoid it there must have been some breakthrough with IMF weeks ago.

Still short of IMF ‘all clear’, govt puts on brave face​

Still short of IMF ‘all clear’, govt puts on brave face

Minister of state claims both sides ‘close to finalisation’; official says yet to receive draft memorandum.

www.dawn.com

 

[TheDarkKnight]

Posted without comment, but the last paragraph is particularly sobering:

Pakistan is at risk of default

A balance of payments crisis is tipping a fragile economy over the edge

www.economist.com

Asia | Broke, broken, brokest
Pakistan is at risk of default
A balance of payments crisis is tipping a fragile economy over the edge

Pakistanis are accustomed to unreliable utilities. Even in affluent neighbourhoods of Karachi and Lahore, residents install diesel generators for power cuts and spare water tanks for when the taps run dry. Yet the events of January 23rd were still shocking. A surge in voltage at a power station in southern Sindh province led to almost the entire country of 230m people losing power for most of the day. Factories, hospitals and mobile-phone networks shut down in many areas. In Lahore, the evening’s trading and promenading—when Pakistan’s second-largest city feels most exhilaratingly alive—was conducted in darkness and a pale glow of mobile phones. Only at midnight did some streetlights come on.

The blackout is indicative of an economic crisis severe even by the standards of a country well-known for them. Pakistan is still suffering the devastating effects of monsoon flooding last summer that displaced 8m people and cost the country an estimated $30bn in damage and lost output. Tens of thousands remain homeless. A follow-up wave of inflation, fuelled by global factors and economic mismanagement, is making their situation harder. Annual inflation reached 27.6% in January, the highest level since 1975. The rupee is crashing; it traded at an all-time low of 275 to the dollar this week, down from 230 in mid-January and 175 a year ago. With foreign exchange reserves dwindling, the country faces its worst balance of payments crisis in peacetime.

Many heavily-indebted emerging markets have faced similar problems over the past year, related to post-pandemic supply glitches and the war in Ukraine. Pakistan, which imports much of its food and fuel, looks a lot like Sri Lanka last spring, before it defaulted on its debt and its president was chased from the country by angry protesters. Yet Pakistan is uniquely troubling. It is the world’s fifth biggest country by population, perennially unstable, beset by extremists and nuclear-armed.


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The return to power of the Taliban in neighbouring Afghanistan in 2021 has launched a third destructive wave—of terrorism and insurgency, mainly in the northwest of the country. A suicide-bomber killed 84 people, mostly members of the security forces, last week in a mosque in the north-western city of Peshawar. Political dysfunction, as ubiquitous as corruption in Pakistan, is inevitably stymying the government’s response to all these disasters.

Imran Khan, a charismatic narcissist who was ousted as prime minister last April, has spent the past year agitating to bring down the government of Prime Minister Shehbaz Sharif that replaced him. Even if he fails (and the army, which tends to stage-manage Pakistan’s political dramas, is not with him) Mr Khan remains popular and well-placed for an election due by October. Mr Sharif’s administration is meanwhile squabbling, including over negotiations for an imf bailout. With foreign currency reserves down to just over $3bn in early February, enough to cover three weeks of imports, Pakistan needs access to $1.1bn in a bailout programme agreed with the imf in 2019 and suspended due to a lack of promised reform. If the fund’s negotiators, who returned to Islamabad on January 31st, depart on February 9th without a deal, Pakistan could default on its sovereign debt.

The forex shortage, in part caused by efforts to prop up the rupee, is causing additional damage. Import restrictions imposed to save dollars for essential items like food and fuel have hit industries reliant on imported inputs. Output in large-scale manufacturing, including cars, chemicals and textiles, fell by 5.5% in November 2022 compared with the year before. The World Bank predicts GDP will grow by 2% this year, half what it forecast last June. “There used to be this conviction that we’ll always come out of it somehow,” says a businessman in Karachi. “Now there’s deep pessimism, almost hysteria.”

The almost total loss of the cotton crop to the floods has ravaged the textile industry, a major source of exports. Some 7m textile workers may have lost their jobs since last summer, according to industry sources. The blackout is estimated to have cost the industry an additional $70m.

The floods and job losses are thought to have pitched between 8.4m and 9.1m more people into poverty, mostly in the countryside. In Dadu, an especially inundated district of Sindh, thousands are still languishing in tents. “Only those who had savings or outside help can afford to fix their houses”, says Rasheed Jamali, an aid worker. Foreign donors pledged $9bn in relief in January; less than $800m of a previous set of pledges had at that time arrived. With only half of Pakistan’s soggy fields sufficiently recovered to sow with winter wheat, much of the country is facing another lost harvest.

These political, economic and environmental crises are mutually reinforcing. Payments from the bailout programme agreed in 2019 were suspended a year ago after Mr Khan, facing a growing prospect of parliamentary defeat and ejection from office, reintroduced fuel subsidies. Mr Sharif’s government vowed to fulfil the fund’s conditions but backtracked in September when, panicked by the floods, it sacked Miftah Ismail, its pragmatic finance minister. His successor reversed some of his policies, prompting another suspension of payouts. “If the floods hadn’t happened I might have kept the job and we might have been OK,” Mr Ismail says.

Mr Sharif’s government seems to be bowing to the inevitable. In late January it stopped trying to prop up the rupee and raised fuel prices, as the IMF had requested. If the current negotiations in Islamabad unlock the bailout funds, it might encourage other external creditors to extend credit lines or defer payments on existing loans. Unlike Sri Lanka, which owed a higher percentage of its debt to foreign creditors, Pakistan may be able to stabilise its position without its creditors being forced to accept a “haircut”.

Yet any relief is likely to be temporary. The current IMF programme expires in June; Mr Sharif’s term will expire in August. A caretaker administration will then preside over what promises to be a two-month political vacuum before the scheduled elections. They will be messy. It is hard to think of Pakistan in such circumstances carrying out the additional reforms, including raising taxes and electricity tariffs, required to secure more imf funding. They would inflict more short-term pain on the country’s wretched people than even an astute Pakistani government might dare to. And especially if Mr Khan, currently nursing his wounds after a failed assassination attempt, has his way, the next government may be even worse than the current one.

We need some out of the box thinking:

 

[Kambojaric]

We need some out of the box thinking:

His way is taking the easy and stupid way out which inevitably will lead to international sanctions, skyrocketing the PKR and hurting an already import reliant economy even more.

The smarter choice would be to make the difficult economic reforms required. It will be a shock, especially for the middle and upper class whose obsession with imported items is completely out of touch with reality. However that requires political capital and maturity which is completely lacking. A default might therefore be the only realistic way forward.

 

[Ssan]

The elections and their aftermath are not all that far way. We shall soon be able to judge the meaningfulness, or lack of it, of the last paragraph relatively early.

MashAllah you are very patient man. The antithesis of what Keynes said - in the long run we are all dead anyways.

 

[SeaMermaid]

https://twitter.com/x/status/1623490067577683968

No breakthrough in IMF talks | The Express Tribune

To break deadlock, Dar met mission chief but IMF did not share MEFP draft

tribune.com.pk

 

[Dalit]

Election’s won’t happen any time soon. Mark my words.

Even if IK comes back by a miracle, the overseas Pakistanis wont trust the state. It’s a given. If there is political stability for a few years, only then things will start to improve.

My guess is, elections will be delayed, IK will be assassinated / disqualified by you know who, PMLN will come to the helm, IMF deal will happen, while Pakistan gradually goes down, but will survive, with establishment continue with their habitual political engineering (because its fun). And then few years down the line a violent revolution.

Elections will be delayed considerably by PDM and the Pakistani army. As long as PTI has strong political support among the masses expect PDM and the Pakistani army to backtrack on elections.

https://twitter.com/x/status/1623490067577683968

No breakthrough in IMF talks | The Express Tribune

To break deadlock, Dar met mission chief but IMF did not share MEFP draft

tribune.com.pk

IMF is really tightening the screws. This is good news.

However you slice it, one invariant is absence of fresh capital inflows to Pakistan. Pakistan is looking at a long period of enforced self-sufficiency and it is time it started making lemonade out of lemon - more small and medium local industries to serve local market, increased agricultural efficiency and skill to grow more and better crops, self-sufficiency in services - medical, technical, tourism, etc.,

The problem is that Pakistan is incapable and incompetent to achieve self-suffiency. Especially the current imported government.

 

[VCheng]

We need some out of the box thinking:

Probably not gonna help any with the situation.

MashAllah you are very patient man. The antithesis of what Keynes said - in the long run we are all dead anyways.

I prefer what President Bush Jr. said: Who cares about history? We'll all be dead.

 

[AZ1]

https://twitter.com/x/status/1623686355485175811

 

[pikkuboss]

What happened to the IMF deal? Today was last date.

 

[Erieye]

Either option you suggest there is impossible, for free markets mean competition, which cannot be allowed for fear of disturbing the favored entrenched monopolies, and government support will continue to be determined by nepotism and corruption, as always, and not by any other measure.

This right here is where all the problems lie in Pakistan.

Elite capture maintaining an unfair and parasitical monopoly, not allowing healthy and fair competition in the free market, and everything in Pakistan operating based on nepotism and corruption which ultimately means ineffective insititutions that are simply incapable of delivery any satisfactory or even meaningful results at all.

All of that leads to the current Pakistan we see today, the failed, unstable and bankrupt Pakistan.

 

[VCheng]

This right here is where all the problems lie in Pakistan.

Elite capture maintaining an unfair and parasticial monopoly, not allowing a healthy and fair competition in the free market, and everything in Pakistan operating based on nepotism and corruption which ultimately means ineffective insitituions simply incapable of delivery any satisfactory results.

All of that leads to the current Pakistan we see today, the failed, unstable and bankrupt Pakistan.

It is actually a pretty comfortable and cozy system for those who benefit from it.

 

[delta2]

Let it burn.

Let it all burn down!

It is better this way.

Only fire will annhilate these devils that have taken a permament hold.

Nothing short of a massive inferno will do! Let it all burn!

 

[Asian.Century]

https://twitter.com/x/status/1661045356048654336

 

[xyxmt]

It's not just of overseas Pakistanis, even an ordinary Pakistani thinks the same. Pindi and Isb are absolutely disconnected with the rest of Pakistan.

Army leadership is totally disconnected, They did not even believe there was a terrorism problem in Pakistan when school, madrassa, hospital and masjid were being blown...until Army Public school incident, they only considers their garrison and DHA as Pakistan, the rest is just their slave colony where their Begmat and kids go for fun drive and run over some bugs on the roads.