For the past few weeks, there has been incessant talk in the media and financial circles about the possibility of a default by Pakistan with regard to its bilateral and multilateral loan repayment obligations. Immediately speaking, as of last week Pakistan successfully averted the immediate threat of default on repayment of a foreign loan.

The central bank made a $1 billion repayment against a maturing Sukuk on December 2, three-days ahead of the original date of repayment. The timely repayment removed the apprehension that the country would default on the loan. At the same time, Saudi Arabia has extended the period of its deposit worth $3 billion at the State Bank of Pakistan.

However, in the long run, the threat of default still persists, unless the country manages to reschedule a large part of its foreign debt. According to an estimate, Pakistan’s external debt repayment obligations total $73 billion in the next three-years (from current fiscal year, FY23 to FY25).

As things stand, Pakistan’s foreign exchange reserves have depleted rapidly over the past few months to reach $7-8 billion at present. Repayment of the huge debt with such little reserves seems highly unlikely. The loan repayment is due to large external borrowings (external debt and liabilities) that have doubled in the last seven-years from $65 billion in FY15 (24% of GDP) to $130 billion (40% of GDP) in FY22. As a result, Pakistan’s total debt and liabilities (domestic and external) have increased from Rs19.9 trillion (72% of GDP in FY15) to Rs60 trillion as of June, 2022 (90% of GDP).

In the given circumstances, what are our debt rescheduling options?

The prospects in this regard are not very encouraging. The negative factors include large external financing gaps, challenging global financial markets and the persisting political instability in the country. The situation is further compounded by the fast dwindling foreign exchange reserves and the rising external funding gap. On top of all this, Pakistan’s borrowing options have further shrunk after the international credit rating agencies downgraded its outlook to negative and debt rating to junk status. The situation has increased the country’s borrowing cost in addition to virtually closing the doors to floating Eurobonds.

Experts say that, to start with, Pakistan will have to do a debt rescheduling with its bilateral lenders, especially China as it forms 30% of government external debt, and also because repayments to China are substantial in the next few years. Simultaneously, Pakistan must seek IMF-led debt restructuring of at least $30 billion for the next three to five-years. The finance minister has already hinted at it, saying that it is working on bilateral rescheduling of debt.

It is pertinent to point out here that the government has to enter into a new and bigger IMF programme to execute the much-needed rescheduling. Commercial lenders, Eurobonds investors, local lenders and others may or may not be affected by this rescheduling, depending upon the negotiations. Similarly, Pakistan’s credit rating that was recently downgraded by Moody’s (from Caa1 from B3) may also be adversely affected. It may be noted in this connection that other countries like Argentina, Angola and Zambia also undertook restructuring of loans. In the past, Pakistan too restructured its Eurobond and rescheduled certain portions of the Paris Club payments post nuclear tests in 1998.

The new IMF programme, along with debt restructuring, will impose tough conditionalities on the country, including stricter monetary, exchange rate and fiscal policies. As such Pakistan’s economic growth will remain sluggish. Moreover, the rupee will remain under pressure, while interest rates will remain on the higher side.

According to government sources, to deal with the immediate challenges, Pakistan has arranged financing worth $32-34 billion from multilateral and bilateral creditors to fulfil the requirements of the current fiscal year. This includes a rollover of loans worth $21.1 billion. This will help finance the current account deficit and improve foreign exchange reserves. For the current fiscal year, the government has estimated the inflow of $7.7 billion in loans from the multilateral agencies. The World Bank’s nearly $1.1 billion budget support loan is also hanging in the balance, although Pakistan claims it has met the conditions for a $450 million loan but no date for a World Bank board meeting has been decided so far.

The only silver lining in the dark clouds is that global commodity prices may likely fall 25% and financial markets improve in the coming months. That will provide much-needed relief. But if Pakistan is not able to get its debt restructured on time, its economic crisis could worsen further.