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Pakistan’s debt obligations

Updated March 05, 2018


WITH total debt servicing projections at $31.3 billion until 2022-23, Pakistan expects a balanced report today from the International Monetary Fund, notwithstanding America’s adversarial stance, seen at its peak during the recent meetings of a global money-laundering watchdog in Paris.

This will be the first post-programme monitoring (PPM) report from the IMF executive board after the completion of $6.4bn Extended Fund Facility in September 2016.

Pakistan has to undergo annual PPM reviews in addition to usual Article-IV consultations until 2023 for borrowing significantly higher than its quota. The threshold for Pakistan to move out of the PPM is estimated at 1.4bn special drawing rights (SDRs) of the IMF ($2bn), currently estimated at around 4bn SDRs ($5.8bn).

It is against this backdrop that the government has made foreign debt servicing projections until 2022-23 to all creditors starting November 2017 including $4.2bn payable to foreign creditors during the current fiscal year. The current year would also see the beginning of debt servicing of the China-Pakistan Economic Corridor (CPEC) loans with less than $80m repayments.

The debt servicing cost is estimated to increase to $6.42bn during the next fiscal year

The debt servicing cost is estimated to increase to $6.42bn during the 2018-19 fiscal year, including $1.76bn to multilaterals, $1.76bn to commercial banks and up to $1.34bn to international capital markets against bonds.

Repayments to Paris Club and non-Paris Club creditors for the next year are estimated at $900 million and $600m, respectively.

For the 2019-20 fiscal year, the government has projected foreign debt servicing cost at about $7bn, including $2.23bn to commercial banks, $1.9bn to multilaterals, $1.24bn to bond investors and $1.6bn to Paris and non-Paris Club members.

Similarly, the government estimates the debt servicing cost to come down significantly to $4.4bn in 2020-21 led by about $2bn to multilaterals, followed by about $1.6bn to bilateral creditors (Paris and non-Paris Club) and bond servicing declining to just $204m.

The debt repayment would again increase to $5.2bn in 2021-22 including more than $2bn to multilateral lenders, $1.9bn to bilaterals and $1.2bn as bond servicing.

The 2022-23 fiscal year is expected to see a decline in debt servicing to $4.2bn including $2bn to multilaterals, $1.9bn to bilaterals and fewer ($320m) repayments to commercial banks and bond investors put together.

The repayments due to the IMF are estimated at about $740m in 2019, $1.06bn in 2020, $1.19bn in 2021 and $1.08bn in 2022.

Government projections also include CPEC-related repayments on account of loans without taking into account repayments on account of return on investments. The government told the IMF during December consultations that $23bn worth of CPEC projects were under implementation, including $17bn in the energy sector by the private sector.

About $6.035bn worth of projects were in the road sector and funded through loans at a weighted average rate of interest at about 2.4pc. These include $1.315bn phase-II of the Karakoram Highway, $1.626bn Lahore Metro Orange Train and $2.9bn Sukkur-Multan Motorway.

This, however, does not include key projects on which agreements have yet to be signed, such as $8.2bn railway line from Karachi to Torkham on the Afghan border.

The flow of funds from not only the multilateral lenders like the World Bank and the Asian Development Bank (ADB), but also from some major bilateral lenders would depend on the clean chit of economic health from the IMF.

The draft report has already been shared with Pakistani authorities as required before putting it up consideration of the executive board, but adverse comments from some directors could not be ruled out in the aftermath of Pakistan being put on the terror financing watchlist of the Financial Action Task Force (FATF). Islamabad says the move was politically motivated and intended to embarrass the country globally.

While the IMF has been appreciative of government policies under its three-year programme, things that may attract negative marking include some loosening of the fiscal side, inability to carry forward structural reforms to address energy sector losses, poor health of public sector entities, and limited success on tax base.

The IMF staff and Pakistan authorities have reportedly revised fiscal deficit limit to 5pc of GDP for the current fiscal year instead of 4.1pc despite a Rs200bn cut to the development programme. The current account deficit would remain challenging, as it soared 48pc to $9.2bn — almost 3.1pc of GDP — in the first seven months of the current fiscal year.

The flow of the World Bank assistance is normally linked to Pakistan’s ability to maintain official foreign exchange reserves sufficient to finance at least two months of the import bill, but it can sometimes be influenced by political dimensions.

The ADB has been a different case in the past that helped Pakistan in difficult situations despite US opposition and could find some support from newly established China-sponsored Asian Infrastructure Investment Bank.

The timing is of critical importance and a reminder of a 2007-08 situation when the Musharraf-led administration was pushed to the wall for political reasons and the subsequent PPP-led coalition government decided at the last moment to put on hold launching of a few transactions in the international capital market, followed by an IMF programme on tough conditions that could not survive the test of time beyond few initial tranches.

Ahead of FATF meetings in Paris, the Miftah Ismail-led Ministry of Finance withdrew from the cabinet meeting a case for launching another $1bn plus bond at the last moment. This was done even though the federal cabinet had already authorised a $3.5bn fund raising from the international market last year when the government stopped at $2.5bn bonds to avoid price escalation.

The ministry had announced at the time it could go for another bond launch for the remaining lot within 45 days. How things unfold going forward would be seen with interest, as the country traverses through diplomatic challenges and political transition.

Published in Dawn, The Business and Finance Weekly, March 5th, 2018