KARACHI: Former central bank governor Syed Salim Raza has said Pakistan should avoid going for a “piecemeal restructuring” of its dollar-denominated debt.

Speaking at a recent seminar on national economic challenges, the former chief of the State Bank of Pakistan (SBP) said that asking one of the many creditors to restructure the debt was “unfair” and tantamount to subsidising the other creditors.

“It’s reasonable that we think of one substantial restructuring,” he said.

His advice follows weeks of reporting by the local press on the rising level of credit default swap (CDS), which is a tool that international bondholders use to protect themselves from a possible default by debt-issuing sovereign nations.

Last month, Finance Minister Ishaq Dar said Pakistan would seek the rescheduling of some $27 billion non-Paris Club debt that Islamabad owes mainly to China.

Referring to the Common Framework for Debt Treatment that the Group of Twenty (G20) recently came up with, Mr Raza said the advanced economies have accepted that there’s going to be a “measure of strain” with respect to loan repayments by developing countries.

“It’s better that the debt problem is handled pre-emptively rather than waiting for defaults like in the 1980s or in the Asian crisis — which then feed on themselves and make matters much worse,” he said.

The new “debt treatment” forum is tasked with anticipating the repayment problems that the emerging markets are going to have and seeking debt restructuring on a pre-emptive basis. Countries can apply for such rescheduling and the forum will then set up a creditor committee within six weeks to help the struggling borrowers, he said.

As for the domestic debt, he said the government has been crowding out the private sector whose share in the overall credit is less than one-fifth. “We need an empowered centralised debt management office with support from market operators to lower the long-term cost of debt,” he said.

The former SBP governor urged the government to create a “yield curve” — varying interest rates on bonds having equal credit quality but differing maturity dates. A liquid market where retail investors actively participate in government debt trading through an online portal will pave the way for the private sector to float fixed-rate bonds that are currently absent, he noted.

“Our big companies shouldn’t be borrowing from banks. It’s cheaper to borrow from the bond market. In America, the bond market is about four times the size of corporate debt of banks. Our bond market is barely developed and one of the biggest reasons for that is the absence of the yield curve,” he said.

Published in Dawn, November 27th, 2022