KARACHI: With dollar-denominated loan repayments of $73 billion falling due in the next three years, the talk of a debt restructuring is gathering pace.

From the incumbent finance minister to the former finance minister as well as an ex-governor of the central bank, influence-wielding voices are calling for restructuring Pakistan’s foreign public debt of roughly $99bn.

Speaking to Dawn on Saturday, Topline Securities Associate Director for Research Umair Naseer said the crisis is so severe that Pakistan won’t be able to make foreign debt repayments even if it miraculously brings the current account deficit down to zero.

In a detailed report on the country’s external sector, Mr Naseer and his colleague Saad Hashemy said loan restructuring has now become “inevitable,” thanks to the doubling of external borrowings in the last seven years. They increased from $65bn in 2014-15 (24 per cent of GDP) to $130bn (40pc of GDP) in 2021-22.

Bond markets were relatively favourable – meaning low interest rates for borrowers like Pakistan — between 2012-13 and 2017-18. This encouraged the government of the time to “regularly” opt for international bond issuances. As a result, Pakistan’s outstanding debt through eurobond and international sukuk increased from $1.6bn in June 2013 to $11bn now.

But that option is no more available to Pakistan for a number of reasons. Issuing new bonds to raise fresh funds is next to impossible as bond yields are generally up. An unusually high level of credit default swap — a tool that investors use to insure against sovereign default — for Pakistani bonds means few international investors are willing to park their money in government instruments.

According to the research report, the country has seen a steady increase in its exposure to multilateral and bilateral debt. Of the total external public debt of $99bn, multilateral debt — owed to international financial institutions — accounted for 42pc. The share of bilateral debt — mainly country-to-country loans — is approximately 38pc.

The largest share within the latter category is of China ($23bn). By including the loans of $6.7bn obtained from Chinese banks, the biggest Asian economy emerges as Pakistan’s largest bilateral creditor.

Mr Naseer said the government should seek Chinese support for debt restructuring in the immediate term. That step may follow attempts for restructuring of the multilateral debt, he added.

Commercial debt’s restructuring often involves harsher terms such as higher rates. But the restructuring of loans that are extended on a government-to-government basis may not always attract punitive conditions, said Mr Naseer.

For example, China and Pakistan have common strategic interests that make the bilateral relationship more than transactional. Chinese companies have invested heavily in long-term infrastructure projects in Pakistan, which means it’s in the commercial interest of Beijing to help Pakistan avert sovereign default.

“I think it may be difficult for Pakistan to convince eurobond investors for restructuring. That’ll involve obtaining consent from an overwhelming majority of bondholders, which can be challenging,” he said.

The writers of the report believe the next government will have to sign a new — and bigger — loan programme with the International Monetary Fund (IMF) of at least $15bn to execute the much-needed rescheduling.

“Pakistan must capitalise on its friendly relationship with China and seek an IMF-led debt restructuring of at least $30bn for the next three to five years.”

Published in Dawn, December 4th, 2022

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