Restructuring debt?

Published June 14, 2023

IF Finance Minister Ishaq Dar’s ‘revelation’ that Pakistan was contemplating bilateral debt ‘reprofiling’ in order to extend the repayment period came as a surprise, the State Bank governor’s assertion that no such plan was under consideration was a bigger shock to the markets.

The SBP chief not only expressed his ignorance about such a scheme, he also contended that the finance ministry was unaware of it, let alone working on one. The central bank, he told financial market analysts on Monday, “is not even aware about the restructuring of external debt. This means the government has not worked out such a plan”.

He made these remarks shortly after the announcement of the monetary policy that left interest rates unchanged at 21pc. If anything, it raises questions about Mr Dar’s reasons for making such a pronouncement — and repeating it during his post-budget presser.

Was he sending a message to the IMF? Maybe, he wanted to calm the markets that are jittery because of the political turmoil and heavy external repayment concerns in case the IMF programme remains suspended. Or was he simply trying to distract public attention from his fiscally irresponsible budget? Whatever the reason, Mr Dar has done further damage to his credibility.

Mr Dar’s spin on debt rescheduling has left the markets baffled because of the government’s lack of strategy to tackle debt payment challenges with foreign exchange reserves projected to fall to $2.6bn after the payment of $900m to creditors by the end of this month, provided China rolls over its $2.3bn deposits at the same time.

With external vulnerabilities increasing by the day, it is time Mr Dar came up with a credible plan to deal with the liquidity issue, in case the IMF rejects the prime minister’s request to sign off on the ninth review and release the stuck-up tranche of $1.2bn before the programme ends on June 30.

This is not the time to spin stories. Pakistan’s financial condition has become so bad that the monetary policy has lost its ability to control inflation, which is soaring. With the government the only borrower in the market to cover its massive fiscal deficit no matter what the cost, it no longer makes a difference if the central bank raises interest rates or keeps them steady.

Reprofiling the bilateral debt can provide some breathing space and reduce Pakistan’s foreign payment requirements of $23bn in the next fiscal year. The government cannot pull this off without a serious roadmap to move forward and without the IMF’s help.

The non-professional attitude of the minister on an existential threat facing the nation will only complicate an already complex situation. The government must take steps to repair its broken relations with the IMF and draw up a plan for bilateral debt reprofiling.

Published in Dawn, June 14th, 2023

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