Debt management

Published July 4, 2023

THE finance ministry’s new three-year, medium-term debt management strategy aimed at raising long tenor foreign official and commercial loans and securing debt relief from commercial creditors is a tad optimistic, despite the agreement with the IMF on a $3bn short-term facility.

The plan seeks to meet Pakistan’s external financing needs through long tenor bonds and concessional multilateral flows as it attempts to reduce the increasing share of short-term loans in the foreign debt stock.

It emphasises efforts for fresh commercial loans in three-year or longer rollover tenures, instead of the existing one-year tenures to increase the average time to maturity of debt.

The scheme proposes debt relief from commercial creditors to slash the annual external repayment burden of $22bn-23bn. The strategy assumes that the agreement will immediately unlock held-up foreign inflows.

Indeed, the programme’s approval by the IMF board later this month will help Pakistan secure assistance from its global partners to boost liquidity and support its repayment capacity.

But expectations of international debt markets opening widely to Pakistan and giving it access to fresh long tenor debt and re-profiling its existing obligations, or multilateral and bilateral partners releasing big amounts soon, are exaggerated.

Our ability to secure the kind of liquidity we require or obtain debt relief largely hinges on a new longer-term funding programme from the IMF next year.

The success of negotiations with the IMF for its fresh, bigger loan will, however, depend on the execution of the new Stand-by Arrangement with the IMF — both in the lead-up to and in the aftermath of elections, as well as political stability.

Over the next several months, every creditor, not just the IMF, will closely monitor Pakistan to see if is diligently executing the reforms agenda and maintaining fiscal discipline to avoid another liquidity crunch in the near to medium term.

Once a new government is formed after the elections, the focus will shift to whether political stability can be restored and if the new set-up is stable enough to implement tough and unpopular economic and financial reforms.

Pakistan requires significantly large external financing to meet its monetary needs in the next few years. But unless it gets a bigger IMF programme, its ability to raise funds from its partners and commercial creditors will remain constrained no matter how meticulous the debt strategy is.

Published in Dawn, July 4th, 2023

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