In the midst of the government’s difficult battle to prevent sovereign default with very little gross foreign exchange reserves left behind, Pakistan is expected to make debt repayments of over $1 billion to two foreign commercial banks early next month.
The government will repay two loans to Gulf banks in the first week of January, according to sources in the ministry of finance. In the hopes that the lenders would further postpone payments when the loans reached maturity, these loans had been secured for a year. However, poor credit rating warning of a significant chance of default prevented foreign lenders from honoring their obligations to Pakistan.
To two commercial banks in Dubai, separate repayments of $600 million and $415 million would be made. Until fresh loans are secured, these repayments are expected to make a major dent in the already precarious foreign exchange reserves – currently standing at around $6 billion. The Ministry of Finance did not comment on this article.
Since the International Monetary Fund (IMF) did not confirm a mission visit that was ad hoc scheduled for October 26, Pakistan’s economic problems have gotten worse. The risk of default has increased, and former finance minister Miftah Ismail has frequently stated that, in the absence of the IMF program, the nation might default.
But on Wednesday, Finance Minister Ishaq Dar strongly asserted that Pakistan “would not default” on its international obligations because the government has secured the $31-32 billion needed for the current fiscal year 2023.
Dar’s early-morning speech did not, however, soothe uneasy investors, as the stock market fell another 524 points after the finance minister’s remarks. The rupee kept shedding its value and closed over Rs226.37 to a dollar on Wednesday – a figure that has become symbolic as the dollar is not available at this rate in the open market.
The gap between the black market and interbank rates has widened to between Rs25 and Rs30 per dollar.
According to information obtained by The Express Tribune, the $32 billion plan was overly optimistic to succeed in the absence of the IMF’s protection. The government has included floating Eurobonds as a means of raising $1.5 billion as part of its external financing strategy. On account of Naya Pakistan Certificates, an additional net $300 million is anticipated (NPC).
The Ministry of Finance still expects $6.3 billion to materialize in the current fiscal year—a figure that likewise seems incredibly optimistic—instead of the over $7 billion in foreign commercial loans that were projected.
The government is pinning its hopes on China rolling over its foreign commercial loans worth $3.5 billion and non-Chinese banks not taking back their loans worth $1.3 billion. The finance ministry says that a $700 million Chinese commercial loan will arrive soon, which Islamabad had returned earlier.
However, because Pakistan’s poor credit rating has a negative effect on both Chinese and non-Chinese commercial banks’ overall balance sheets, neither has offered loans thus far.
In the current fiscal year, the government projects that it will be able to get new foreign commercial loans totaling $1.5 billion, although this prediction may not come to pass if the IMF program is not revived. The government cannot politically afford the interest rates that foreign commercial banks are currently requesting, which are significantly higher than 10%.
The loans that Pakistan is returning to the London Bank the next week were taken out at the advertised rate plus 2 to 2.2%. Even at today’s Libor rate, the total cost will be over 6%, almost half of what the banks are now demanding, according to the sources.
Nathan Porter, the IMF’s mission chief in Pakistan, demanded at the last meeting that Islamabad allow the rupee to appreciate to its true value—a request that appears to run counter to the goals of the administration.
The government’s priorities also appear to be in the wrong place, since it is more concerned with stopping money smuggling than it is with resolving the underlying issues that led to it in the first place. According to a press release from the PM’s office, Prime Minister Shehbaz Sharif presided over a meeting on Wednesday to reduce smuggling and improve the FBR’s ability to collect money through enforcement.
The government makes an accurate prediction that it will be able to obtain the $7 billion loan that China and Saudi Arabia have agreed to roll over.
Saudi Arabia has already rolled over $3 billion, while Pakistan has requested China to roll over the $4 billion maturing in this fiscal year.
The finance ministry hopes to receive $11 billion from the multilateral creditors, but its materialization depends upon the revival of the IMF program. So far, the Asian Development Bank has been helping Pakistan in a major way, but the World Bank is looking toward the IMF.
