Muhammad Asad Tahir Bhawana

Pakistan faces one of the severest economic downturns marked by substantial external debt obligations and surging inflation and exacerbated by political tensions and terrorism. The delay in realisation of the ninth review of the $6.5 billion International Monetary Fund (IMF) loan programme initiated in 2019 has worsened the economic condition, with the lender expressing dissatisfaction over Pakistan's commitment to reforms and its ability to secure funds for external financing.

To evaluate Pakistan's chances of economic recovery, several factors need consideration, including the composition of its overall external debt, the short-and-medium-term repayment pressures, potential inflows to offset debt outflows, and the country's external debt management strategy. As of December 2022, Pakistan's external debt and liabilities totalled $126.3 billion. Of this, around $97.5 billion (77% of the total) is directly owed by the government to various creditors, while an additional $7.9 billion is owed by the government-controlled public sector enterprises to multilateral creditors.

Pakistan's external debt can be categorised into four main components: multilateral debt, Paris Club debt, private and commercial loans, and Chinese debt. The Paris Club’s debt of $8.5 billion is owed to a group of 22 major creditor countries. Pakistan's private debt is approximately $7.8 billion and consists of private bonds like Eurobonds and global Sukuk bonds. Foreign commercial loans amount to nearly $7 billion, with a significant portion owed to Chinese financial institutions.

China's debt to Pakistan is around $27 billion, including bilateral debt, debt to public sector enterprises, and commercial loans. Additionally, China has provided a currency swap facility and deposited $4 billion in foreign currency with Pakistan's central bank. Further, Pakistan faces significant repayment pressure due to its large external debt. Over the period from April 2023 to June 2026, the country needs to repay $77.5 billion in external debt, which is a substantial burden for its $350 billion economy. The major repayments in the next three years include obligations to Chinese financial institutions, private creditors, and Saudi Arabia.

Even if Pakistan manages to fulfil these obligations, the following fiscal year will present additional challenges. Debt servicing is expected to rise to nearly $25 billion, comprising $15 billion in short-term loans and $7 billion in long-term debt. This includes a crucial $1 billion repayment on a Eurobond in the fourth quarter. Short-term debt repayments encompass $4 billion in Chinese SAFE deposits, $3 billion in Saudi deposits, and $2 billion in UAE deposits, which the Pakistani government assumes they will be rolled over by the creditors annually. Additionally, Pakistan will need to repay another $1.1 billion of long-term commercial loans to Chinese banks.

In 2024-25, Pakistan's debt servicing is projected at around $24.6 billion, with $8.2 billion in long-term debt repayments and $14.5 billion in short-term debt repayments. Notably, Chinese lenders account for $3.8 billion of the total. For 2025-26, the debt servicing burden is expected to be at least $23 billion, including $8 billion in long-term debt repayments. This includes a $1.8 billion Eurobond repayment and $1.9 billion to a Chinese commercial lender.

Pakistan heavily relies on exports, foreign direct investment (FDI), and remittance inflows to repay its debt and avoid a sovereign default. However, projections indicate that these inflows will fall short of covering the import bill and debt repayment obligations. Over the past three years, Pakistan's export earnings and remittances totalled $164 billion, while imports amounted to $170 billion. In the next three years, imports are expected to exceed the combined value of exports and remittances, leading to a current account deficit that will require external financing.

FDI is also expected to remain low. With an average annual investment of $2 billion in recent years, the challenging business environment and policy changes have hindered higher levels of FDI. Similar levels of investment are anticipated in the foreseeable future. Ijaz Ali, a research economist at the Centre for Business and Economic Research (CBER), Karachi, and Assistant Data Manager, Interactive Research Development, Karachi, while talking to WealthPK said Pakistan was currently facing a challenging situation regarding its external debt burden, which had limited its access to sovereign financing.

“To avoid default, Pakistan is dependent on Middle Eastern partners and China for debt rollovers and new loans. The specific amount of funds required will depend on negotiations with the IMF. If the disrupted IMF programme is revived, Pakistan will need a new IMF programme, along with loans and debt rollovers, to address its debt burden over the next three years.” Alternatively, he said Pakistan could pursue pre-emptive debt restructuring to ease repayment pressure and conserve foreign exchange reserves. “However, officials are hesitant due to the expected difficulties, lengthiness of the process, and potential political backlash from austerity measures,” he added.

He further said that the implications of this situation for Pakistan's stability were concerning, as a sovereign default could occur. “To prevent this, Pakistan urgently needs support from the IMF, as well as assistance from China and Middle Eastern partners. Efforts to seek intervention from the United States with the IMF have not been successful. If Pakistan defaults, it could lead to import disruptions, shortages of essential goods, and exacerbate political turmoil in the country, considering its demographic profile and the threat of terrorism.”

Credit : Independent News Pakistan-WealthPk