The pending IMF bailout is only sufficient to cover a portion of Pakistan’s debt over the next year
Firms should prepare for the eventuality of a debt default in Pakistan. This will include extended disruptions in the supply of key commodities for individuals and businesses, further losses in the value of the currency, significant disruptions in the manufacturing sector, and an exodus of foreign investment. As the domestic political situation also remains tenuous, firms should expect extreme uncertainty and volatility in government policy regarding taxes and spending plans. These developments will worsen inflation levels and likely aggravate social unrest seen in recent weeks, hampering consumer confidence and spending levels. Regardless of when Pakistan defaults on its debt, examples from Sri Lanka, Zambia, and Ghana suggest that hyperinflation, shortages, policy uncertainty, and general economic weakness are likely to last beyond the actual period of the default.
Overview
- Pakistan’s foreign exchange reserves have resumed their downward trend, plunging to US$ 4.2 billion, after a loan infusion briefly stabilized reserves in April.
- Debt levels remain extremely high, at US$ 96 billion in just public external debt. The total debt due by June 30 is approximately US$ 3 billion.
- The IMF’s ninth review of the bailout program continues to hang in the balance, with a crucial US$ 2.7 billion remaining by June 30. Nonetheless, this amount likely does not cover the country’s immediate debt dues.
- This economic logjam comes at a time when Pakistan also faces one of its worst-ever political crises, with the ex-prime minister under threat of arrest, violent protests across the country, and extreme uncertainty around provincial and national election dates.
Our View
A debt default in Pakistan is not a question of if, but when. The accruing external debt is only likely to balloon further as the country uses loans and debt rollovers from its allies (China and Saudi Arabia) to avoid immediate defaults and currency crises. In addition to mounting loans, the weakening Pakistan rupee will make dollar-denominated loans more expensive. While the IMF prolongs the process of disbursing the final tranche of funds to Pakistan, questions on the country’s medium-term debt sustainability and management remain. The ongoing political crisis and expected elections this year will also likely mean that lawmakers will be distracted from implementing much-needed economic reforms and austerity measures, likely choosing populist policies instead.
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