Despite IMF help Pakistan may need debt reduction, Barclays
Business
Lack of bilateral funding reflection of difficult political climate, Payment halt possibility
LONDON (Web Desk) - Even if some help from the International Monetary Fund (IMF) and bilateral institutions materializes Pakistan may need to make some sort of debt adjustment given the rapid deterioration in its external position, Barclays Bank has stated.
Any money obtained from bilateral or multilateral sources will have to be used to support import credit letters of credit and debt repayment, the bank stated. It added that it suggested that in the absence of assistance with debt repayments or additional finance the drain on FX reserves is unlikely to stop.
Payment halt is a possibility, according to Barclays, which stated that it still has a "Underweight rating" on Pakistan's national debt in its report on the country, which was published on February 21. According to Barclays, Pakistan's debt measures by themselves do not yet warrant worry. The report stated that in order to keep debt at manageable levels, continuing access to financing and strong economic development are required.
"In this scenario, economic devastation brought on by the floods, a developing political crisis, and growing skepticism over the country's capacity to reach IMF objectives might make managing debt load more challenging."
Pakistan is faced with a long list of problems, according to the report, including "deterioration in current account position, large foreign currency repayments, limited fiscal space, currency pressures and need for regular central bank intervention, rising cost pressures, as well as damage from record flooding."
Moreover, when a government is faced with significant rollover risks, credit rating downgrades and lower bond prices (higher refinancing costs) have effectively excluded that country from the capital markets, raising the possibility of a 'liquidity' problem. The research stated that this leaves few options and an increasing probability of a debt readjustment sometime in 2023–2024 in the absence of a bilateral or multilateral rescue.
On the IMF program, Barclays stated that it is still at a crucial phase since the lender has demonstrated a low tolerance for program goal deviations in terms of budgetary adjustments, foreign exchange policy, and energy sector reforms. Also, the lender has relied on Pakistan's bilateral creditors to increase the amount of financing available.
"We have felt that Pakistan's complicated political climate and macroeconomic instability—high inflation, poor growth, rising budget deficit—are reflected in the absence of new bilateral funding deals. According to the paper, "We do not anticipate a shift in this environment and predict that future bilateral funding arrangements will continue to be piecemeal, concentrate on investment returns and possibilities rather than strategic alliances, and be anchored by an IMF program.
In light of recent government initiatives, Barclays predicted that the rate of inflation will continue to be high. Given the precarious economic situation, increasing polarization in civilian-military relations, an increase in insurgency/terrorist activity, and the possibility of elections taking place in October, the report stated that it believes there is a risk that 2023 will see significant political instability.
Pakistan's balance of payments status, according to Barclays, shows that the nation is already in a crisis. "In light of this, any finance obtained from bilateral or multilateral sources will need to be used to support import letters of credit as well as debt repayment. This suggests that, in the absence of relief for debt repayments or additional finance, the drain on FX reserves is unlikely to stop," it stated.
