By Saeed Shah/Wall Street Journal
Islamabad, January 9: Pakistan held talks Monday with the International Monetary Fund in an effort to restart a stalled bailout program, as economists warn that the country is in danger of defaulting on its foreign debt.
Foreign currency reserves have shrunk to critical levels, enough to cover only about three weeks’ worth of imports, according to financial analysts. Pakistan Prime Minister Shehbaz Sharif said that he had pleaded to the IMF to pause what he called harsh conditions to its loan.
The government in Islamabad, facing an election later this year, has resisted the IMF’s demands that it raise electricity and gasoline prices, as well as taxes, Pakistani officials say. Nor is the administration willing to let the rupee fall further in value, with the IMF saying that the market should determine the level of the currency.
“Without the IMF, Pakistan cannot last beyond a few months,” said Sakib Sherani, an economist who was formerly on the prime minister’s advisory council. “Resuming the program cannot wait.”
To save its dollar reserves, Pakistan is limiting imports, including inputs required by manufacturers. That has led to factories shutting down. In recent days, local car plants for Toyota Motor Corp. and Suzuki Motor Corp. announced temporary halts in production, as have a series of manufacturers in other sectors, including textiles, which is Pakistan’s main industry.
“Pakistan’s potential is great. What is required is bold political leadership. It must make the tough calls,” said Saquib Shirazi, chairman of the Pakistan Automotive Manufacturers Association.
The country, which was hit by devastating floods in the summer, said that it raised funding pledges of some $9 billion—more than it had asked for—to rebuild the livelihoods and infrastructure of the 33 million people affected by the disaster at a conference organized Monday by the United Nations in Geneva. Pakistan says it needs $16 billion to cover the damages, and it was seeking half of that from external sources.
The pledges included 500 million euros from the European Commission, $100 million from the U.S. and $100 million from China.
Most of the money was in loans from multilateral agencies, and some of it had been previously announced. The funds are to be disbursed over three years, and much of it is financing agreed in the past that is now being redirected to flood relief. It is unclear how much of it will eventually be counted in the foreign exchange reserves.
The Islamic Development Bank said it will provide $4.2 billion, with $2 billion coming from the World Bank—originally announced in September—and $1 billion being reprioritized for the floods by the Asian Development Bank.
On the side lines of the fundraising event in Geneva, Pakistan’s finance minister held talks with the IMF’s Pakistan team. There was no immediate comment from either side on any substantial outcome of the discussions, which would need to be followed by a visit of an IMF delegation to Islamabad. The finance minister, Ishaq Dar, “reiterated the commitment to complete the Fund program” in the meeting, according to his ministry.
Pakistan needs the IMF deal to unlock billions more in borrowing from Gulf allies and China, as well as multilateral lenders like the World Bank.
In an attempt to break the deadlock, Mr. Sharif, the prime minister, spoke by telephone last week to the managing director of the IMF, Kristalina Georgieva. The IMF described the call as constructive.
Speaking Monday in Geneva, Mr. Sharif said that Pakistan would do its best to comply with the IMF, though he is still trying to persuade them to soften their terms. He wondered how, after the wave of inflation emanating from the Ukraine war, and the floods in Pakistan, he could be expected to add to the burden of poor people in his country.
“You know the plight of poor people in developing countries, so kindly be considerate and compassionate, and give us some breathing space,” Mr. Sharif said he had told the head of the IMF.
“This is an ongoing dialogue,” he added. “I’m sure one day soon, we will be able to convince them.”
Charles Robertson, global chief economist at Renaissance Capital, an emerging markets investment bank, said that Pakistan’s debt servicing burden put it in the same category as some developing countries which have already defaulted, such as Sri Lanka, and others vulnerable to default, like Egypt.
“Pakistan will struggle to get through this year. A default looks likely but it is not a given,” said Mr. Robertson. “Pakistan could still take measures to resolve the situation.”
Pakistan’s foreign exchange reserves were $5.6 billion on Dec. 30, according to the central bank. Since then, debt of more than $1 billion has been repaid, leaving it with what analysts estimate at $4.5 billion.
Pakistan must repay $73 billion by 2025, according to Topline Securities, a Pakistani stockbroker. Experts say it can’t meet that obligation, meaning that even if it gets back in the IMF program, it will still need to negotiate a debt restructuring further down the line. Such a process is a default of sorts, as it involves negotiating debt forgiveness and rescheduling of repayments.
Elections have to be held by October, according to Pakistan’s constitution, so any debt restructuring would be likely to be undertaken by the next government. Unlike Sri Lanka, relatively little of the country’s debt is owed to foreign bondholders, making a restructuring simpler. Around one-third of the external debt is owed to close ally China.
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