February, 22, 2024
IMF Decisions on Pakistan's Debt Dilemma

IMF Decisions on Pakistan’s Debt Dilemma

Infostani  International: After Pakistan’s recent election, the IMF grapples with a key decision on the country’s debt sustainability. With the $3 billion loan program ending soon, former central bank governor Reza Baqir raises questions about the IMF’s stance and potential support for debt restructuring. Amid rising tensions and economic challenges, Pakistan’s debt situation is a critical concern for global investors and financial institutions.

Challenges and Decisions for IMF in Assessing Pakistan’s Debt Sustainability Post-Election

Former central bank governor Reza Baqir asserted that the International Monetary Fund (IMF) confronts challenging decisions regarding its approach to Pakistan following the February 8 general election and the evaluation of the country’s debt situation. In July, the government secured a $3 billion loan program with the IMF, preventing a sovereign debt default for the cash-strapped nation. However, the nine-month standby arrangement is set to expire this spring.

Baqir, head of sovereign advisory services at Alvarez & Marsal and former governor of the State Bank of Pakistan from 2019 to 2022, highlighted that the IMF must decide on pulling the plug on Pakistan, referring to its assessment of debt sustainability. He mentioned that the IMF labeled Pakistan’s debt as sustainable but also emphasized significant risks, a stance Baqir negotiated during the country’s 2019 IMF program.

Investors are closely watching whether the Fund will continue labeling the debt as sustainable or support a debt restructuring if authorities choose that path. Pakistan’s public external debt was just under $100 billion by September last year, with China and its lenders as the largest creditors. Shorter-dated bonds trade at 96 cents, close to par, while longer-dated ones maturing after 2030 stand at just over 60 cents, below the 70-cent distress threshold.

IMF Decisions on Pakistan's Debt Dilemma
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Tensions and Economic Strategies Unfold: Pakistan’s Bond Decline, Potential “Debt-for-Nature” Swap

Following Pakistan’s strike on terrorist hideouts in Iran, bonds experienced sharp falls amid rising tensions with its neighbor. Baqir suggested that Pakistan could be a potential candidate for a “debt-for-nature” style swap, citing the 2022 floods that affected over 33 million people. Debt-for-nature swaps, where countries implement eco-policies in exchange for debt reduction, are gaining popularity.

Eugenio Alarcon, responsible for Latin America & the Caribbean at Alvarez & Marsal, noted the benefits of such transactions, allowing countries to significantly reduce their debt stock. On Tuesday, the IMF released the awaited $700 million tranche, boosting the State Bank of Pakistan’s foreign reserves, which had decreased by $66 million during the week ending January 5.