Pakistan’s risk of defaulting on its debt ‘real’, warns US think-tank
- Report says if Pakistan defaults, there will be a “cascade of disruptive effects”.
- From April 2023 to June 2026, Pakistan needs to repay $77.5bn in external debt.
- “Given Pakistan’s demographic profile, crisis could go in unexpected directions,” it states.
A Washington-based think tank, the United States Institute of Peace (USIP), has warned that there is “a real danger that Pakistan could default on debt”, which might further intensify political turmoil amid already surging terrorism.
The author of the analysis published on Thursday warned that amid skyrocketing inflation, political conflicts, and rising terrorism, the country is facing the risk of a default due to its massive external debt obligations.
The cash-strapped nation is reeling with the repercussions of a deepening political crisis — which initially began in April last year when former prime minister Imran Khan was ousted through a vote of no-confidence motion — and the derailment of the $6.5 billion International Monetary Fund (IMF) programme.
Islamabad has been hosting an IMF mission since late January to negotiate a series of policy measures to secure $1.1 billion in funding for the cash-strapped economy, which is on the verge of collapse.
The funds are part of a $6.5 billion bailout package the IMF approved in 2019, which analysts say is critical for Pakistan to avert defaulting on external payment obligations.
The deal will also unlock other bilateral and multilateral financing avenues for Pakistan to shore up its foreign exchange reserves, which have fallen to four weeks’ worth of import cover, and help it steer out of a balance of payment crisis.
The USIP report highlighted four factors that are important to consider if authorities want to pull Pakistan out of the economic abyss; these include:
- Composition of Pakistan’s overall external debt
- Repayment pressure on the debt in both short- and medium-term
- Potential inflows that can offset debt outflows
- Pakistan’s external debt management strategy
1. Debt composition
Pakistan holds external debt and liabilities worth $126.3 billion — as of December 2022 — out of this nearly 77% amounting to $97.5 billion is directly owned by the government to various creditors. Meanwhile an additional $7.9 billion is owned by government-controlled public sector enterprises to multilateral creditors.
It should be noted that Pakistan’s creditors fall under four broad categories:
- Multilateral debt
- Paris club debt
- Private and commercial loans
- Chinese debt
2. Short- and medium-term debt repayment pressure
The country’s large external debt comes with considerable repayment pressure. The US think tank report mentioned that from April 2023 to June 2026, Pakistan needs to repay $77.5 billion in external debt, which is a “hefty amount” for a $350 billion economy.
It should be noted that the major repayments in the next three years are to Chinese financial institutions, private creditors and Saudi Arabia.
The country faces near-term debt repayment pressure as the external debt servicing burden is $4.5 billion from April to June 2023.
The major repayments are due in June when a $1 billion Chinese SAFE deposit and a roughly $1.4 billion Chinese commercial loan would mature. Pakistani authorities hope to convince the Chinese to refinance and roll over both debts, something the Chinese government and commercial banks have done in the past.
However, even if Pakistan manages to meet these obligations, the next fiscal year will be more challenging, as the debt servicing will rise to nearly $25 billion. This includes:
1. $15 billion of short-term loans; which include:
- $4 billion Chinese SAFE deposits
- $3 billion Saudi deposits
- $2 billion UAE deposits
2. $7 billion in long-term debt; which includes:
- $1 billion repayment on a Eurobond in the fourth quarter
- $1.1 billion of long-term commercial loans to Chinese banks
The report forecast that in 2024-25, Pakistan’s debt servicing is likely to be around $24.6 billion, which includes $8.2 billion in long-term debt repayments and another $14.5 billion in short-term debt repayments; this includes major repayments to Chinese lenders of $3.8 billion.
In 2025-26, the debt servicing burden is likely to be at least $23 billion; that year Pakistan is to pay back $8 billion in long-term debt, including repaying $1.8 billion for a Eurobond and $1.9 billion to Chinese commercial lender.
3. Repayment calculus
The US think tank suggested that in order to repay its debt and avoid a sovereign default, Pakistan’s earnings from exports, foreign direct investment (FDI) and remittances inflows are vital.
However, inflows from these three sources are projected to stay subdued compared to the import bill as well as the mounting debt repayment pressure.
Over the next three years, imports are likely to be higher than the total dollar amount of exports and remittances, which will lead to a current account deficit requiring external financing.
Meanwhile, FDI is projected to remain subdued as well. In recent years, investment has averaged a dismal $2 billion annually due to the challenging business environment and frequent policy changes; similar levels of investment are the best case for the next few years.
Investor sentiment has also been impacted by the government’s recent restrictions on the movement of capital outside the country.
4. Options to manage external debt
The report suggested that the economic managers of Pakistan has only two options to address its external debt burden. The first is to take fresh loans and seek rollovers of debt — however, the country’s ability to access the sovereign financing market is limited due to downgrades by international credit rating agencies.
Therefore, if the country seeks to avoid default the leadership will depend on Middle Eastern partners and China, not just for existing rollover but also fresh loans.
It should be noted that the details of these will depend on negotiations with the IMF. If the stalled IMF programme is revived, the amount will be smaller than the one it would seek if the programme collapses.
And in case the bailout programme is revived and completed over the summer, Pakistan will need a new IMF programme, in addition to new loans and rollovers from its Middle Eastern and Chinese partners, due to its external debt burden over the new three years.
The second option that the country has is that it seeks pre-emptive restructuring of debt as it will help reduce the repayment pressure and spare scarce dollars in the economy to finance the country’s current account deficit.
What will happen if Pakistan defaults?
The US think tank report mentioned that if Pakistan ultimately defaults, there will be a “cascade of disruptive effects”.
Primarily, the country’s imports could be disrupted, which could lead to a shortage of essential goods and commodities.
The nation of 220 million people, which is already seeing intense political conflict between the Pakistan Democratic Movement-led government and Pakistan Tehreek-e-Insaf (PTI), may also see the economic crisis creating more political turmoil.
“And given Pakistan’s demographic profile and surging terrorism threats, the resulting crisis could go in unexpected directions,” it stated.
Gold rate declines for second consecutive day
- Rate of gold reaches Rs232,800 per tola.
- International rate up by $11 per ounce.
- The silver price remains unchanged.
Despite an increase in the international rate, gold’s value declined in Pakistan for the second consecutive day Tuesday.
Data provided by the All Pakistan Sarafa Gems and Jewellers Association (APSGJA) showed the price of gold (24 carats) decreased by Rs1,700 per tola and Rs1,458 per 10 grams to reach Rs232,800 and Rs199,588, respectively.
The gold rate cumulatively lost Rs1,100 per tola last week, and a further Rs1,700 on the opening day this week.
Meanwhile, the international price went up $11 to settle at $1,956 per ounce.
The safe-haven bullion’s value has remained volatile in the international market recently. However, it bounced back from its lowest level in over two months Tuesday after the US dollar’s value declined from a high and investors remained anxious about negotiations on the US debt ceiling.
If the debt ceiling — which is currently capped at $31.4 trillion — is not raised in the next few days, it would trigger the first-ever US default.
Investors also remained wary about a possible hike in the interest rate, which would negatively affect gold’s value.
Meanwhile, the gold rate has been volatile in Pakistan recently amid continued political and economic uncertainty, high inflation, and currency depreciation. People prefer to buy the yellow metal in such times as a safe investment and a hedge.
The rupee gained Re0.07 or 0.02% against the US dollar in the interbank market Tuesday, closing at Rs285.35, according to State Bank of Pakistan data.
Data shared by the jeweller’s body showed that the rate of silver remained unchanged at Rs2,850 per tola and Rs2,443.41 per 20 grams, respectively.
France launching electric car battery factory to dent Chinese dominance
Under a plan of reindustrialisation by President Emmanuel Macron, France is to inaugurate a factory for manufacturing batteries for electric cars Tuesday in Billy-Berclau — the first of its kind — challenging the Chinese dominance in the industry, according to an AFP report.
Battery industry buildup is a component of the plan by Macron with a clutch of factories set to emerge in the north of the country over the next three years.
The “gigafactory” is owned by Automotive Cells Company, a partnership between French energy giant TotalEnergies, Germany’s Mercedes-Benz and US-European automaker Stellantis, which produces a range of brands including Peugeot, Fiat and Chrysler.
The inauguration will be attended by French Economy Minister Bruno Le Maire and the country’s energy transition and industry ministers along with German and Italian officials.
The heads of Mercedes, Stellantis and TotalEnergies will also be at the event.
The factory is as large as football pitches in which production will commence this summer.
Elected officials and business leaders intend to turn the Hauts-de-France region into “Battery Valley” — the electric car industry’s answer to Silicon Valley.
AESC-Envision — a Sino-Japanese group — is building a plant near the city of Douai which will supply French automaker Renault from early 2025.
French startup Verkor is scheduled to begin production at a facility in Dunkirk from mid-2025 while Taiwan’s ProLogium has also chosen the coastal city for its first European factory, with output to start in 2026.
Competition between US and China
As European Union (EU) has marked a deadline of 2035 to phase out fossil fuel-run cars, the countries are racing to step up the production of batteries and electric vehicles to meet the target of electric vehicles within the deadline.
In recent years, around 50 battery factory projects have been announced in the EU and the French government has set a target of producing two million electric vehicles per year by 2030, as per the economy ministry.
The ministry said that “the ACC plant will supply 500,000 vehicles per year by then.”
China is the world leader in electric car battery production and also dominates the production of the raw materials needed to make them.
Europe also faces stiff competition from the United States, which is heavily subsidising the sector through the Inflation Reduction Act, which includes $370 billion in clean energy incentives.
Govt mulls slashing duty on mobile phones in budget
ISLAMABAD: The Federal Board of Revenue (FBR) is mulling options to reduce the duty on mobile phones in the federal budget for the fiscal year 2023-24 — which is expected to be unveiled on June 9 — keeping in view the suggestions of Pakistan Mobile Phone Traders, The News reported Monday.
Previously, the government was obliged to raise the duty on mobile phones by 100% to 150%, and resultantly, only Rs5 billion to Rs10 billion were being deposited in the national exchequer instead of Rs85 billion.
The number of mobile phone users in Pakistan has exceeded 186.9 million.
In order to cope with the financial crisis of the current financial year, in the new budget, a proposal for a conspicuous reduction in the rates of duties on cellular phones is under consideration, which is about 100% to 150% at present on small and big mobile phones.
The mobile industry is on the brink of collapse due to an increase in taxes. It not only affected traders but also made the life of millions of people difficult to earn a livelihood.
It has been learnt that a delegation of the Mobile Phones Traders Association has given recommendations to Finance Minister Ishaq Dar and other senior officials.
The delegation ensured that efforts would be made to include the recommendations in the budget. These proposals and recommendations are being reviewed to make them a part of the new budget.
It has been learnt that a 75% duty was imposed on cellular phones in Pakistan as compared to other countries of the region like Singapore, Bangladesh and Turkey where it is not at that level. That is the reason people are using smartphones without paying duties in connivance with FBR.
The additional 100% to 150% duty on cell phones has made it out of reach of the poor, labourers, daily wagers, students, professionals, the lawyer community, and civil society.
All Pakistan Mobile Phones Traders Association General Secretary Munir Beg Mirza said that due to the ban on the import of used mobile phones, smuggling has increased to give favour to a few companies.
Also, people are using smartphones illegally without paying heavy taxes to enjoy all functions of smartphones, which is inflicting a loss on the national kitty.
He said that not only every consumer would pay tax but also the government would get Rs100 billion instead of Rs5 billion on phones if an appropriate duty was imposed in the new financial year.
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