WEB DESK
Risk of Pakistan failing to meet its obligations will remain high over the next 3 years. Even as monetary policy tightening in the US and other major Western economies has put a question mark on the sustainability of emerging-market sovereign debt, Pakistan will manage to avert default.
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However, its economy will remain in a precarious position. This was stated in the “Sovereign debt challenges in Asia” report by the Economist Intelligence Unit (EIU) released on Thursday.
According to the report, Sri Lanka and Pakistan were already on a high-risk path before the novel coronavirus (Covid-19) pandemic.
It added that Pakistan along with Mongolia, Myanmar, Cambodia and Laos stand out in terms of Asian countries which are vulnerable to repayment difficulties based on economic fundamentals and external creditor relations.
The report said that Pakistan was already on the brink when it approached the International Monetary Fund (IMF) to extend the fund facility it had signed on to in 2016.
But the fund halted the three-year programme in 2021 after key domestic reforms stalled, including independence of the central bank and using foreign exchange reserves to slow the depreciation of the rupee.
The programme resumed after Islamabad passed laws on central bank autonomy and implemented fiscal austerity measures.
The EIU estimated that it expects per its baseline scenario, that the measures will help Pakistan avoid default.
Key issues
The report noted that one of the major issues with Pakistan’s economy in recent years has been surging imports which have caused a widening of the current-account deficit.
As with Sri Lanka, the report noted that a narrow tax base was a major weakness for Pakistan’s economy.
“Nonetheless, the risk of Pakistan failing to meet its obligations will remain high over the next three years, owing to an onerous repayment schedule and ingrained political instability in government that may derail fiscal consolidation,” it said.
Pakistan, the report added, faces external debt repayments of $3.2 billion in 2022, with subsequent repayments totalling $3.2 billion spread over 2023-24.
“Large current-account deficits and weak prospects for foreign investment will mean that honoring these commitments is contingent on new debt inflows, which even with IMF support may not be sufficient,” the report concluded.
The report also looked at monetary policy tightening in the US and other major Western economies and its impact on the sustainability of emerging-market sovereign debt.
“Rising rates have pushed up borrowing costs,” the report said, adding that a stronger US dollar is also increasing the cost of external repayment for governments.
Rising inflation is compounding the issue by pushing national authorities to provide additional fiscal relief before many have managed to rein in budget deficits that ballooned during the novel coronavirus (covid-19) pandemic.
The report ranked Pakistan’s deficit for the fiscal year 2022-23 to be greater than 5% as a percentage of its GDP.
Moreover, public debt as a percentage of GDP in FY 2022-23 was greater than 60%
Foreign currency-denominated public debt to GDP Debt as a percentage of GDP in FY2022-23 was greater than 30%.
Total debt service ratio – external debt due as a percentage of export of goods and primary income and remittances for FY 2022-23 was 10-20%.
Significant off-budget liabilities had the potential of going up to 20% of GDP.
Current-account balance as a percentage of GDP for FY2022-23: stood at less than 6%.
External financing requirement – external debt repayments minus the current account balance (annual) is less than 50%.
The availability of financing at concessional rates during the crisis is either poor or not offered.
