Pakistan doesn’t have enough foreign reserves to pay debts: Moody’s

• Pakistan needs $12 billion to meet its external financing needs till June 2019

Pakistan will need far more dollars in its reserves to meet its external financing needs (imports and loan repayments) this year, according to the latest report released Moody’s.

“Foreign exchange reserves are low, and gross borrowing requirements are large in Pakistan and Sri Lanka, threatening the ability of these governments to refinance debt and fund deficits affordably,” Moody’s Investors Service said in a report on Thursday.

The sovereign credit rating agency says its external vulnerability indicator (EVI) reading for Pakistan exceeds 160pc for 2019, indicating that total public and private external debt due over the next year is larger than foreign exchange reserves.

This simply means that Pakistan’s current dollar reserves, which stand at $7.2 billion, are not enough to repay the foreign loan and plug in the trading loss ($2.3 billion per month) this year. This would make the country vulnerable on the external front and again push it to default, reminiscent to the recent situation that Pakistan averted with the help of dollars from Saudi Arabia.

Pakistan’s foreign exchange reserves have declined owing to persistent current account deficits, which have widened over the past two years. That is, for every dollar earned, the country spends two, as it is unable to increase its exports at the pace desired to sustain healthy foreign exchange reserves.

The reserves coverage of imports has also fallen in Pakistan, where reserves are now worth less than two months of goods and services imports, Moody’s stated. By international standards, a country should have a minimum of three months cover to support its imports.

This shows Pakistan has a large borrowing requirement but tighter global funding conditions may result in higher credit risk for the country whose debt affordability is already very weak, according to Moody’s.

Since coming into power last August, the Pakistan Tehreek-e-Insaf government’s biggest challenge was to avoid a sovereign default by shoring up its depleting forex reserves. The talks between Pakistan and the International Monetary Fund (IMF) for a bailout package have been delayed, which has worsened the situation. However, Prime Minister Imran Khan’s last year’s visits to Saudi Arabia and UAE resulted in aid packages from both the countries, which provided it breathing space.

Pakistan needs $12 billion to meet its external financing needs till June 2019, but it could only get $3 billion from the Saudi government while a similar amount has been promised by the UAE. It has received $2 billion from Riyadh and the rest of the amount promised by the two countries is said to be arriving this month. Besides, there are also reports that China is likely to provide $2 billion to support the country’s forex reserves. However, experts believe that an IMF bailout is inevitable because all of the aid secured so far is good enough only to see us through June 2019.