Miftah Ismail, cautions against any form of debt restructuring

Former finance minister Dr. Miftah Ismail has cautioned against any kind of debt restructuring, warning that it would have far-reaching repercussions on Pakistan’s economy.

In an interview with Business Recorder in Karachi, Ismail, a two-time finance chief, stated that the cons of restructuring outweigh the pros. He pointed out that countries like Sri Lanka that had opted to take this route had experienced a contraction in their GDP, which shrank by 10% during the first year. If Pakistan were to follow suit, and it took 2-3 years, its GDP would shrink as well.

Ismail believes that Pakistan’s interest payments on dollar-denominated debt are low, and a majority of the loans, due to the nature of their creditors, cannot be restructured. He added that commercial debt, which is not much, is the only component that can be restructured. However, restructuring this debt would lock Pakistan out of the commercial debt market, which would result in Pakistan’s inability to benefit from future debt.

These comments from Ismail come as talks of debt restructuring gather pace, with many analysts recommending effective management of upcoming payments. Pakistan needs to repay around $3 billion of debt by June, while $4 billion is expected to be rolled over, according to Bloomberg. Its foreign exchange reserves currently stand at $4.3 billion, courtesy of loan inflows of $500 million from Industrial and Commercial Bank of China (ICBC) and $700 million from China Development Bank. Pakistan expects another $800 million from ICBC after it renewed its $1.3-billion facility, which the country had repaid earlier.

However, the import cover is around one month, with February’s bill coming in at $4 billion, according to data available with the Pakistan Bureau of Statistics. Pakistan’s worries are also compounded by the delay in reviving its bailout programme with the International Monetary Fund (IMF), a facility that has been stalled since November last year.

Ismail, who was the finance minister to successfully negotiate the combined seventh and eighth reviews with the IMF before being unceremoniously removed to make way for Ishaq Dar, said Pakistan has the added worry of getting its creditors, including China and Western institutions, on one table. He questioned how Pakistan would get China, the Western countries and their institutions to sit on one table, calling it a difficult task. Ismail added that Pakistan is already looking to manage China versus the West.

Last month, US State Department Counselor Derek Chollet expressed concern about debt owed to China by Pakistan and other countries, saying that it was in talks with Islamabad about the “perils” of a closer relationship with Beijing. Chollet added, however, that Washington would not ask Pakistan to choose between the two major powers.

The debt burden in the local currency and interest payments are higher, making a haircut in this case troublesome, according to Ismail. He concluded that debt restructuring is not the way and called for a focus on stabilizing the economy. He stated that the IMF programme’s revival is now contingent on the support of “friendly nations” as Pakistan has completed the items on its to-do list.

Pakistan has been faced with a barrage of woes in recent months, including a perceived default risk and downgrade by international ratings agencies, reflecting the state of the economy, which has also had to bear major political turmoil and frequent changes in key leadership. Last year, the country was also devastated by record monsoon rains and melting glaciers that submerged nearly a third of the country, displacing some 8 million people and resulting in at least 1,700 deaths in a catastrophe blamed on climate change.

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