Moody’s Ratings has projected that Pakistan will draw on its foreign exchange reserves to repay maturing foreign debt, maintaining high near-term default risks.
According to a report published by the global rating agency, Pakistan, along with Argentina and Tunisia, faces market debt repayments over the next two years compared to their foreign exchange reserves.
“Without new or additional foreign currency financing from development partners, these countries are expected to use their reserves for debt repayment, reducing their foreign exchange liquidity buffers.”
The report highlighted that large interest payments will limit the government’s fiscal space to absorb economic shocks. It also noted that the Pakistani government is actively engaged with the IMF to secure a new loan program after the conclusion of the $3 billion standby arrangement in April 2024.
The State Bank of Pakistan (SBP) reported that the country’s foreign exchange reserves rose by $16 million to $9.11 billion as of May 31, 2024. However, this amount remains lower than the maturing foreign debt of $10 billion, which is due by the end of July 2024.
Authorities may roll over a portion of this debt, leaving a smaller amount to be financed through reserves or new loans.
Moody’s indicated that high global interest rates would prevent Pakistan from opting for commercial borrowing to finance debt repayments and did not expect the US central bank to cut its key rate soon.
Moody’s projected that interest payments for countries including Bahrain, Egypt, Nigeria, and Pakistan are likely to exceed a third of their total revenue by 2028, limiting budgetary resources to respond to economic shocks or invest in long-term policies.
The rating agency suggested that emerging economies like Pakistan might maintain high interest rates to attract foreign investment in local currency-denominated government debt securities.
Pakistan’s central bank is scheduled to review its policy rate on June 10, with financial markets expecting a rate cut of up to 200 basis points to 20%.
Moody’s also noted that improved risk appetite will keep credit spreads relatively tight, allowing most emerging market sovereigns to refinance upcoming market maturities at affordable rates.
However, spreads remain prohibitive for some low-rated sovereigns with significant market repayment needs, such as Argentina, Pakistan, and Tunisia, meaning they will continue to rely on their foreign exchange reserves, keeping near-term default risks high.
Pakistan and other countries, such as Egypt, have attempted to lengthen their debt maturities and reduce exposure to interest rate risk. However, this strategy is challenging in a high-interest-rate environment and will take time unless domestic markets have deep long-term investors like pension or social security funds.
