ISLAMABAD: As Pakistan grapples with a debt crisis, a delay in the government’s debt restructuring plan is expected to result in a $1 billion fiscal gap in this year’s budget.Â
Originally scheduled for announcement on August 14, the debt restructuring strategy remains undisclosed as October approaches, compounding financial uncertainties in a country already struggling with fiscal instability.
The delay pertains particularly to the issuance of international sovereign bonds, now postponed until July of the next year, according to the latest draft of the government’s plan. This postponement means that Pakistan will miss out on a crucial $1 billion this fiscal year, previously expected from these transactions.
Pakistan’s debt situation has deteriorated significantly over the past decade, with public debt having doubled in the last seven years, reaching an alarming 73% of GDP.Â
This fiscal predicament is compounded by international credit ratings that remain below investment grade. Despite slight improvements, Pakistan’s current CCC rating falls short of the BBB- the minimum required to competitively float bonds on the international market. The inability to issue bonds not only impacts Pakistan’s liquidity but also its ability to secure financing under favorable conditions.
In response to these challenges, the government’s restructuring plan includes measures such as diversifying foreign loans and securitizing foreign remittances. These steps are intended to broaden the financial base and reduce dependence on traditional debt mechanisms. Comparable restructuring efforts have been seen in about 30 low-income countries, yet only a handful have formally sought restructuring, with negotiations often extending beyond a year.
Moreover, the International Monetary Fund (IMF) estimates Pakistan’s external financing needs at approximately $128 billion over the next five years, a figure that starkly exceeds even the most optimistic forecasts of its foreign reserves.
The absence of a timely and effective restructuring plan sets the stage for further austerity measures, reminiscent of those being phased out during the current 37-month Extended Fund Facility (EFF) with the IMF. The economic slowdown, coupled with high debt servicing costs, is likely to strain public services and welfare programs further.
The draft plan hints at potential relief with hopes of mobilizing $300 million by December 2024. However, experts like UK economist Stefan Dercon, initially tasked with drafting the economic plan, have criticized its efficacy, leading to its reassignment to Deputy Prime Minister Ishaq Dar.
As the government scrambles to finalize its approach, public dissatisfaction and political pressures may influence the strategic financial decisions ahead. Pakistan’s leadership continues to navigate complex negotiations with key stakeholders, including China and the IMF, whose support is crucial for any substantive debt relief.
