Former governor of the central bank Reza Baqir stated that the International Monetary Fund (IMF) has difficult decisions to make over how to handle Pakistan following the election in February and how to evaluate the nation’s debt status.
Operating under a caretaker administration, the nation obtained a $3 billion credit program from the IMF in July, which enabled the cash-strapped country to avoid a sovereign debt default. But the agreement was only a standby arrangement, with a nine-month expiration date this spring.
According to Baqir, head of sovereign advisory services at Alvarez & Marsal, “the IMF will have to decide whether to pull out on Pakistan or not, and by that I mean it will have to decide about its assessment of debt sustainability.”
According to Baqir, who oversaw Pakistan’s 2019 IMF program and spent nearly two decades working for the Washington-based lender, the Fund determined that Pakistan’s debt was manageable, but it also highlighted the substantial and noticeable risks.
“That’s almost like having it both ways,” he said, noting that investors would be waiting to see if the Fund would stick with its designation of the debt as sustainable or, in the event that Pakistan’s authorities decided to take that course, whether it would extend its support for a debt restructure as part of a new program.
According to figures from the central bank, the nation’s total external debt as of the end of September 2023 was just under $100 billion, with China and its lenders being the single largest creditor.
While longer-dated bonds maturing after 2030 are trading at just over 60 cents, considerably below the 70-cent threshold beyond which debt is deemed distressed, Pakistan’s shorter-dated bonds are trading at 96 cents, quite near to par. Bond prices dropped precipitously on Thursday in response to Pakistani strikes inside Iran amid escalating hostilities with its neighbor.
Baqir mentioned Pakistan as a possible candidate for a debt swap akin to the “debt-for-nature” model, citing the devastating floods of 2022 that impacted over 33 million people.
Debt-for-nature swaps, in which nations reduce their debt in exchange for implementing eco-policies, are becoming more and more common following the success of recent agreements in locations like Belize and the Galapagos Islands of Ecuador.
