The US Institute of Peace (USIP) in a report underscored the existential economic crisis in Pakistan, warning that there is a “real danger that Pakistan could default on its debt, which could lead to intensifying political turmoil amid already surging terrorism.”
“Amid skyrocketing inflation, political conflict between Prime Minister Shehbaz Sharif’s government and former Prime Minister Imran Khan, and surging terrorism, the country is facing the risk of a default due to its massive external debt obligations,” the report said.
“This burden has been exacerbated by the derailment of the $6.5 billion International Monetary Fund (IMF) program Pakistan entered in 2019, as the international lender is unsatisfied with Pakistan’s commitment to reform and ability to arrange for funds to meet external financing requirements,” the report said. “Troublingly, Pakistan’s official foreign exchange reserves are hovering around $4 billion, which is insufficient to finance even a one-month of the country’s import bill.”
According to the report, to determine tf Pakistan can recover from the economic abyss, it is important to consider four factors:
1- The composition of Pakistan’s overall external debt
2- Repayment pressure on the debt in both the short- and medium-term
3- Potential inflows that can offset the debt outflows
4- Pakistan’s external debt management strategy
The report said that Pakistan held external debt and liabilities of $126.3 billion as of December 2022.
“Nearly 77% of this debt, amounting to $97.5 billion is directly owed by the government of Pakistan to various creditors; an additional $7.9 billion is owed by government-controlled public sector enterprises to multilateral creditors,” the report added.
The USIP split these creditors into four categories: multilateral debt, Paris Club debt, Private and commercial loans, and Chinese debt.
The report said that a major share of Pakistan’s debt is owed to multilateral institutions, amounting to roughly $45 billion.
“Islamabad’s main multilateral creditors include the World Bank $18 billion, the Asian Development Bank $15 billion and the IMF $7.6 billion,” the report read. “Pakistan owes smaller amounts to the Islamic Development Bank and the Asian Infrastructure Investment Bank as well.”
According to the USIP, Pakistan owes $8.5 billion to the Paris Club, a group of 22 major-creditor countries.
This debt is scheduled to be repaid over 40 years with less than 1% interest rate, and is mostly owed to Japan, Germany, France and the United States, the USIP said.
USIP said that Pakistan holds a large amount of private debt with much of it in the form of private bonds such as Eurobonds and global Sukuk bonds, amounting to $7.8 billion.
“In the last fiscal year, Pakistan raised $2 billion by floating Eurobonds of 5, 10, and 30 years at an interest rate ranging from 6 percent for five years and 8.87 percent for 30 years,” found the report.
The USIP said that Pakistan held foreign commercial loans to the tune of nearly $7 billion, which is likely to increase to nearly $9 billion by the end of the current fiscal year.
“Much of Pakistan’s commercial loan stock is owed to Chinese financial institutions, as Pakistan has repaid major non-Chinese commercial loans of institutions,” it added.
The report also said that Pakistan holds around $27 billion of Chinese debt. “This includes around $10 billion of bilateral debt and $6.2 billion in debt provided by the Chinese government to Pakistani public sector enterprises, and Chinese commercial loans of around $7 billion,” it added.
The report underscored two options for addressing its external debt burden. The first is to take fresh loans and seek rollovers of debt and the second possibility, according to the report is that Pakistan “seeks pre-emptive restructuring of debt.”
The report warned that there is a real danger that nuclear-armed Pakistan with a population of nearly 230 million people may be unable to meet its external debt obligations — which will trigger a sovereign default.