PESHAWAR – Pakistan’s new Prime Minister Shehbaz Sharif is expected to travel soon to China and Saudi Arabia to request urgent financial assistance to prevent a potential default as US$2.5 billion in foreign loans come due at the end of June and foreign reserves are insufficient to cover the bill.
Fitch Ratings said in a report last week that the recent change in government has raised, not lowered, Pakistan’s economic and financial uncertainty amid spiking global commodity prices and rising “global risk aversion” to many emerging markets.
Overall, Pakistan faces $20 billion in external debt repayments through financial year 2023, with $4.5 billion already rolled over by China and the United Arab Emirates (UAE). As of February, Pakistan officially had $21.6 billion in foreign-exchange reserves, though much of those funds are inaccessible.
“Higher trade deficits and capital outflows have driven a sharp depreciation of the Pakistani rupee against the US dollar. This, along with debt repayments, has put pressure on liquid foreign-exchange reserves with the State Bank of Pakistan (SBP), which fell by $5.1 billion between end-February and April 1, 2022, to $11.3 billion,” the Fitch Ratings report said.
The International Monetary Fund (IMF), meanwhile, projects average inflation will hit 11.2% in 2022, up from 8.9% last year. More worrying, perhaps, the IMF estimated Pakistan’s current-account deficit at 5.3% of gross domestic product (GDP), up significantly from 0.6% last fiscal year.
Uzair Younus, director of the Pakistan Initiative South Asia Center at the Atlantic Council think-tank, told Asia Times that Pakistan’s near-term financial challenges can be met with an inflow of dollars, either from the bond market or through bilateral deposits by China and/or Saudi Arabia.
“Indications are that this is likely, especially if Pakistan Finance Minister Dr Miftah Ismail has fruitful discussions with the IMF.… Pakistan must get the IMF program back on track, as it will ease uncertainty in the market and also signal to key partners like Saudi Arabia and China that the new team is committed to making difficult choices to stabilize the economy,” Uzair said.
Pakistan’s newly appointed Finance Minister Ismail rushed to Washington on April 21 to renegotiate a $6 billion Extended Fund Facility (EFF) program with the IMF. The EFF hit a snag under the previous Imran Khan government for violating terms of the agreement, including in regard to maintaining fuel subsidies.
In May 2019, Pakistan and the IMF reached a staff-level agreement on economic policies for a three-year EFF arrangement. Under the agreement, Pakistan was to receive about $6 billion over 39 months in exchange for implementing various market-oriented reforms.
However, so far, it has received only half of that amount because of failure to meet those requirements.
Pakistan was waiting for the IMF to resume talks on its seventh review of the facility, but the Fund has put it on hold until the new government is firmly in place.
The Pakistan Business Council (PBC), an advocacy forum for business policy, has warned the government that the grave economic issues confronting the country are similar to those being faced by Sri Lanka, which is teetering on the brink of a disastrous default.
In a letter sent to Prime Minister Sharif, the PBC suggested various damage control measures to stave off an economic crisis. Among these, the PBC recommended that the government should restore fiscal prudence, stem the pressure on foreign-exchange reserves and revive the IMF program, among others.
The PBC also suggested a broad-based and cross-party consensus on the formation of a “Charter of Economy” to pull the country out of its present economic and financial straits. The PBC said it opposes fuel subsidies and suggested steps such as reducing imports through conservation measures including working from home, early closure of commercial centers and wedding halls, and a rationing of fuel for private vehicles.
Sharif is expected to travel to Saudi Arabia and China on his maiden foreign trip after taking charge as Pakistan’s new leader. Government insiders have said it will be a routine visit, as traditionally a new prime minister in Pakistan always visits Riyadh and Beijing given Islamabad’s strategic relations with both countries.
“The Gulf monarchies, led by Saudi Arabia, have provided $20 billion in assistance to Egypt in recent days.… Some assistance for Pakistan can’t be ruled out in the coming days,” Uzair said.
Under Khan, Pakistan had sought $21 billion worth of financial assistance from China, including a rollover of existing loans of $10.7 billion and deposit funds of $10 billion to meet future needs considering the country’s foreign reserve crisis.
Khan, who visited China in February, had discussed a potential rollover of all Chinese financing facilities upon maturity with the Chinese leadership. His agenda at the time also included a State Bank of Pakistan (SBP) proposal of enhancing a currency swap arrangement to $15 billion.
One SAFE (State Administration of Foreign Exchange) deposit of $2 billion and a three-year commercial loan of $2.2 billion extended by a consortium of the China Development Bank (CDB), Bank of China and Industrial and Commercial Bank of China Limited (ICBC) matured last month and was subsequently rolled over by the Chinese banks.
Political analysts believe that Sharif will seek to use his family’s close personal relations with the Saudi royal family, which played a key role in the safe exit of his brother Nawaz Sharif after an October 1999 military coup ousted his government, to get some quick financial relief.
Sharif already reportedly received a warm and cordial telephone call from Saudi Crown Prince Mohammed bin Salman, or MBS, before visiting Riyadh. Later, the Saudi ambassador met with him to deliver an invitation to visit the kingdom.
In November last year, Saudi Arabia extended Pakistan a loan package of $4.2 billion to help ease its financial woes, albeit under harsh and what some saw as humiliating conditions. The package included a $3 billion cash deposit for a term of one year. However, the loan was required to be returned any time on three days’ notice.
Earlier in 2018, Saudi Arabia provided a similar $6.2 billion package, which the kingdom had revoked before the expiry of the three-year term in 2020 because of political differences. Pakistan repaid the loan after taking a loan of the same amount from China.
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