Pakistan must pay back a staggering $77.5 billion in external debt between April 2023 and June 2026, all the while grappling with a severe economic collapse.
United States Institute of Peace (USIP), an American think tank has warned that the country’s enormous foreign debt might lead to the country’s economic default, which would have disruptive implications.
According to the USIP analysis, which was released on April 6, Pakistan is at risk of default due to soaring inflation, domestic political strife, an uptick in terrorist assaults, and a colossal foreign debt load.
“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 read.
The research stated that there would be a cascade of disruptive repercussions if the country defaulted on its $77.5 billion foreign debt repayment commitment from April 2023 to June 2026. Pakistan which is already groaning under a mountain of debt will have to make enormous repayments to Saudi Arabia, individual creditors, and Chinese financial institutions over the course of the next three years.
Pakistan is under tremendous pressure to repay its debt between April and June 2023 because it must service USD 4.5 billion in external debt, as mentioned by the US institute. Significant repayments are allegedly anticipated in June when a $1.4 billion Chinese commercial loan and a $1 billion Chinese SAFE deposit will mature.
Noting that the Chinese government and commercial banks have previously done the same, the Pakistani government is attempting to convince China to refinance and roll over both liabilities.
Even if Pakistan is able to fulfil these obligations, the upcoming fiscal year would be more challenging since, as per the USIP, the cost of repaying the debt will climb to over $25 billion. The country still hasn’t received a much-needed $1.1 billion funding tranche from the International Monetary Fund (IMF). The money was initially supposed to be given out in November 2022.
Analysts asserted that the payments are a crucial component of a $6.5 billion rescue plan that the IMF authorised in 2019 if Pakistan is to avoid defaulting on its commitments under external debt. The IMF programme expires on June 30, 2023, and under the current procedures, it cannot be extended after that date.
“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 observed.
“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,” it added.
There has been no progress on the relaunch of the programme despite months of talks between Pakistan and the IMF. The country’s government is confident that they have undertaken all the tough decisions required to restart the IMF plan that has been suspended, but there is no easy fix for Pakistan’s faltering economy.
Two solutions to the issue of foreign debt are highlighted in the assessment. The first measure is to take out new loans and explore the option of debt rollovers and the second one is that Pakistan seeks a pre-emptive restructuring of debt.
The report remarked that there is a genuine risk that the country, a country with nuclear weapons and a population of close to 230 million, may be unable to pay its foreign debt commitments, leading to a sovereign default.
It is crucial to note that Pakistan is facing an unprecedented challenge from all directions as a result of the country’s worsening financial woes, political turmoil, and terrorist strikes, all of which have contributed greatly towards severe poverty, bloodshed and fatalities there.
