Pakistan may need debt adjustment despite IMF support: Barclays

Pakistan may require a debt adjustment in some form given the sharp deterioration in its external position, even if some support from the International Monetary Fund (IMF) and bilateral institutions is materialised, said Barclays Bank.

In its report on Pakistan titled ‘Payment halt a possibility’ released on February 21, Barclays said it maintains an ‘Underweight rating’ on the country’s sovereign debt.

Barclays was of the view that Pakistan’s debt metrics in and of themselves are not yet a cause for alarm.

“But the large debt stock implies that ongoing access to funds and robust economic growth are necessary to keep debt within sustainable levels,” it said.

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“In this context the economic damage caused by the floods, the evolving political crisis, and increasing doubts about the nation’s ability to meet IMF targets could make it more difficult to manage the debt burden.”

The report highlighted that Pakistan faces a long list of issues: “deterioration in the current account position, large foreign-currency repayments, limited fiscal space, currency pressures and need for regular central bank intervention, rising cost pressures as well as the damage from record flooding.

“In addition, the credit-rating downgrades and lower bond prices (higher costs of refinancing) have resulted in an effective exclusion from capital markets when the country is facing large rollover risks; creating a potential ‘liquidity’ issue. This leaves limited alternatives and, absent a bilateral/multilateral bailout, growing risk of a debt readjustment sometime in 2023-24,” said the report.

On the IMF programme, Barclays said that it remains at a critical juncture after the lender has shown a low tolerance for deviations from its programme targets regarding fiscal adjustments, foreign exchange policy and energy sector reforms.

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Moreover, the lender has leaned on Pakistan’s bilateral creditors to boost available funding.

“We have believed the lack of new bilateral financing agreements reflects Pakistan’s complex political environment and macroeconomic instability–high inflation, slow growth, widening fiscal deficit. We do not expect this situation to change, and believe new bilateral financing agreements will remain piecemeal, focus on investment returns/opportunities rather than strategic partnerships and anchored by an IMF program,” said the report.

Barclays said that the inflation rate is expected to remain high in wake of recent government measures.

Political volatility on a rise

The report said that it believes there is a risk that 2023 may see significant political instability “given the perilous economic situation, growing polarisation regarding civilian-military relations, an uptick in insurgency/terrorist activity, and the prospect of elections being held in October”.

Foreign currency flow crisis

Barclays pointed out that Pakistan’s balance of payments position indicates that the country is already in crisis.

“Given this, any financing secured from bilateral or multilateral sources will need to be deployed for debt repayments and to support letters of credit for imports. This implies that the drain of FX reserves is unlikely to halt in the absence of relief for debt repayments or incremental financing,” it said.