Pakistan is in a debt crisis. It must pay billions in debt servicing, but the state’s coffers are almost empty. As hopes for reviving a bailout deal with the International Monetary Fund fade, experts say the country may escape default this month, but the situation will grow increasingly grave.

Hit by devastating floods, political instability and pandemic-related supply shocks, Pakistan’s import-dependent economy has been on the brink of default for months as the country’s external debt burden mounts against shrinking foreign exchange reserves.

Pakistan’s total external debt stood at upward of $126 billion at the end of 2022. Most of the country’s income goes to pay off the principal as well as interest on this debt.

In June, Pakistan is due to pay $3.6 billion to its lenders. According to the governor of the State Bank of Pakistan, the country’s central bank, $400 million has been paid, while $2.3 billion is expected to be rolled over. Still, the country must pay $900 million. The dollar reserves of the central bank are hovering at about $4 billion.

Need for IMF

Hopes of reviving a stalled 2019 International Monetary Fund, or IMF, bailout deal faded further this week after the lender objected to a few provisions in Pakistan’s proposed federal budget for the fiscal year starting July 2023.

In a statement to VOA, IMF resident representative for Pakistan, Esther Perez Ruiz, listed several measures that did not meet the lender’s expectations, including a new tax amnesty that she said was “against program’s conditionality and governance agenda.”

However, Perez Ruiz said, “the IMF team stands ready to work with the government in refining this budget ahead of its passage.”

Pakistan’s Minister for Finance Ishaq Dar rejected the objections.

“Pakistan is a sovereign country and cannot accept everything the IMF demands,” local media quoted Dar as saying in a briefing to the Pakistani Senate Standing Committee on Finance on Thursday.

The $6.5 billion 2019 deal regarded as a key to avoiding default would give Pakistan $1.1 billion. Not a huge amount by itself, yet it would unlock funds from other lenders, helping to ease the country’s debt crisis.

To revive the deal, Islamabad slashed subsidies, increased taxes and largely stopped controlling the value of the rupee, among other steps over past few months, to woo the IMF.

Experts say the actions were too little, too late.

Differences also persisted on how much funding Pakistan should gather from friends. Islamabad failed to reach the target as allies, slow to help, signaled frustration with the country’s lack of economic reform.

Default risk

The 2019 program ends June 30 with Pakistan’s current fiscal year. Dar maintains Pakistan will not default if talks with the Washington-based lender fail.

“We have sovereign commitments, which the past government made. They are not PTI’s [Pakistan Tehreek-e-Insaaf] or [former Prime Minister] Imran Khan’s, they are Pakistan’s commitments. I think even at the cost of paying a political price we must meet those obligations, and we have,” Dar said at a news briefing last week.

Pakistan’s major ally China, to whom it owes the largest chunk of its bilateral debt, came to its rescue yet, again. In a message to journalists late Friday night, the State Bank of Pakistan announced receiving a $1 billion loan from China. Beijing refinanced the loan which Islamabad had earlier repaid.

However, the current government’s term in office ends mid-August, after which a caretaker setup will run the country until general elections.

Pakistan’s former finance minister, Hafeez Pasha, told VOA if the present government fails to unlock IMF funds, it may put Pakistan’s economy in peril in the new fiscal year.

“IMF will not talk to temporary governments. So, the earliest we can talk to the IMF is sometime after the elections, which could be October, November. This interim period is a period of great uncertainty. And this is what we are all very worried about,” Pasha said.

Plan B

It is unclear how the government plans to manage debt repayment without the IMF.

Dar told a post-budget news conference last week that the government would engage in debt restructuring with bilateral lenders or individual countries.

Days later, the central bank governor informed analysts in a briefing that he was unaware of any such plans.

Earlier, when asked if Pakistan had a Plan B, Dar’s response in a pre-budget news briefing had been an emphatic yes, but it was short on details.

He then signaled Pakistan could sell or lease assets to remain current on debt repayments.

“If you are pushed into a corner, what will you do? Lie down? Let there be a default? Pakistan is solvent. If Pakistan’s loans have soared from 70 billion to 100 billion in the last four years, Pakistan also has assets worth billions,” Dar told journalists.

Some experts say that in many ways, Pakistan already has defaulted, as companies face restrictions in sending dividends to shareholders overseas, airlines threaten to move out over nonpayment of dues, and parents struggle to find dollars for their children studying abroad.

Ali Khizar, research head at Business Recorder, a major Pakistani news outlet, points to the flight of human and financial capital from Pakistan as a sign.

“Pakistan may not have defaulted technically on its debt,” Khizar told VOA. But, he says, as people use informal means to send money outside, large businesses leave the country, and people migrate in record numbers to find work outside Pakistan, “we have defaulted on many grounds.”
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