A report from the US Institute of Peace (USIP), a Washington-based think tank, has cautioned that Pakistan is at risk of defaulting on its debt, which could exacerbate the ongoing political turmoil and escalating terrorism.
The analysis published on Thursday pointed out that the nation is grappling with soaring inflation, political conflicts, and increasing terrorism, all of which contribute to the potential default due to its significant external debt obligations.
Pakistan’s economic situation had worsened as it faced a political crisis that began in April last year when former Prime Minister Imran Khan was removed through a vote of no-confidence motion.
The country’s $6.5 billion International Monetary Fund (IMF) program has also been derailed. Since late January, Islamabad has been negotiating with an IMF mission to finalize policy measures to secure $1.1 billion in funding for its struggling economy, which is on the brink of collapse.
The IMF bailout package, approved in 2019, is seen as crucial for Pakistan to avoid defaulting on external payment obligations. The agreement would also open up other financing options for Pakistan, helping to bolster its foreign exchange reserves, which have dwindled to cover just four weeks’ worth of imports and assist in navigating its balance of payment crisis.
The USIP report identifies four key factors that must be addressed for Pakistan to emerge from its economic crisis:
- Composition of Pakistan’s total external debt
- Short- and medium-term debt repayment pressure
- Possible inflows to counterbalance debt outflows
- Pakistan’s external debt management strategy
As of December 2022, Pakistan’s external debt and liabilities totaled $126.3 billion, with approximately 77% ($97.5 billion) directly owed by the government to various creditors. In addition, government-controlled public sector enterprises owe an additional $7.9 billion to multilateral creditors.
The report emphasizes that Pakistan must repay $77.5 billion in external debt from April 2023 to June 2026, a “substantial amount” for a $350 billion economy. Most repayments in the next three years are owed to Chinese financial institutions, private creditors, and Saudi Arabia. As a result, Pakistan faces immediate debt repayment pressure, with a $4.5 billion external debt servicing burden from April to June 2023.
Though Pakistani authorities hope to persuade the Chinese to refinance and roll over both debts, as they have done in the past, the next fiscal year will present even greater challenges, with debt servicing projected to reach nearly $25 billion.
