Bring back the IMF
The good news is that Pakistan is not about to default on the payment of its external debt obligations.
The $1 billion, 5-year Third International Pakistan Sukuk matured on the 5th of December 2022 and the entire principal plus interest was paid by the State Bank of Pakistan (SBP).
There is no bond maturing during calendar 2023-thus no question of any default. The $1 billion, 10-year Pakistan Government International Bond will mature on the 15th of April 2024.
The real crisis we are up against is a serious ‘currency crisis’ where the SBP is left with dollar reserves that would cover four to five weeks worth of imports.
We need to import 2.5 million tonnes of wheat, 7 million bales of cotton, $6 billion worth of crude oil, $3 billion worth of machinery, $3 billion worth of LNG plus coal and medicines.
This year, our gross external financing requirement hovers around $32 billion. Plus, we have promised the IMF that we will increase our foreign currency reserves by $6 billion.
Yes, we still have multilateral lenders and we still have bilateral lenders. But the global capital market-where we can sell bonds-has now closed its doors to us (because all our globally traded bonds are currently selling at steep discounts).
To be certain, all multilateral lenders and most bilateral lenders depend on the IMF as the IMF is the only lender with a monitoring mechanism.
Yes, there’s always a stigma attached to seeking help from the International Monetary Fund (IMF). Yes, countries around the world try to avoid the IMF-whenever and wherever possible.
Yes, there are always stringent conditions attached to an IMF program. Yes, IMF programs are politically difficult to sell. But, to be sure, the IMF continues to be the lender of last resort.
We cannot do without shoring up SBP’s foreign currency reserves. Our only option is the IMF. We must restore investor confidence.
Our only option now is the IMF. We must restore the value of the rupee. Our only option is the IMF. We have to stitch-up $32 billion this year just to keep ourselves afloat. Our only option is the IMF.
Scenario 1: Full agreement. We can agree to each and every demand of the IMF. This would need complete political backing.
This would certainly restore investor confidence and stabilize the rupee. This would have an extremely heavy political cost.
Scenario 2: No deal. This would be problematic both for the IMF and Pakistan. The rupee as a result would lose a great deal of its value against the dollar and there could be a run on bank deposits.
Scenario 3: A compromise with some reform measures. This would certainly mean additional taxes-perhaps a mini budget-and justifying electricity and urea subsidies.
Right now we would have to do three things: bring back the IMF; strategise an IMF-led rescheduling of external loans plus a blueprint of critical structural reforms.
What is making investors extremely nervous is the lack of a roadmap. We are hoping for billions of dollars from Saudi Arabia. Hope is neither a strategy nor a roadmap. We need a strategy and a roadmap.