Pakistan-IMF talks uncover major gaps

Pakistan Shehbaz Sharif IMF International Monetary Fund

The International Monetary Fund (IMF) has been informed by Islamabad that the debt servicing cost may rise to Rs8.5 trillion, marking a slippage of Rs1.2 trillion over the allocated budget.

Challenges persist in arranging approximately $6.5 billion in external debt this year due to challenging economic conditions.

Pakistani authorities have now requested the Fund’s assistance in bridging the external financing gap, which remains despite the IMF programme, according to sources from the Ministry of Finance.

Excessive expenditures on interest payments and difficulties in raising external debt due to unfavourable domestic and global economic conditions are the two major issues in the ongoing talks for the $710 million loan tranche. The challenges in arranging the $6.5 billion debt represent nearly one-third of the planned borrowings for this fiscal year. The $6.5 billion amount may come down to $5.5 billion if Chinese timely finance their maturing loans in May-June next year, said the sources.

The discussions on domestic debt and external financing requirements were shared with the IMF during the second day of technical-level talks.

The IMF raised questions and will share its assessment next week, according to sources. However, the IMF staff observed that Pakistan’s budget deficit would rise far higher than the estimated one due to the growing cost of debt servicing, according to government sources.

Discussions also took place concerning the debt management office. Sources noted that the IMF expressed concerns about an understaffed office, with many important positions vacant and much of the work handled by foreign-funded consultants.

In contrast to past practices where technical-level talks were led by the Finance Secretary, this time interim Finance Minister Dr Shamshad Akhtar also participated in the technical rounds.

The IMF was informed that the interest cost might rise to Rs8.5 trillion during the current fiscal year, representing a slippage of Rs1.2 trillion against the budget estimates of Rs7.3 trillion.

It was conveyed that efforts would be made to lower the projected Rs8.5 trillion cost by raising debt with one-year and six-month maturity profiles. This would shift some of the debt payments from this fiscal year to the next but would not significantly impact the overall debt cost.

Out of the Rs8.5 trillion debt cost, a substantial portion, over Rs7.5 trillion, was related to domestic debt servicing. The external debt servicing cost has now exceeded Rs900 billion, according to sources.

The global lender will now review these figures and provide its assessment of the revised budget deficit and the country’s external financing needs. Both sides are negotiating for a $710 million second loan tranche under the $3 billion short-term programme.

Qamar Abbasi, the spokesman for the Ministry of Finance, was asked to confirm the development and whether alternate plans to address high-interest payments and challenges in arranging the $6.5 billion in loans were also shared with the IMF. His response was awaited until the filing of this report.

The government had estimated interest payments at Rs7.3 trillion, assuming an 18% interest rate, but the central bank has already increased rates to 22%.

Sources indicated that the IMF’s perspective was that raising debt with 12-month treasury bills would only have an accounting impact, as the interest would still accrue in this fiscal year.

The IMF programme will conclude in April next year. In the last quarter of this fiscal year, Pakistan’s interest payments are estimated to be close to Rs2.9 trillion, including Rs2.6 trillion to domestic lenders.

During the first quarter of this fiscal year, the country paid Rs1.38 trillion in debt, nearly equal to the entire net federal income. Pakistan’s finance minister has expressed concern about the growing interest cost, considering it a primary issue for fiscal stability.

Due to the overshooting of interest payments, the projected federal budget deficit of Rs7.5 trillion could reach a new record of Rs8.7 trillion, even if all other estimates remain constant, according to sources.

On the lower than budgeted disbursement of foreign loans, the cost of budget deficit financing has entirely shifted to domestic sources. The government is also unlikely to receive budget cover for a significant portion of the IMF debt and the $1 billion UAE loan received in July this year.

In its July report, the IMF projected the cost of interest payments at Rs8.6 trillion, which is Rs1.3 trillion more than the annual budgeted figures. The Ministry of Finance is gradually realising and adjusting to the actual ground realities.

External financing issues

Sources noted that Pakistani authorities informed the IMF that the realisation of external loans of around $6.5 billion would depend on market conditions. Pakistan has requested the IMF’s assistance in arranging these loans. Earlier, the IMF played a role in obtaining loans from Saudi Arabia and the United Arab Emirates.

The IMF has been informed that raising foreign commercial loans, Eurobonds, and some debt from the Islamic Development Bank would depend on favorable market conditions. The Islamic Development Bank had committed to providing $1 billion in this fiscal year, but the entire amount may not materialise.

One option could be to increase the size of the current $3 billion loan programme, but this would require the IMF’s consent.

The government had estimated receiving over $20 billion in foreign loans from all creditors.

Sources mentioned that as opposed to earlier estimated external financing requirements of over $26 billion, the current needs are below $24 billion. Some needs have been reduced due to a lower than projected current account deficit, now estimated at $6.5 billion, and the rescheduling of Chinese loans.

The total rollovers of foreign loans, earlier estimated at $11 billion, have now been projected close to $12.5 billion, offsetting some of the projected shortfalls in external debt inflows.

Sources also noted that some of the shortfall would be compensated by reducing imports, further lowering the projected current account deficit.

They mentioned that the prospects for raising significant debt through Green Bonds are not very bright, although discussions on its rules have recently taken place at the Special Investment Facilitation Council (SIFC) level.

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