Pakistan’s latest record-breaking, reality-denying IMF program

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Pakistan’s latest record-breaking, reality-denying IMF program

Debt Will Tear Us Apart (Again)

www.ft.com

 

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Earlier this month, Pakistan secured a staff-level agreement for a record 24th tryst with the IMF. Conspicuously absent from the accompanying IMF press release was any mention of debt sustainability. This omission is both surprising and disappointing.Just this May, the IMF came as close to declaring Pakistan’s debt unsustainable as it diplomatically could without triggering a run for the hills by creditors. In its last Staff Report, it warned that Pakistan’s path to debt sustainability was “narrow” amid “acute”, “exceptional” and “uncomfortably high” risks from elevated gross financing needs and scarce external financing:The end-FY24 debt-to-GDP ratio is projected to decrease markedly, driven by fiscal consolidation and ex-post negative real interest rates. That said, risks to debt sustainability remain acute given very large gross financing needs and the persistent challenges in obtaining external financing, and that real interest rates are projected to become an adverse driver of debt dynamics in the coming years.In Fundspeak, this was an SOS call. Yet barely a month and a half later, the Fund and the Pakistani government seem intent on walking back this candour and kicking the can down the road. The consequences of this “extend and pretend” gamble will probably be tragic.It will impose unbearable austerity on a population already laid low by stagnant per capita income over the past decade, a historic cost of living crisis and endemic political dysfunction. As witnessed in Kenya last month, it could spark a major social rebellion in the world’s fifth-largest country. Moreover, it will lead to deeper losses for creditors when the inevitable reckoning comes. When the dust settles, the already sullied image of the IMF in Pakistan could be in tatters. Some will object to this bleak prognosis. After all, debt sustainability is usually a judgment call that lies in the eye of the beholder. However, some facts are incontrovertible.According to the IMF, for each of the next five years, Pakistan owes the world an average of $19bn in principal repayments, or more than half of its export revenues. It will also need a minimum of $6bn every year to finance even threadbare current account deficits forecasts, bringing total external financing needs to at least $25bn a year between now and 2029. Pakistan has foreign exchange reserves of less than $9.5bn.That’s not all. For each of the next five years, the government will need to pay an average of 6.5 per cent of GDP in interest on the debt it already owes to residents and foreigners. Pakistan’s total tax take is barely 10 per cent of GDP.Let those facts sink in. Unchecked, things will fall apart. And it’s hard to see how Pakistan can extricate itself from this predicament without debt relief.For starters, Pakistan cannot meet its external financing needs without incurring more government debt. This is because it doesn’t really attract any meaningful FDI (less than $2bn every year) and its private sector is incapable of generating capital inflows from abroad.Just take the latest IMF loan for example. The $7bn that the IMF will lend is less than the amount that Pakistan needs to repay the Fund over the next four years — a classic case of ever-greening and a worrying sign of a brewing Ponzi scheme.At 77 per cent of GDP, Pakistan’s public debt is already above levels considered excessive for an emerging market. Further debt accumulation will be dangerous. And at 24 per cent of GDP, its gross financing needs (the sum of the budget deficit and debt coming due over the next year) are second only to Egypt in the emerging world.Gross Financing Needs (2024, % of GDP) © IMF Fiscal Monitor (April 2024)As a result, borrowing abroad at a reasonable cost will be very difficult, and the debt overhang will continue to weigh on domestic investment and economic growth.Indeed, things have already come to a head. Consider the following troubling exhibits — courtesy of UNCTAD’s World of Debt Dashboard — with Pakistan shown as the blue dot and other developing countries in orange.At 6 per cent, Pakistan’s government pays more on interest as a share of the economy than any other country in the developing world.

 

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