The writer is a former head of Citigroup’s emerging markets investments and author of The Gathering Storm.
The sharp 14% fall in the Pakistani rupee since last Thursday raised fears that Pakistan could be the next emerging market to default. The currency hit this record low after authorities relinquished control over its exchange rate in an attempt to secure conditions for IMF bailouts. The IMF mission is due to arrive tomorrow.
Earlier this month, a nationwide power outage in Pakistan left nearly 220 million people without power. Several days without regular electricity threatened to wreak havoc in a country on the verge of default, with inflation at 25 percent.
While some make dubious claims that the reasons for the blackout may have been technical, Pakistan could soon run out of fuel that powers its power plants. On Sunday, the state raised gasoline prices by about 16 percent. The country is struggling to pay for oil imports and meet energy needs as its foreign exchange reserves have dwindled to just $3.7 billion, the equivalent of three weeks of imports.
Former Prime Minister Shahid Khaqan Abbasi, a senior leader of the ruling coalition, warned that Pakistan would have to default if it did not renew its commitment to an IMF program calling for current spending containment and tax revenue mobilization.
Pakistan has increased its power generation capacity through the China-Pakistan Economic Corridor program that began in 2015, but the expansion has come at a cost, both in terms of the high profits guaranteed to China’s Independent Power Producers (IPPs) and expensive debt in foreign currency.
Pakistan has been unable to make capacity payments to IPP under its long-term power purchase agreements. The debt of the country’s electricity sector has grown to about $9 billion.
China is Pakistan’s largest bilateral creditor with a total debt of about $30 billion, about 30 percent of the developing country’s total official external debt. In addition, Pakistan owes Chinese IPPs $1.1 billion for electricity purchases. Last December, the Pakistani government agreed to pay off this debt in installments. But this likely angered the IMF, which in August 2022 expected the government to renegotiate its electricity purchase agreements. Pakistan tried to renegotiate the terms, but China refused.
Pakistan is caught between IMF demands and China’s interests. Debt restructuring will bring some relief, but who will be the first to bite the bullet? China or international financial institutions owed $41 billion? If Pakistan does not reach an agreement with the IMF within the next few weeks, its reserves could be reduced to the point that it will no longer be able to buy oil.
Pakistan’s central bank governor admitted last week that the country needed $3 billion to pay off its external debt obligations and about $5 billion more to cover its current account deficit. In total, it takes between $9 billion and $10 billion to stabilize the rupee.
The IMF program has effectively been put on hold since November last year, largely due to Finance Minister Ishaq Dar’s announcement that he was refusing to meet the organization’s demands that Pakistan adhere to a market-driven exchange rate and take steps to reduce its growing budget deficit.
But a few days ago, the government finally agreed to accept the demands and wrote to the IMF asking for a mission.
Even if the IMF program is soon restarted, the next tranche of around $1.1 billion may not be enough to replenish Pakistan’s foreign exchange reserves. The Saudi Development Fund recently agreed to finance $1 billion of oil imports on a deferred basis, which is not enough even to finance Pakistan’s oil needs for even one month.
Only immediate and massive assistance can save Pakistan from default. Otherwise, the country may suffer the same fate as Sri Lanka last year.
