Event

Pakistan is to request a freeze on its external debt service under the (IMF/World Bank/) G20 initiative that was agreed mid-April in the context of covid-19 pandemic. Repayments would be put on hold from 1 May until the end of the year. The government pledges to use the money saved to address the health and economic crisis. 

Impact

The covid-19 crisis comes at an unfortunate time for Pakistan. Before the crisis, Pakistan’s liquidity position had significantly improved under the 3-year IMF programme that started during the summer 2019 and aimed at coping with a balance of payment crisis. Indeed, foreign exchange reserves dramatically jumped to a level of 3 months (from 6 weeks a year earlier). Import contraction, IMF disbursements and external loans from allied countries (China, Saudi Arabia) and multilaterals contributed to it. Moreover, fiscal austerity policies and a weak Pakistani rupee had led to a sizable narrowing of the current account deficit, hence reducing Pakistan’s financing needs. 

With the covid-19 pandemic, the Pakistani economy is again in deep trouble as it is sharply hit by containment measures (infection cases have been relatively limited so far but the medical system is underdeveloped), collapsed global demand and probably decreasing remittances from the Gulf. Therefore, the economy is heading towards a recession this financial year with exports and remittances expected to contract. Hence, Islamabad recently got extra financial assistance (a zero-interest loan of USD 1.4 billion) from the IMF’s Rapid Financing Instrument to back the country's liquidity and budget amid the coronavirus outbreak. This comes in addition to the IMF’s ongoing USD 6 billion bailout package. Moreover, Pakistan received loans of USD 500 million from the World Bank and USD 800 million from ADB. All this shows that in the current difficult health, social and economic context and on top of improved foreign exchange reserves, Pakistan has been very active to mobilise external support on which it can rely to meet its upcoming financing needs. The country should also benefit from low oil prices when the economy rebounds and from the narrower current account deficit. Besides, Islamabad would also be seeking some relaxation of its bilateral debt terms related to the China-Pakistan Economic Corridor power projects in order to further alleviate the annual debt service burden.  

In the short term, external financial support will be essential for Pakistan to keep its head above water. All support is welcome as the future is very challenging due to uncertainty about the duration and spread of covid-19 in the country. In Pakistan, as in many other poor and highly populated countries, the containment measures are very unpopular – especially during Ramadan that has just begun. This puts great pressure on the government to get the balance right and ensure continuity in economic activity. 

Analyst: Raphaël Cecchi – r.cecchi@credendo.com