Pakistan’s economic stability to ‘improve’ after debt rollovers from Saudi Arabia, UAE, China — experts

People walk past a sidewalk money exchange showcase, which is decorated with pictures of currency notes, in Karachi, Pakistan on September 12, 2023. (REUTERS/File)

• Debt rollovers to pave way for International Monetary Fund’s final nod for $7 billion loan program 
• Rollovers to also improve Pakistan’s credit rating, leading to reduced borrowing costs, says experts

ISLAMABAD: Pakistani financial analysts on Thursday said the country’s economic stability would improve following reported debt rollover commitments from China, Saudi Arabia and the United Arab Emirates, which is expected to pave the way for a final nod for a new $7 billion loan program from the International Monetary Fund (IMF).
Pakistan secured debt rollover commitments from China, Saudi Arabia and the United Arab Emirates (UAE) for a year, according to a report published by Bloomberg on Tuesday. Last month, the country reached a staff-level agreement with the IMF for a new $7 billion loan program that is pending a final nod from the lender’s executive board. 
Grappling with soaring inflation, low foreign exchange reserves and a weak currency, Pakistan has struggled since 2022 to keep its fragile $350 billion economy afloat. 
The South Asian nation completed a short-term $3 billion IMF program in April this year which helped Islamabad avert a sovereign default in 2023. However, Islamabad reportedly needed financing commitments from bilateral donors to get a final nod from the IMF board, expected later this month, for the fresh bailout.
“The overall economic stability will improve with the debt rollover and expected IMF loan,” Dr. Vaqar Ahmed, the joint executive director of the Sustainable Development Policy Institute (SDPI), told Arab News.
“The IMF board meeting could lead to a credit rating upgrade and enhance investor confidence.”
Dr. Ahmed said the debt rollovers and IMF nod would improve Pakistan’s access to international capital markets, which would allow the government to issue lower-rate sovereign bonds and panda bonds.
Panda bonds are Chinese yuan-denominated bonds issued by Pakistani entities in China’s bond market, allowing them to raise funds in the Chinese currency, diversify funding sources, and access Chinese investors, thereby reducing reliance on USD-denominated debt.
Dr. Ahmed said an improved credit rating could also reduce future borrowing costs, providing the government with the much-needed space to implement the key energy and state-owned enterprises reforms.
He warned the government against falling short of implementing IMF-mandated reforms on energy, taxation and state-owned enterprises.
The IMF has asked Pakistan to undertake reforms to broaden its tax base, improve management of state-owned enterprises, strengthen competition, secure investment, enhance human capital, and scale up social protection through increased generosity and coverage in major welfare programs.
“IMF will look at these reforms critically and any slippage could lead to delays in the program,” Dr. Ahmed added.
However, he said relying on bilateral creditors for frequent debt rollovers was not “sustainable” as frequent rollovers reduce debt market options and increase the cost of borrowing in the longer run.
Pakistani economist Sakib Sherani agreed the debt rollovers would help Pakistan gain access to international capital markets. 
“Both the debt rollover and the IMF loan will be credit-positive for the country,” Sherani told Arab News. “And will improve the chances of accessing international capital markets.” 
However, he said the debt rollover provides the government a “significant” but short-term space and that Pakistan’s IMF program has been “poorly designed.” 
“The IMF program on paper should help in furthering structural reforms but in reality, has been poorly designed and suffers from perverse incentives and unintended consequences that will prove to be antithetical to the needed reforms,” he explained. 
Sherani said Pakistan was on course to secure the IMF’s nod for the $7 billion loan. He called for a broader debt restructuring to make Pakistan’s external debt situation “more sustainable.” 
 “Reliance on short-term bilateral debt rollovers is kicking the can down the road rather than addressing the debt overhang the country faces,” Sherani concluded.