by The writer is the former head of emerging markets investments at Citigroup and the author of “The Gathering Storm.”
The Pakistani rupee’s staggering 14% drop since last Thursday raises fears that Pakistan could be the next emerging market to default. The currency hit the all-time low after authorities dropped controls on its exchange rate, in a bid to secure conditions for an IMF bailout. An IMF mission is due to arrive tomorrow.
Earlier this month, a nationwide blackout in Pakistan left nearly 220 million people without power. Successive days without regular electricity threatened to wreak havoc in a country on the verge of default, with inflation reaching 25%.
While some have dubiously claimed that the reasons for the power outage may have been technical, Pakistan may soon run out of fuel that powers its power stations. The state raised gasoline prices about 16% on Sunday. The country is struggling to pay for oil imports and meet energy demand, with its foreign exchange reserves having fallen to just $3.7 billion, just three weeks worth of imports.
Former Prime Minister Shahid Khaqan Abbasi, a senior ruling coalition official, has warned that Pakistan will have to default if it does not resume adherence to the IMF program which called for containing current spending and mobilizing tax revenue .
Pakistan has increased its power generation capacity through the China-Pakistan Economic Corridor program which began in 2015, but the expansion has come at a cost, both in terms of high returns guaranteed to independent power producers (IPP) and expensive foreign currency debt.
Pakistan has been unable to make capacity payments to IPPs under its long-term power purchase agreements. The country’s electricity sector debt has reached about $9 billion.
China is Pakistan’s largest bilateral creditor with a total debt of around $30 billion, which is around 30% of the developing country’s total external public debt. In addition, Pakistan owes $1.1 billion to Chinese IPPs for its power purchases. Last December, the Pakistani government agreed to repay this debt in installments. But that probably displeased the IMF, which was waiting in August 2022 for the government to renegotiate its power purchase agreements. Pakistan tried to renegotiate but China refused.
Pakistan is caught between IMF demands and Chinese interests. Debt rescheduling will bring some relief, but who will bite first? China or the international financial institutions to which we owe 41 billion dollars? If Pakistan fails to reach an agreement with the IMF in the coming weeks, its reserves could fall 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 meet its external debt obligations and about $5 billion more to close its current account deficit. In total, between 9 and 10 billion dollars are needed to stabilize the rupee.
The IMF program has been essentially suspended since last November, mainly due to Finance Minister Ishaq Dar’s reported refusal to respond to the organization’s demands that Pakistan stick to a market-determined exchange rate and take measures to reduce its growing budget deficit.
But a few days ago the government finally agreed to accept the requests and wrote to the IMF asking it to send a mission.
Even if the IMF program is soon revived, the next tranche of about $1.1 billion may not be enough to bolster Pakistan’s foreign exchange reserves. The Saudi Fund for Development recently agreed to finance $1 billion in oil imports on deferred payment, which is not enough to finance even one month of Pakistan’s oil needs.
Only an immediate and substantial bailout can save Pakistan from default. Otherwise, the country risks suffering the same fate as Sri Lanka last year.
