IMF debt dilemma looms after election: former SBP governor

• Reza Baqir says the IMF faces a tough choice after Pakistan’s referendum.
• “The IMF will have to decide whether to pull the plug or not.”
• The Fund argues that Pakistan’s debt is sustainable.

The International Monetary Fund (IMF) faces tough choices on how to deal with Pakistan after February’s elections and how to assess the country’s debt situation, former central bank governor Reza Baqir said.

The country, which is operating under a caretaker government, secured a $3 billion loan program with the IMF in July, which has helped pull the cash-strapped nation from the brink of debt default. However, the program was a nine-month standby agreement, which will expire this spring.

“The IMF will have to decide whether to pull the plug on Pakistan or not, and by that I mean it will have to decide on its debt sustainability assessment,” said Baqir, head of sovereign advisory services at Alvarez & Marsal .

The Fund described Pakistan’s debt as sustainable but also highlighted significant and acute risks, said Baqir, who negotiated Pakistan’s 2019 IMF program and also worked at the Washington-based lender for nearly two decades.

“It’s almost like we have it both ways,” he said, adding that investors will be watching to see if the Fund will continue to label the debt sustainable or offer its support for a debt restructuring as part of a new program. if the Pakistani authorities choose to go that route.

The country’s public external debt was just under $100 billion by the end of September 2023, according to central bank data, with China and its lenders the country’s single largest creditor.

Pakistan’s shorter-dated bonds are trading at 96 cents, fairly close to par, although bonds with longer maturities beyond 2030 are just above 60 cents, well below the 70-cent threshold below which the debt is considered problematic. On Thursday, the bonds suffered a sharp decline after Pakistan’s attacks inside Iran amid rising tensions with its neighbor.

Pakistan would also be a likely candidate for a “debt for nature” debt swap, Baqir said, pointing to the deadly 2022 floods that affected more than 33 million people.

Debt-for-nature swaps – where countries introduce green policies in exchange for cutting their debt – are growing in popularity after successful recent deals in places like Belize and Ecuador’s Galapagos Islands.

Eugenio Alarcon, who recently joined Alvarez & Marsal in charge of Latin America and the Caribbean, said: “Countries have seen the benefits of this type of transaction because they can suffer a huge reduction in their debt stock.”