The IMF sees $8 billion in debt reduction over two years

Islamabad:

The International Monetary Fund (IMF) has projected that Pakistan’s external debt may remain at around $131 billion by June 2025 – about $8 billion less than previous projections – due to reduced debt servicing needs and the relative lower current account deficit.

Sources told The Express Tribune that the global lender has revised down its external debt projections for two financial years – the current financial year 2023-24 and the next financial year 2024-25. These revisions were made at the time of the first program and are subject to review by IMF management.

These assessments will be further reviewed during the next round of talks, likely to take place in February or March next year, depending on the timetable for forming the next government after the February 8 election.

Against a four-month forecast of $131 billion in external debt by June 2024, the IMF now sees stocks at nearly $124 billion, the sources said. However, the IMF’s forecast appears to be lower, as Pakistan’s external debt has already risen to $128 billion by September this year, according to central bank data.

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The reduction in the projected debt stock is a result of the relatively lower current account deficit and lower external debt repayments due to restructuring by China.

The sources said another key factor behind the lower than earlier forecast external debt was that the State Bank of Pakistan (SBP) was now buying dollars from the open market, which would reduce the need for foreign borrowing by the same amount. The central bank informed the IMF about foreign exchange purchases from the local market.

Caretaker Finance Minister Dr Shamshad Akhtar admitted on Thursday that Pakistan’s public debt has become unsustainable, saying the country has also been priced out of international credit markets due to rising debt costs. He also stated that there were also complications in the restructuring of external debt, which is mainly due to either senior creditors or private lenders.

For the 2024-25 fiscal year, starting in July next year, the IMF has forecast external debt at $131 billion – $8 billion lower than its four-month estimate, the sources said. Of the total external debt, external public debt is projected to rise to $103 billion by June 2025 – a figure that is $5 billion less than the old numbers.

Pakistan’s income from foreign sources remains well below its expenditure due to debt payments, financing of the current account deficit and repatriation of profits by companies that have already invested in Pakistan. The gap is filled by taking more loans from international creditors.

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New IMF forecasts showed that even for the next fiscal year, combined income from exports, foreign direct investment and foreign remittances was slightly below import needs, leaving the government in search of more borrowing to pay off old loans. .

However, IMF forecasts often undergo drastic changes.

The revisions to gross external financing requirements — an amount of money needed to fill the CAD as well as repay maturing debt — came in this week’s first review of the $3 billion rescue package.

Compared to July this year, the IMF also cut foreign borrowing requirements for the next fiscal year 2024-25 from $27.2 billion to $21.8 billion — a drop of $5.4 billion.

The sources said the IMF cut its current account deficit forecast by $6.5 billion to $5.1 billion for the next fiscal year. This would reduce the debt requirement by the same amount.

The estimated decrease in foreign loan claims is also due to lower private sector repayments of $2.2 billion and $1.8 billion from the public sector. The decline in public sector debt repayments was mainly due to the rollover of debt by China’s Exim Bank. The Exim bank provided a total relief of $2.4 billion over two years, extending only the repayment period. This, in turn, would increase repayments for the 2025-26 financial year.

The IMF had earlier estimated public sector external debt repayments at $13.2 billion, now projected at $11.4 billion. Private sector repayments have also been reduced to $3.8 billion for fiscal year 2025.

Contrary to the old forecast of $35 billion, the IMF has now projected foreign remittances at $31 billion for the next fiscal year, showing no significant improvement in non-debt inflows compared to this fiscal year. Exports have also been adjusted downward to $30 billion, they added.

Published in The Express Tribune, November 26^u2023.

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