Pakistan may face disruptive effects if it defaults on the repayment of a whopping $77.5 billion external debt from April 2024 to June 2026, warns a US think tank, United States Institute of Peace (USIP).
According to the United States Institute of Peace (USIP), Pakistan is confronted with a formidable task of servicing its external debt of USD 77.5 billion between April 2024 and June 2026. This debt amounts to a “hefty amount” for a USD 350 billion economy, and the country may face “disruptive effects” if it defaults, said the report. The government is tackling major economic crises, including a weak local currency, dwindling foreign exchange reserves, high external debt, rising terrorism, and political conflicts.
Authorities are hoping to convince the Chinese to refinance and rollover both debts that would mature in June, according to the report. In the next fiscal year, the debt servicing will rise to nearly USD 25 billion, including $15 billion of short-term loans and $7 billion in long-term debt. Negotiations between Pakistan and the IMF to renew the programme, which was signed in 2019 and has a deadline of June 30, 2024, have been ongoing for several months without a final agreement
Debt Burden
Pakistan’s external debt burden is a “hefty amount” for a USD 350 billion economy, the USIP analysis revealed. From April 2024 to June 2026, it needs to repay a whopping USD 77.5 billion in external debt. Currently, the nation is facing challenges such as a substantial amount of external debt, a frail domestic currency, and declining reserves of foreign currency. From April to June 2024, it has a debt repayment burden of USD 4.5 billion, leading to immediate pressure on external debt servicing. The report stated that if Pakistan defaults, there will be a “cascade of disruptive effects” as Pakistan’s imports could be disrupted, leading to a shortage of essential goods and commodities.
Debt Repayment Obligations
Pakistan‘s external debt repayment obligations are significant in the next three years, according to the USIP report. The nation has significant payments scheduled to be paid to financial institutions in China, private creditors, and Saudi Arabia. In June, Pakistan needs to repay a USD 1 billion Chinese SAFE deposit and a roughly USD 1.4 billion Chinese commercial loan that would mature.
The officials are aiming to persuade the Chinese government and commercial banks to refinance and extend the maturity of both debts, a practice that the Chinese have previously done. The upcoming fiscal year will pose greater challenges for Pakistan as its debt servicing is expected to increase to around USD 25 billion, encompassing $15 billion in short-term loans and $7 billion in long-term debt, even if the country fulfills its current obligations.Pakistan’s debt servicing for the year 2024-25 is projected to be approximately $24.6 billion, comprising $8.2 billion for long-term debt repayments and an additional $14.5 billion for short-term debt repayments.
The IMF Programme and Pakistan’s Negotiations
Pakistan’s USD 6.5 billion bailout package approved in 2019 by the International Monetary Fund (IMF) is critical if Pakistan is to avoid defaulting on external debt obligations. Pakistan and the IMF have been in talks for several months to resume the IMF programme, which will end on June 30, 2024, and cannot be extended beyond the deadline, but they have not yet come to an agreement. The government believes that it has taken all the tough decisions for reviving the stalled IMF programme.
Pakistan is presently anticipating the disbursement of a $1.1 billion IMF tranche that was initially scheduled to be released in November of the preceding year. If it fails to meet its external debt obligations, it may face a sovereign default, which will trigger a cascade of disruptive effects
