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IMF Confronts Dilemma Over Pakistan’s Debt Sustainability Post-Election

Reza Baqir, former governor of the State Bank of Pakistan and head of sovereign advisory services at Alvarez & Marsal, has highlighted the challenging decisions the International Monetary Fund (IMF) faces regarding its dealings with Pakistan following the February 8 general election.

The government had previously secured a $3 billion loan program with the IMF in July, rescuing the nation from the brink of a sovereign debt default. However, this nine-month standby arrangement is set to expire in the spring.

Baqir emphasized that the IMF must determine whether to continue supporting Pakistan or withdraw its assistance by assessing the country’s debt sustainability. While the IMF labeled Pakistan’s debt as sustainable, it also acknowledged significant risks. Baqir, who negotiated Pakistan’s 2019 IMF program, noted the ambiguity in the IMF’s stance and suggested that investors are closely monitoring whether the Fund will maintain its characterization of the debt as sustainable or endorse debt restructuring if authorities pursue that option.

As of September last year, Pakistan’s public external debt amounted to just under $100 billion, with China and its lenders being the largest creditors. The country’s shorter-dated bonds are trading close to par at 96 cents, while longer-dated bonds maturing after 2030 are at just over 60 cents, below the 70-cent threshold indicating distressed debt. Recent tensions with Iran further impacted bond prices after Pakistan targeted terrorist hideouts.

Baqir also proposed the possibility of Pakistan engaging in a “debt-for-nature” style debt swap, citing the devastating floods in 2022 that affected over 33 million people. Debt-for-nature swaps, where countries implement eco-policies in exchange for debt reduction, have gained popularity following successful deals in other regions.

Alvarez & Marsal’s Eugenio Alarcon, responsible for Latin America & the Caribbean, highlighted the benefits of such transactions, noting that countries can achieve significant debt reduction. On Tuesday, the IMF released a $700 million tranche to bolster the State Bank of Pakistan’s foreign reserves, which had experienced a decline of $66 million in the week ending January 5.

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