The assessment of Pakistan’s debt situation is one of the toughest decisions the International Monetary Fund (IMF) will face following the elections in February, as one former governor of the country’s central bank (SBP) has pointed out.

In order to keep the cash-strapped country from heading towards a sovereign debt default, Pakistan last year successfully negotiated a $3 billion loan programme with the IMF under the supervision of a caretaker government. The IMF must make important decisions as the nine-month standby agreement is about to expire this spring.


Dr. Reza Baqir, head of sovereign advisory services at Alvarez & Marsal and former negotiator for Pakistan’s 2019 IMF program, noted that the IMF faces the pivotal decision of whether to continue supporting Pakistan or reassess the country’s debt sustainability. While the Fund labeled Pakistan’s debt as sustainable, it also emphasized significant risks, leaving room for speculation about the future course of action.

Baqir emphasized the dual nature of the IMF’s stance, stating that investors are closely monitoring whether the Fund will persist in labeling the debt as sustainable or extend support for a potential debt restructuring if Pakistan’s authorities opt for that path.

As of end-September 2023, Pakistan’s public external debt neared $100 billion, with China and its lenders holding the largest share. The trading dynamics of Pakistan’s bonds reveal nuances, with shorter-dated bonds trading close to par, while longer-dated ones maturing after 2030 are below the 70 cent threshold, signaling distress.

Recent geopolitical tensions, exacerbated by strikes inside Iran, resulted in sharp falls in Pakistan’s bond values. The situation adds complexity to the IMF’s decision-making process.

Dr. Baqir suggested that Pakistan might explore a “debt-for-nature” debt swap, citing the 2022 floods that affected over 33 million people. This mechanism involves countries implementing eco-policies in exchange for a reduction in their debt, a strategy gaining popularity with recent successful deals in places like Belize and Ecuador’s Galapagos Islands.

Eugenio Alarcon, recently joining Alvarez & Marsal and responsible for Latin America & the Caribbean, highlighted the benefits of such transactions, noting that countries can achieve substantial reductions in their debt stock through these initiatives. The evolving situation makes it imperative for the IMF to carefully navigate the economic trajectory of Pakistan in the post-election period.








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