Doris Lessing once remarked, ‘Borrowing is not much better than begging; just as lending with interest is not much better than stealing’. Ironic as it may be, this statement ignites a discourse on Pakistan’s financial ordeals that has transformed it from an aspiring nation to an indigent one. Time and again, Pakistan has sought refuge in ‘financial beggary’ or ‘borrowing’ from bilateral and multilateral partners rather than pursuing alternative routes towards financial self-reliance. However, recent talks over Pakistan seeking an additional $6 billion in bailouts to roll over previous debts through a new IMF loan program has garnered attention. The possibility in securing this aid is questioned amidst the atmosphere of political turmoil sparked by price hikes and allegations of electoral rigging during the February electioneering.
Lessing’s view does not only give us insight into Pakistan’s dependency syndrome when it comes to debt rollovers but also gives us a plausible insight into how creditors criterion of conditional lending with interest has made it impossible for Pakistan to escape its debt trap that is a creation of its own undoing. Debt rollover is termed as the renewal of a loan but on the condition that liquidating an old loan or the original principal amount has become difficult upon its maturity. Thus, the only structural alternative is to enter a new repayment agreement which may in de facto cancel off the old loan but gives precedence to a second debt or even a ‘Rollover
risk’. This not only incurs more interest charges but acts like a ‘debt trap’ in the name of relief. Rollover risks have more to do with the prevailing economic conditions and nature of debt – both which threaten Pakistan’s finances given its vulnerable economy and lenders reluctance to renew expiring short-term loans when collateral drops given early debt maturity.
Within the past 75 years, Pakistan has received up to 23 IMF bailouts – mostly in rollovers. As early as September 2023, Pakistan was in bilateral talks for the rollover of $11 billion in debt from Saudi Arabia and China to meet external financing needs. This was because Pakistan’s interim parliament had become increasingly apprehensive about debt repayments and current account deficit financing owing to the impact of rising global crude oil prices that posed a threat to the nation’s sectors stability.
Simultaneously, the loan package approval of $3 billion by the IMF in 2023 was seen as a major gain that was paraded by the incumbent government. However, the nation’s inability to charter a fixed and realistic plan on repaying these bilateral creditors was often unheeded or was relegated to the backburner. With Pakistan expecting half of its maturing debt amounting to $11.3 billion of $24.5 billion in fiscal year 2024 (FY-24) to be rolled over alone, IMF seems the only way forward as bilateral creditors such as China and Saudi Arabia debate cash flow crunches as third world countries alongside Pakistan fail to live up to their timely debt obligations when it comes to loan lending.
Threat to rollover risk remains high for Pakistan given plausibility over China’s own domestic financial condition as a bilateral creditor. Beijing is grappling with a domestic banking crisis of its own due to external borrower nations defaulting on their debt obligations and multiple rollovers have caused China to proceed with caution when it comes to external investing and loaning, although the South-East Asian nation is still heavily invested within Pakistan. Given that Pakistan has borrowed 161 loans worth $68 billion from China with overdue payments piling and that Saudi Arabia has held a similar stance as it is advocates loan recipient countries to impose tax reforms on its public before being willing to consider future loans, bilateral relief does not seem imminent. Instead, it seems that debt relief will once again fall under the IMF umbrella and western mandate.
Pakistan averted default in summer 2023 owing to a short-term IMF bailout. However, given the history of IMF loans being preceded by fixed conditions; a reminder that there is no free lunch for any nation, Pakistan failed to abide by the slew of demands put forward such as hiking interest rates and revised electricity prices. Alas, with the IMF bailout programme set to expire next month on 30th March that coincides with Pakistan’s repayment timeline of $6.8 billion, doubts are looming even prior to the new government’s formation. Thus, the new government must now prioritise long-term bailout and debt rollover by April if they wish to keep the $350 billion economy afloat. If not, Bloomberg figures estimate debt servicing budget for the next fiscal year will exceed $9 trillion with most outstanding payables making up more than 90 per cent of government expenditure via domestic borrowing that risks deficit financing, loss of public trust and amplifies rollover risk; a future estimate the nation cannot afford. However, this begs the question, does Pakistan’s dependency syndrome on debt servicing via rollovers seem a sustainable option? If not, what is the likelihood for an alternative?
Probability of rollover risks remains high for Pakistan’s government and private sector. Reasons as to why Pakistan may face hurdles in refinancing or rolling over of previous debts alongside what would hold for Pakistan if refinancing does not occur can be explained. One bleak outlook is that increased interest rates due to the unpredictable global economy may result in interest rate risk when it comes to external financing.
Borrowing cost increases with interest leading to increased overall debt burden. Furthermore, currency risk increases especially for Pakistani debtors who have borrowed in foreign currencies while local rupee value depreciates leading to higher repayment obligations in local currency. Equity based on dollar-based returns also creates a cycle of circular debt. Pakistan’s credit risk also exacerbates Pakistan’s credit worthiness when negative sovereign credit rating and economic outlook can influence availability of new refinancing from lenders like the IMF. Another concern is liquidity risk as liquidity in debt markets may dry up due to financial instability leading to decreased chances to access new refinancing to roll over existing debt. Ultimately ‘debt sustainability’ may be called into question as relying on the recurrent strategy of rolling over debts can prove to be unpredictable and may even result in default or a fiscal crisis; similar to what was seen in Sri Lanka.
Some alternatives involve targeted schemes such as ensuring Pakistan’s Special Investment Facilitation Council (SIFC) having sustainable and yearly projects not exceeding 30 that should be financially feasible and should have realistic goals. Privatisation of state-owned enterprises (SOE’s), whether the oil or railways sector, should continue with zeal as seen with successful examples of PIA or KE. This helps establish a footprint that reduces need for external financing as privatisation leads to increased efficiency, higher revenues coupled with lower costs, financial independence owing to capital injection, attracts foreign investment and reduces fiscal burden on government budgets, hence reducing dependency on all forms of foreign financing.
Launching dollar Sukuks in every sector such as mining, railways and tourism invites both domestic and foreign investments that helps circumvent circular debt. Lowering overall interest rates given Pakistan alone has a standalone tax on amenities such as retail food of up to 13 per cent can be reduced by 5 to 6 per cent so this avoids the need to be bound by IMF tax regulations and external financing. Instead, taxation that often falls on amenities can be redirected towards other industries. Other options include lowering retail tax and having a price regulating mechanism in place given that predictions alone show that upcoming Ramadan alone will face unregulated meat price hikes. Another actions that can reduce burden on the government’s national exchequer and budget would be to increase efficiencies of state ministry’s by reducing their size while encouraging competent people in power via a transparent and open selection process. Slashing ministry’s grants and funds will allow breathing space for the government to galvanise a budget that can revise its cash flows towards meeting our pre-existing foreign loan debts rather than relying on rollovers.
Hence, Pakistan’s reliance on debt rollover to manage its fiscal obligations reflects a recurrent pattern of dependency given the history of bilateral and IMF bailouts. However, despite the temporary economic relief it offers, it raises issue over debt sustainability which remains unresolved.
The writer is international affairs and political economy analyst.
