An Update on Pakistan's Loan Prospects

♠ Posted by Emmanuel in ,, at 10/19/2008 04:46:00 PM
The fog of imminent default is producing inconsistent reports on Pakistan from various news sources. Earlier, I thought Pakistan would be successful in playing off two countries vying for regional influence against each other--the US and Pakistan. China now appears reluctant to make a large commitment to Pakistan, perhaps fearing that it may become another client state of dubious value alike North Korea. Hence, Asif "Give Me $100 Billion" Zardari and his new economic advisor, Shaukat Tarin, have drawn up a game plan for soliciting badly needed foreign exchange as the country encounters balance of payments difficulties. Unsurprisingly, the desirability of approaching various lenders varies according to the level of domestic political pain Pakistan must endure. In terms of increasing painfulness:
  • China is hesitant. Although it is famous for doling out cash with few preconditions to repressive regimes with abundant natural resources, Pakistan isn't too attractive to the PRC in that department;
  • The Islamic Development Bank, the UK's Department for International Development, the Asian Development Bank, and the World Bank have been approached by Pakistan. The nation's status as the world's second-largest Islamic nation after Indonesia makes the Islamic Development Bank a logical port of call. Meanwhile, Pakistan's status as a Commonwalth member may make some DfID funding available to it, although the UK's own financial mess may limit its abiilty to bankroll other cleanup operations. Regional lender the ADB and the World Bank also look set to help Pakistan out;
  • The International Monetary Fund is called the lender of last resort for a good reason. If Pakistan still comes up short in stabilizing its financial situation after approaching the above lenders, then it will have to borrow from the IMF regardless of the ultimate political cost. Though always controversial, its handling of the Asian financial crisis and follow-on episodes in Russia and Argentina have made the IMF appear even more penalizing from the point of view of many LDCs. It would surprise few if famed loan conditionalities involving belt-tightening and other domestically unpopular measures make a notable reappearance.
From Bloomberg:
Pakistan, perceived as the world's riskiest borrower, may seek the help of the International Monetary Fund to avoid default on its debt obligations, said Shaukat Tarin, financial adviser to the prime minister. The South Asian country may need as much as $6 billion to shore up its foreign-currency reserves after they dwindled more than 74 percent in the past year to about $4.3 billion. Pakistan has $3 billion in debt servicing costs in the coming year. Standard & Poor's, doubting the nation's ability to repay debt, cut the long-term foreign-currency rating on Oct. 6 to seven levels below investment grade, and said it may lower it again.

Pakistan may need as much as $4.5 billion to tide over the crisis and is working on a few plans, including seeking loans from the World Bank, the Asian Development Bank and U.K.'s Department for International Development, Tarin said in an interview today. ``If I don't feel the comfort level with the multilateral agencies and our bilateral friends in three to four weeks, then I'll have to write to the IMF,'' he said via mobile phone. A default is ``out of the question.''

A delegation from Pakistan will meet IMF officials in Dubai tomorrow and Oct. 21 for a ``routine economic review,'' he said. Pakistan has already presented its economic stabilization plan to the IMF, including removal of subsidies, tighter monetary policy and steps toward reducing the fiscal deficit, he said. ``If this plan is acceptable to them, only then we will have the IMF program,'' he said.

Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note. Multilateral and bilateral aid may not be timely enough, S&P said on Oct. 6. Surging import costs widened the nation's balance of payments deficit, sending the local currency to a record low last week.

The current economic crisis is the deepest faced by the nuclear-armed nation since 1999, when it came close to defaulting on its debt and reserves plunged to less than $1 billion. Pakistan ended its three-year, $1.5 billion loan program with the IMF in December 2004. ``The balance-of-payments position is grim as some short- term obligations are coming up,'' said Syed Suleman Akhtar, an economist at Foundation Securities Pvt. in Karachi. ``There's been no concrete commitment yet.''

The global credit-market crisis triggered a capital outflow from emerging markets, with Pakistan's benchmark Karachi Stock Exchange KSE 100 Index losing more than a third of its value this year. The bourse kept trading restrictions in place and sought police protection to thwart a repeat of violence on July 16, when hundreds of protesters stoned the exchange and shouted anti-government slogans.

Pakistan faces the politically unpopular decision to seek an IMF bailout after China rebuffed its neighbor's request for cash, the New York Times reported yesterday. The U.S. and other nations are preoccupied with the financial crisis, and Saudi Arabia, a traditional ally, refused to offer oil concessions, the newspaper said. China may offer a soft loan of $500 million to the nation, the Financial Times reported, citing a finance ministry official it didn't identify.

Pakistan has sought about $1.5 billion from the World Bank, $1.6 billion from ADB and about 500 million pounds ($864 million) from the U.K.'s DFID, apart from a request for $500 million from the Islamic Development Bank, Tarin said.

The South Asian country's balance of payments deficit widened to the quarter to Sept. 30 to $3.95 billion from $2.27 billion a year earlier, while the current-account deficit reached a record $14 billion in the year ended June 30, according to data provided by the government.

Credit-default swaps on Pakistan's $2.7 billion of dollar- denominated bonds outstanding have more than tripled since August to 2,453.7 basis points, according to CMA Datavision. That means it costs $2.45 million annually to protect $10 million of the country's debt from default for five years. The cost reached a record $3.07 million on Oct. 6.