Pakistan May Seek Bailout From IMF to Avoid Defaulting on Debt
By Khaleeq Ahmed
Oct. 20 (Bloomberg) -- Pakistan may be forced to seek a loan from the International Monetary Fund to prevent the nation defaulting on its debt, according to a government official.
South Asia's second-largest economy, which has seen its foreign reserves plunge more than 74 percent to about $4.3 billion in the past year, is also seeking financial support from the World Bank and the Asian Development Bank, said Shaukat Tarin, financial adviser to the prime minister. The country has $3 billion in debt servicing costs in the coming year.
``They are going to have to bite the bullet and sign for the IMF,'' said David Fernandez, the Singapore-based head of emerging markets research at JPMorgan Chase & Co. ``It has to come now.''
Pakistan's first civilian government since 1999 is facing economic turmoil after the rupee plunged to an all-time low, the current account deficit widened to a record, and inflation jumped to a 30-year high. The nation, which only came off its last IMF program in December 2004, may need as much as $4.5 billion in loans to tide over the crisis, Tarin said.
``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,'' Tarin said in an interview in Islamabad yesterday. A default is ``out of the question.''
Standard & Poor's, doubting Pakistan'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. Moody's Investors Service lowered its credit outlook to negative on Sept. 23, citing a risk of ``missed repayments.''
Removing Subsidies
A delegation from Pakistan will meet IMF officials in Dubai today and tomorrow for a ``routine economic review,'' Tarin said. Pakistan has already presented to the IMF a stabilization plan which includes 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. The government is also seeking loans from the World Bank, the Asian Development Bank and U.K.'s Department for International Development, Tarin added.
Pakistan has said it has almost removed subsidies on fuel by raising domestic fuel prices six times between April and July in line with global crude costs. Subsidies on electricity are due to be removed by June 2009.
``The question is once the IMF program is put in place, will there be political backing to implement it,'' JPMorgan's Fernandez said. ``That's what the market is going to focus on.''
Unpopular Decision
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 Oct. 18. 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.
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.
Credit Crunch
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.
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.
To contact the reporter on this story: Khaleeq Ahmed in Islamabad at paknews@bloomberg.net
Last Updated: October 19, 2008 21:56 EDT |
