Pak in Financial Free Fall, Credit Default Swap Jumps to 93%, No Help from IMF, ‘Friends’

Pakistan’s economy is in upheaval, and its reserves are running out.

According to the latest data, the cost of insuring exposure to Pakistan’s five-year sovereign debt rose by 1,224 basis points over the weekend, hitting the highest-ever level of 92.53%.

Talks with the International Monetary Fund (IMF) over the ninth review of the loan facility have come to a stalemate, while no help seems to be forthcoming from friendly nations.

All financial and credit rating agencies have been ringing alarm bells for Pakistan.

The Pakistani rupee (PKR) continues to fall. The currency has lost 2.24 rupees or 1% against the greenback in the last seven trading sessions.

The political uncertainty in the country has also exacerbated its economic woes.

Its total debt and liabilities stood at Rs 62.46 trillion in July-September FY2023.

Pakistan is scheduled to repay $1 billion against a five-year Sukuk (Shariah-compliant bond) maturing on December 5, 2022. The CDS increase indicates that investors were worried that the country would miss its obligation to repay credit holders $1 billion because the Sukuk is due to mature.

The IMF has shown its wrath over non-compliance with some very important conditions including laws for state-owned enterprises (SOEs) and flood-reconstruction estimation. The international body is also delaying its review due to the Army chief’s appointment and protests by Imran Khan’s party PTI as well as the Long March.

State Bank of Pakistan (SBP)’s reserves fell to $7.96 billion. Actually, Pakistan has zero reserves in its central bank, as $2.3bn of it was credited by China, $3bn deposited by Saudi Arabia, and $1.2bn came from the IMF.

Imports (by letters of credit, or LCs) are already banned, but surprisingly imports of coal and vegetables increased from Afghanistan in recent months. There is a clear trade imbalance due to the banning of trade with India.

In the past, Afghanistan was dependent on Pakistan but now the situation has reversed. Pakistan is buying coal from Afghanistan at high rates to fulfil fuel demands. Due to the surge of cross-border trade and the smuggling of dollars in Afghanistan, the foreign currency rate in the open market is about PKR 240 to PKR 244.

Pakistan’s total debt and liabilities peaked by an unsustainable 24% to Rs 62.5 trillion at the end of September 2022 – pushing the country into uncharted territory.

Another alarming factor is that Pakistan’s remittances reached an all-time low in recent months. The inflow of workers’ remittances declined by 15.7 per cent in the month of October 2022.

After finance minister Ishaq Dar’s claim of bringing down the dollar rate to PKR 180 or PKR 200, people started inflows through black market/Hundi to get higher rates. This is why, the interbank rate of dollar is PKR 223 now, but in the black market, the dollar is floating at PKR 240. According to economic experts, during the last 4 months, Pakistan faced a 1 billion dollar loss in remittances.

Pakistan has not yet succeeded to get any financial facilities from China and Saudi Arabia despite Prime Minister Shehbaz Sharif’s visits to both countries. The financial facility from friendly countries is also dependent on the IMF 9th review.

Pertinently, Fitch downgraded Pakistan’s long-term issuer default rating to CCC+ from B-, while Moody’s lowered the country’s issuer and senior unsecured debt ratings to Caa1 from B3. S&P has already downgraded Pakistan.

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