Fitch Ratings, the credit agency, has retained its CCC rating, indicating a belief that it faces liquidity difficulties which make it difficult to service its foreign debt. The agency has noted that the country needs not just the IMF to help it weather the challenges ahead, but also other multilateral and bilateral donors. The Asian Development Bank has also signed six loan agreements with Pakistan, which are worth a total of $1.2 billion, of which $400 million is in budgetary support for the current fiscal year. These loans have been made possible by the recent agreement with the IMF, with approval of the second tranche of the current Stand-By Arrangement now scheduled for the January 10 meeting of the IMF Board of Directors. That approval may only be a rubber-stamp for the recent staff-level agreement, but without that approval, the next tranche of $700 million cannot be disbursed.
As the Fitch report noted, the threat of an immediate default may have receded, but forex reserves not just show no signs of growing, but remain low. That means there is a possibility of a return to the situation that prevailed at the end of last year, and beginning of this, when every month, as payments fell due, there was a kind of controlled panic until the payment was actually made. It should be noted that IMF and other multilateral loans are not project loans any more, but programme loans, which go towards ‘budgetary support’, which means they are mostly being used to service debt. That is essentially a form of rollover, and indicates how deeply the country is dripped by the debt trap. The government has quietly begun putting the squeeze on imports, so as to conserve foreign exchange, but that clearly has only enabled the country to pay for its imports, not service its debt, which is funded only by further borrowing.
It is clear enough that the present SBA, which expires in June, is only a temporary measure before another IMF programme. However, Pakistan must begin to sell more to the world and buy less if it wishes to survive. That will perhaps not be enough to take it out of the debt trap, but it would indicate that the country is moving in the right direction.
