As the spectre of a deadlier conflict in the Middle East looms following the killing of a Hamas leader in Iran, with potentially horrific consequences for people and economies worldwide, Pakistan continues to grapple with its own set of challenges.

Though not immune to the unsettling developments in the Middle East, brokerage houses foresee better times ahead for Pakistan, which has long been teetering on the edge.

They believe Prime Minister Shehbaz Sharif’s government will secure the necessary support from China, Saudi Arabia and the United Arab Emirates for debt reprofiling in time to obtain the International Monetary Fund’s (IMF) board clearance for a 39-month $7 billion Extended Fund Facility. Unconfirmed reports indicate that the IMF board will meet later this month.

“The IMF has not requested a $27bn debt reprofiling, as reported. It only requires assurance of a $10-12bn debt rollover by China, the UAE and Saudi Arabia. This assurance is likely to be given to Pakistan soon, helping in securing a long-term IMF loan,” noted Muhammad Sohail, CEO, Topline Securities.

“Pakistan will succeed in reprofiling the bilateral debt and securing the $7bn IMF programme,” remarked Arif Habib, a prominent business magnate and one of the country’s biggest stock traders.

Finance Minister Aurangzeb Khan recently stated in a press conference that Pakistan has sought to reprofile $27bn in debt. The IMF has conditioned the approval of its bailout credit package on the rollover of Pakistan’s $12bn annual debt liability to three key bilateral donors.

Brokerage houses indicate confidence in Pakistan’s economic recovery, which hinges on securing an IMF loan and the UAE, China, and Saudi Arabia agreeing to roll over loans

Over the recent past collectively Saudi Arabia has extended $5bn, China $4bn and UAE $3bn for one year. Due to foreign exchange difficulties and an inability to repay its loans, Pakistan has been securing one-year extensions.

However, it is now seeking rollovers for three to five years to access IMF credit, address uncertainty, and get sufficient time to fix structural flaws and regain its external sector sustainability.

Economists were sceptical, expecting the approval process for IMF’s $7bn credit to be prolonged, as Pakistan will likely be unable to reschedule its bilateral debts within the next two weeks. They believe that debt reprofiling, even with willing partners, is a complex and lengthy process.

“If all goes well, it will take months, not weeks, to secure agreement from all three bilateral donors on extending the repayment timeline,” remarked a former chief economist of the Planning Commission.

The corporate sector had a more nuanced perspective. They do not expect the debt rescheduling process to be completed before the IMF board meeting but remain hopeful for the approval of Pakistan’s bailout package, recognising the economic team’s efforts to follow IMF guidance.

Some speculated that the multilateral donor might reduce the package scale due to higher risk perception in the absence of debt rollover. They advocated for extending the repayment deadline with donors but regretted the delay in initiating the process earlier.

M. Abdul Aleem, Secretary General, Overseas Chamber of Commerce and Industry (OICCI), said, “Based on the government and finance ministry’s media statements, it is highly unlikely that Pakistan will reprofile the $27bn liabilities within this month. However, considering the harsh measures in the 2024-25 budget to meet IMF conditions, we believe the IMF will still approve the credit, possibly at a slightly lower amount, even if some but not all of the $27bn is re-aligned.

“The IMF likely wants Pakistan to succeed and take bold steps for economic stability. The current volatile economic situation affects investor confidence. We are eager to see what steps the government will take to regain the confidence of existing and attract potential foreign investors.”

Ehsan Malik, CEO of the Pakistan Business Council (PBC), emphasised the necessity of external debt reprofiling for economic stability. “With forex reserves barely covering two months of imports, building reserves is crucial, especially to ease import crunch. The IMF requires the continuation of the $12bn in deposits from friendly countries and assurance that its funds won’t be used to settle the $15bn owed to Chinese independent power producers.

Reprofiling debt typically extends the repayment period without reducing lender’s returns, preserving the net present value of receivables. Securing the IMF programme will boost lender confidence and give Pakistan time for essential reforms, making it likely that bilateral and multilateral lenders will agree to reprofile their debt. Pakistan has been servicing its commercial debt on schedule, so reprofiling is not currently needed in this category.

Published in Dawn, The Business and Finance Weekly, August 5th, 2024