The IMF's "extend and pretend" deal with Pakistan

The IMF's "extend and pretend" deal with Pakistan

Pakistan and the IMF recently agreed on a program worth $7 billion, which appears woefully insufficient to resolve the country’s macroeconomic imbalances. The Fund claims that the Extended Fund Facility over the next 37 months intends to “cement macroeconomic stability and create conditions for a stronger, more inclusive, and resilient growth.” But this nothingburger of a deal - painfully, obviously so ($2.3 billion per year?) - will more likely achieve the opposite.

Some quick stats from 2023 pulled from my sovereign stress tracker, where Pakistan flashes red on reserve cover and debt-to-revenue:

• International reserves / GDP: 2.9% ($9.8 billion)

• Public Debt / Revenue ratio: 670

Some other figures worth bearing in mind:

• Gross financing needs = 24% GDP (~80 billion)

• Average annual interest payments over the next five years = ~6.5% / GDP (~$20 billion)

• Average annual principal payments over the next five years = $19 billion

• Imports typically range from $60-85 billion

• Export revenues range from $30-40 billion

• Tax revenues = ~10% / GDP (~$35 billion)

In 2023, the current account deficit narrowed to -0.7% of GDP (-$2.4 billion), but in the past these have been much larger (e.g. ~-$17.5 billion in 2022). But even financing small external deficits could prove difficult. With annual FDI generally under $2 billion and in the absence of other private capital inflows, the government will likely have to borrow more. This is a problem given already-high public debt levels at 77% / GDP, of which Pakistan owes 28% / GDP to external creditors.

So it is crucial that Pakistan runs small current account deficits or, dare I say it, surpluses. If the global trading system worked as it should (i.e. fantasy-land), non-commodity-exporting emerging and frontier economies should be expected to run current account deficits. The idea is that the current account surpluses of wealthy countries would fund the development and climate transition of poorer nations.

But since so few advanced economies run surpluses, I guess this nuclear power and world’s fifth-most populous country will just have to tighten its belt. Fantastic.

To avoid large external deficits, Pakistan’s real exchange rate needs to depreciate. Yet the exact opposite is happening, so don’t hold out too much hope for a small CAB deficit this year:

Olivier Blanchard once said that inflation is the canary in the coal mine. In the chart below you can see that Pakistan’s weighted inflation differential with its trading partners skyrocketed in May 2024.

Consider the alarm sounded. Even on the off-chance Pakistan manages to run a small CAB deficit in 2024 (say, like the -$2.4 billion in 2023), annual IMF support ($2.3 billion) will barely help bridge that gap. Islamabad still has to cough up about $39 billion in combined principal and interest payments every year going forward. This sum is roughly equivalent to export receipts and slightly larger than tax revenues.

This looks to be a solvency issue. And with inflation through the roof, it’s hard to see how this doesn’t get worse before it gets better. Watch this space.

Headline Roundup

Sovereign Debt

• Global:

  • Putting some flesh on the Hagan-Setser sovereign debt proposal

  • Emerging-Market Junk Index Hits Record as Growth Lures Investors

  • The Big Exit: Emerging market sovereigns carve a way out of default

  • Emerging Markets Show Resilience Despite Global Monetary Tightening

  • Sovereign Debt Restructuring Process Is Improving Amid Cooperation and Reform

• Sri Lanka:

  • Sri Lanka’s Bond Deal Should Not Set a Precedent

  • Sri Lanka reaches provisional deal on $12.5 bln bond rework

  • Article IV Consultation and Second Review Under the Extended Fund Facility

  • Centrist president election win path opens up

• Pakistan:

  • Pakistan’s latest record-breaking, reality-denying IMF program

  • Pakistan's course correction continues

• Cameroon: Cameroon Joins Ivory Coast, Kenya, Senegal in Africa’s 2024 Eurobond Wave

• Ukraine:

  • Ukraine Warrant Holders Form Group for $2.6 Billion Talks

  • Ukraine avoids default with generous bond restructuring deal

  • Will Ukraine default on its debt in August?

• Ghana:

  • Assessment of recovery values under restructuring agreement

  • Second Review under the Extended Credit Facility

  • Agreement in Principle – initial thoughts

• Barbados: EIB and Inter-American Development Bank approve guarantees to support climate and fiscal resilience

• Kenya:

  • Kenyan bond selloff justified by protests and fiscal slippage

  • Is Kenya the Canary in the Sovereign Debt Coal Mine?

  • Kenya’s fiscal troubles are largely homemade. Now the country is running out of options.

  • Kenya protests different this time, driven by grass roots not tribal leaders

• Zambia: Third Review Under the Arrangement Under the Extended Credit Facility

• Saudi Arabia: Crown Prince’s Transformation Stress-tests Economy and Stretches Petrowealth

• US: There is no need for investors to panic over government debt

Geoeconomic Fragmentation

• Global: A Brief History of Globalization

• Russia:

  • Stepping up economic sanctions is urgently needed to constrain Russia

  • Hong Kong shell companies’ exports bust sanctions

  • Hungary faces energy crisis, after Ukraine cuts off Russian oil deliveries

  • Russia’s surprising consumer spending boom

  • Russian oil tracker – revenues down despite higher volumes

  • Increasingly isolated by sanctions, Russia’s metal producers are being pushed into China’s arms

• US:

  • Kamala Harris Could Provide 'Continuity' on China Tariffs

  • Trump's idea of replacing income tax with tariffs 

• US-China: Iraq halts financial transactions in Chinese yuan under US pressure

• Africa: Africa's energy ambitions stifled by investment shortfall

• Serbia: Serbia signals its geopolitical alignment with EU lithium deal

Global Electoral Calendar

Highlights

• Sri Lanka: Sri Lanka to hold presidential election on Sept. 21, first since declaring bankruptcy

• Venezuela: Analysing Results and Future Implications

The Big Picture

Looking back

See the update for Q1 2024 electoral results here.

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