Re-profiling Debts under IMF Supervision is More Feasible, Restructuring is a Negative Sign

Repaying external debt is a pressing concern for Pakistan, and the country should consider debt re-profiling instead of restructuring. Arif Habib Limited (AHL) states that debt re-profiling is “less disruptive” and implementing it with a new International Monetary Fund (IMF) program would provide “breathing room” to improve the country’s financial situation. Debt re-profiling adjusts the maturity date of debt without altering the coupon or interest payments.

This gives the country time to recover without debt relief and provides a more sustainable solution to address financial stability issues. The IMF also recognizes that debt re-profiling can effectively provide “breathing room.” On the other hand, restructuring debt results in direct losses for creditors through reductions in the coupon or principal of debt, lowering the government’s debt-to-GDP ratio or interest expense. Uruguay and Mongolia are examples of successful debt re-profiling in 2003 and 2017, respectively.

AHL confirmed in December 2022 that a new IMF agreement is the best option for Pakistan. The firm has emphasized the importance of managing the country’s medium to long-term external debt obligations. Re-profiling $13 billion in short-term bilateral and commercial debt from friendly countries would provide the needed breathing room to improve the country’s financial situation. However, this transaction can only occur once Pakistan signs a new long-term agreement, such as a Standby Agreement, after the upcoming General Elections in October.

Pakistan’s bilateral creditors require IMF oversight before committing additional funding and support. The IMF’s policy discussions with Pakistan began on Tuesday, following the conclusion of technical discussions on Monday. While the return of the IMF is hopeful, Pakistan still has a long way to go to address its macroeconomic vulnerabilities, according to AHL. Unfortunately, the delayed resumption of the IMF 9th review has worsened macroeconomic indicators, with forex reserves dropping to an alarming low of USD 3.1 billion (less than 3 weeks of import coverage) and at the lowest level since February 2014.

With the precarious foreign exchange reserves situation and large external repayment obligations over the next three years (USD 73 billion over FY24-26), discussions on debt restructuring have resumed, putting more pressure on the country’s financial situation.

Re-profiling Debts under IMF Supervision is More Feasible, Restructuring is a Negative Sign