Pakistan’s US dollar-denominated bond yields experienced a significant surge, indicating an elevated risk of default on foreign debt repayment for the country. The bond market’s return to volatility is casting doubt on Islamabad’s ability to revive the International Monetary Fund (IMF)’s $6.7 billion loan program and meet its international payment obligations beyond June 2023.
On Monday, the yield on Pakistan’s 10-year government international bond, valued at $1 billion and maturing on April 15, 2024, climbed 73 basis points to 106.37% in the international market. The surge comes after cumulative growth of 30.60 percentage points in the past five months.
The yields on six other Pakistani global bonds, maturing at different times until April 2051, experienced surges ranging from 10 to 39 basis points. One bond, maturing in January 2029, saw a recovery of six basis points. The rise in interest rates on banks’ financing in the US, Europe, and other regions reduced liquidity supply and impacted bond yields in emerging markets, including Pakistan.
Before the outbreak of COVID-19 in Pakistan in February 2020, bond yields were around 8%-10%. However, the stalled IMF loan program, set to conclude on June 30, 2023, has once again raised questions about Pakistan’s ability to repay loans after June 2023, causing an impact on bond yields. Moody’s Investors Service raised the alarm, stating that Pakistan could default without the IMF loan program after June 2023, given its weak reserves.
“Pakistan’s financing options beyond June are highly uncertain. Without an IMF program, Pakistan could default given its very weak reserves (at $4.4 billion at present),” warned Samiullah Tariq, Pak-Kuwait Investment Company’s Head of Research, speaking to the Express Tribune.
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Finance Minister Ishaq Dar’s recent assurance that Pakistan had made arrangements to repay foreign debt worth $3.7 billion until the end of June 2023 did not alleviate concerns. Out of the total $25 billion in external loans to be repaid next year, around $15 billion are expected to be rolled over by friendly countries such as China, Saudi Arabia, and the UAE.
Pakistan still needs to secure a new and larger IMF loan program in the next fiscal year to resume imports and repay outstanding foreign debt. During the Geneva conference on flood relief in January 2023, the international community pledged around $9 billion in foreign financing to Pakistan. Financial institutions like the World Bank, Asian Development Bank (ADB), and friendly countries await the IMF’s approval.
The IMF has conditioned the revival of the program on Pakistan acquiring new financial commitments worth $6-7 billion before June 30. So far, Pakistan has secured commitments of $2 billion from Saudi Arabia and $1 billion from the UAE.
The surge in bond yields reflects the ongoing uncertainty and tight liquidity position in the international market, making it difficult for Pakistan to meet its payment obligations beyond June 2023.
