With the prevailing uncertainty over the next round of talks with the IMF and ongoing political turmoil, Pakistan’s default risk as measured by five-year credit-default swaps (CDS) has risen sharply. According to reports, the CDS soared to 75.5 percent on Wednesday from 56.2 percent a day ago. This sharp increase reflects a grave situation, making it increasingly difficult for the government to raise foreign exchange from markets either through bonds or commercial borrowings.
Sources in Washington last week claimed that the schedule for talks between the IMF and Pakistan had been readjusted, but that the negotiations were ongoing. However, there were other reports claiming that the talks were rescheduled after last month’s release of a World Bank report on flood damages in Pakistan. There was in fact another round of engagement on Thursday, but the two sides could still not finalise a schedule for formal talks on the overdue ninth review of a $7 billion loan programme.
This continued uncertainty will add to the growing fears of default. Therefore, it is crucial that the hurdles which are causing delays are addressed urgently. These are mainly the lack of clarity on flood-related financial requirements for this fiscal year and declining revenue stream in the wake of import controls. Some outstanding issues pertaining to the energy sector also have to be addressed according to official sources.
Pakistani authorities had been looking around for additional revenues, including on profitability of the financial sector and higher revenue stream from the State Bank’s profits, but there has been no luck in that regard. Islamabad has already hinted at requests for a series of waivers on performance criteria owing to flood losses and the IMF’s push for staying on course committed to a tax-to-GDP ratio of at least 11 percent.
The situation does not look good as Pakistan was behind the tax-to-GDP ratio target by almost 0.8pc of GDP. The financial sector claims that the IMF is demanding new taxes to increase liquidity and avoid fiscal deficit expansion. The government requires at least Rs800 billion, which is only possible through new taxes, something that can be difficult for the government amid a faltering economy and political unrest. Based on Pakistan’s specific slippages and demands for waivers, it remains to be seen if the IMF executive board is sympathetic to Islamabad’s predicament.