Debt Restructuring Will be Very Difficult for Pakistan: Former SBP Governor

Former Governor of State Bank of Pakistan (SBP) Dr. Reza Baqir warned that debt restructuring for Pakistan will be very challenging because most of the country’s foreign loans are very difficult to restructure. He made these remarks at Harvard Kennedy School’s “Pakistan’s Debt Distress – Causes and Controversies” podcast which is centered on how the South Asian economy can improve its debt architecture. So far, the former SBP Governor’s comments suggest it’s a bit too late. Dr. Baqir said, “All the warning signs are there that the process will be difficult because of the type of debt that dominates on the balance sheet of Pakistan”. He explained the bulk of the country’s debt is “official debt,” which implies Islamabad owes it to either multilateral official partners such as the International Monetary Fund and the World Bank, or bilateral creditors such as governments and their institutions. Reza said even if Pakistan goes for restructuring, it’ll be very difficult to get a debt reduction. He believes that neither multi-lateral nor bilateral creditors will jump at the chance to reduce Pakistan’s debt. He said, “For multi-laterals, that’s almost impossible. For bilaterals, even in its heyday, (the) Paris Club would loath to give debt reductions, and continued to give rescheduling even if the insolvency of the country was staring them in the face”. On another note, Dr. Baqir lavished praise on China for its assistance to Pakistan when he was governor of the SBP from 2019 to 2022. He also added that he wasn’t a fan of criticism for Beijing as a creditor in Western economies who complain that the country doesn’t do much to help address debt problems in countries like Pakistan. Baqir reiterated that overall, foreign loans are very hard to restructure and in Pakistan’s case, it would be very difficult to achieve meaningful debt reduction because it would put a lot of pressure on financial markets if the domestic debt was included in the restructuring. His remarks come amid growing talk about the need for debt restructuring. The country faces $73 billion in dollar-denominated loan repayments over the next three years while forex reserves remain scarce.