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Pakistan pays $1 billion ahead of schedule to avoid default

Pakistan pays $1 billion ahead of schedule to avoid default

 Cash-strapped Three days early on Friday, Pakistan avoided defaulting on its obligation to repay USD 1 billion in relation to a matured international Sukuk (Sharia-compliant bond).

According to the actual plan, the nation was supposed to return the maturing investment in the international bond denominated in US dollars on December 5 according to The Express Tribune's article on Saturday.

Abid Qamar, a spokesperson for the State Bank of Pakistan (SBP), confirmed to the publication that the USD 1 billion payment had been made. The bank has already paid Citigroup, which will next distribute the monies to the investors.

Prior to that, the risk of default, as determined by a CDS for a period of five years, reached a record high of 123% last month, largely due to the impression that the nation would be unable to make the payment due to its low foreign exchange reserves. A derivative of insurance known as a CDS protects against the risk of repayment default.

However, experts claimed that this derivative was poorly liquidated and traded in low volumes.

A small CDS deal had erroneously created the impression that the repayment had failed. Former finance minister Miftah Ismail, current finance minister Ishaq Dar, and SBP Governor Jameel Ahmad all reaffirmed that Pakistan would not miss any of its scheduled payments to foreign creditors.

Ahmad said last month that it has greater foreign currency reserves than was necessary. After Sri Lanka's global bond repayments fell behind schedule earlier this year as a result of declining reserves, perceptions about Pakistan's potential default began to take shape.

Along with a political crisis, the country was experiencing a severe shortage of food, petroleum, and medical supplies.

Experts compared the repayment capacities of Colombo and Islamabad, and they found that Pakistan had a tiny part of 7-8% of its total foreign debt through floating international bonds like Eurobond and Sukuk.

The remaining foreign debt was commercial, multilateral, and bilateral, and it has occasionally been rolled over.

Sri Lanka, on the other hand, had acquired more than half of its foreign debt through floating international bonds that cannot be renewed, so repayment was necessary in order to avoid default.

Pakistan is covered by the USD 6.5 billion loan program from the International Monetary Fund (IMF), which functions as a guarantee against failure to make international payments.

For the current fiscal year (July-June) 2022–2023, Islamabad has secured the necessary finance from international creditors in the amount of USD 32–34 billion.

This covers the financing of the current account deficit, a USD 21.1 billion debt, and an increase in foreign exchange reserves.

On Friday, the same day Pakistan paid off the USD 1 billion debt, Saudi Arabia extended the term of its USD 3 billion deposits at the State Bank of Pakistan.

According to the SBP Governor, additional foreign exchange has been arranged, so the repayment of USD 1 billion will not have an impact on foreign exchange reserves.

Due to the constant financing of the current account deficit and the repayment of maturing debt, the nation's foreign exchange reserves have fallen to a critically low level of USD 7.5 billion.

This hardly covers an import for five to six weeks. According to The Express Tribune, the reserves were valued at USD 20 billion in August 2021, 15 months prior.


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