Default threat reaches Pakan as political crisis deepens

Soaring inflation. Squabbles over fuel prices. A fractious political environment. For months, Pakan has struggled to keep its economy afloat, raising the prospect that one of the world’s most populous nations could soon follow Sri Lanka in a wave of potential global defaults.
Investors are getting nervous. Without a bailout from the International Monetary Fund, Pakan may default for the second time in its hory. As talks with the IMF conclude Wednesday in Doha, officials acknowledge that winning a loan from the multilateral lender might involve trade-offs, including the politically tough decision of raising fuel prices.
“We are confident we’ll get to the finish line,” Murtaza Syed, acting governor of the State Bank of Pakan, said in an interview with Bloomberg TV on Tuesday.
The negotiations come at a time when citizens are battling Asia’s second-fastest inflation and ousted premier Imran Khan is poised to occupy the nation’s capital with his supporters to force early elections. With a barrage of financial shocks caused the pandemic, Russia’s war in Ukraine, and rising interest rates, Pakan is one of several emerging economies facing debt restructuring.
File photo of supporters of former Pakani Prime Miner Imran Khan chanting slogans as they protest after he lost a confidence vote in the lower house of parliament in Islamabad. (Reuters)
Pakan is seeking the release of $3 billion from the IMF. That amount would augment the nation’s foreign-exchange reserves, which at $10.2 billion cover less than two months of imports. The government is staring at a $45 billion trade deficit this year.
The bond market has been pointing toward rising concern. Pakan’s dollar notes due in 2031 have dropped about 14 cents this month — even after rebounding some Tuesday and Wednesday — to 63 cents. Investors generally view prices below 70 cents on the dollar as indicating dress and an increased risk that borrowers may face future challenges meeting obligations if conditions deteriorate.
“Pakan is in a tight situation,” said Lars Jakob Krabbe, portfolio manager for Frontier Markets fixed income at Coeli Frontier Markets AB in Stockholm.
Fighting between the government and former Prime Miner Khan has complicated a path forward with the IMF. In recent weeks, Khan’s party, Pakan Tehreek-e-Insaf, has pushed for elections a year earlier than planned in a bid to recapture power. And Khan called on his supporters to hold protests Wednesday in Islamabad.
The city is bracing for unrest. Police have placed barricades in front of the so-called Red Zone, a neighborhood with key government buildings, including Parliament, embassies and the prime miner’s offices. The government has said demonstrations won’t be allowed, raising concerns that more mayhem and social unrest could follow.
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A sticking point for the IMF connects to Khan’s tenure. Before leaving office in April, he reduced fuel and gasoline prices and then froze them for four months, a last-ditch attempt to improve his image among voters and quell frustration over rising costs.
But the IMF has delayed giving Pakan more money until the government scraps the fuel subsidies. And Khan’s successor, Shehbaz Sharif, has deferred raising prices despite the subsidies costing $600 million a month. The government has resed angering a population already struggling to afford staples like wheat and sugar.
“Three weeks ago, I would have said there’s a 0% chance of Pakan becoming the next Sri Lanka,” said Mattias Martinsson, chief investment officer of Tundra Fonder AB in Stockholm. “The inaction of the new government is, however, worrying.”
For now, at least, Pakani officials say they are confident of finding a middle ground with the IMF, even if the subsidies remain.
In the Bloomberg TV interview, Syed said “gaps are being closed.” He expressed optimism that IMF money would enable the country to easily fill funding holes until the end of the next fiscal year. Apart from reviving a rescue package from 2019, Pakan is asking for an additional $2 billion from the IMF.
Edwin Gutierrez, London-based head of emerging-market sovereign debt at abrdn plc, which owns Pakan’s bonds, said the company is comfortable with some volatility and doesn’t plan to sell its holdings.
“It will be a rocky path given the politics, but in the end, neither Pakan nor the IMF will be walking away,” he said.