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Govt faces decision on resuming debt payments

KARACHI: The government is likely to decide by June whether it can resume regular debt payments when a 30-month debt restructuring grace period with the Paris Club ends in December, financial sources said on Monday.

The ability to pay depends largely on the success of unlocking a crucial suspended International Monetary Fund credit programme and attracting foreign direct investment, they said.

"The debt management committee will be able to finalise its proposals before the budget (in June)," said a source close to the committee.

The committee, whose mandate is to suggest ways for the government to reduce debt, was looking at various options including a proposal to start partial payment of regular instalments of debt to its official borrowers, the committee source said.

Before the rescheduling of $3.1 billion debt by the Paris Club last year -- covering a period from July 1, 1998 to the end of December 2000 -- Pakistan's annual debt payments were estimated at about $5 billion a year.

Financial analysts said a yawning trade deficit and a sharp drop in foreign direct investment, mainly because of a damaging tariff dispute with private power producers, remained top worries on whether Pakistan would be able to restart the debt payments.

Figures released on Monday showed Pakistan had a trade deficit of $1.01 billion in the first seven months of the fiscal year, up almost 43 percent from the year-earlier period.

Pakistan had a budgeted deficit target of $800 million for the whole fiscal year to the end of June.

According to official estimates, Pakistan's total domestic and foreign debt was close to 3.3 trillion rupees ($61 billion), almost equal to its gross domestic product.

Out of that, foreign liabilities were close to $38 billion, including loans to the private sector under sovereign guarantees.

The source said a resumption of multilateral credit inflows led by the IMF could restore Pakistan's financial situation to the shape it was in before its nuclear tests in May 1998.

Pakistan's balance of payments was tipped into a crisis after U.S.-led economic sanctions wiped out aid and private investment inflows soon after the tests.

The partial lifting of sanctions in December that year paved the way for the restoration of an IMF $1.56 billion loan programme plus the rescheduling of $3.1 billion in debt by the Paris Club of official creditors.

The London Club of commercial creditors also restructured commercial debt worth $877 million last year.

But a failure by the government of former prime minister Nawaz Sharif to meet commitments on broadening the tax base and resolving the tariff row with private power producers caused the IMF to suspend its loan tranches last July.

The IMF said after the coup in October which removed Sharif from power that its funding for Pakistan had been placed on hold while it assessed the situation.

Finance Ministry sources said the IMF was now contemplating a new Poverty Reduction Growth Facility for Pakistan, which would replace the originally agreed Extended Structural Adjustment Facility.

"We expect them to send us a paper on the programme soon and their team might visit next month," said one source close to the ministry.-Reuters