Investors in Pakistan are facing increased uncertainty as the political confrontation between former premier Imran Khan, the military, and the government approaches a critical point. Analysts are warning of a potential 20% drop in the Pakistani rupee, which could make it even more challenging to secure the International Monetary Fund’s (IMF) $6.7 billion bailout.
The recent arrest of Khan, his subsequent release, and his ongoing challenge to the military’s influence in politics have heightened tensions in the country. This situation serves as a stark reminder of Pakistan’s history of political instability, including three coups since 1958, and the threat of violence looms large.
Investors are being cautioned about the risks associated with investing in Pakistan. Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen plc, a long-time investor in the nation, emphasizes the need for preparedness for significant risks and the higher probability of unforeseen events. Moody’s Investors Service has raised concerns about the possibility of a default if Pakistan fails to secure IMF funding after June. The country’s external debt service for the fiscal year 2024 is estimated to be around $22 billion, approximately five times its foreign-exchange reserves.
Bond investors are growing increasingly nervous, as reflected in the rising yield spread between Pakistan’s dollar bonds and US Treasuries, which reached a record high. Pakistan’s dollar bonds are trading at distressed levels, with 2031 notes quoted at about 34 cents on the dollar. The Pakistani rupee has already depreciated by approximately 20% this year, making it one of the worst-performing currencies globally.
The political environment remains unstable, with Khan expressing fears of another arrest and potential violent clashes. Any further deterioration of the political situation, such as the imposition of martial law, could deter the IMF and exacerbate the risk of default, leading to continued pressure on bonds and the currency.
Analysts predict that if Pakistan fails to secure the IMF loan, the rupee could slide to as low as 350 per dollar in June. Importantly, Pakistan’s foreign currency reserves, which stood at $4.3 billion in mid-May, are insufficient to cover even one month of imports, despite heavy restrictions.
Against this backdrop, investors are advised to carefully select investments in Pakistan. T. Rowe Price, for example, focuses on stock picking, with investments in companies like Systems Ltd., an information technology firm that benefits from the weakness of the rupee due to its foreign currency revenue.
The military has historically wielded significant influence in Pakistan, directly ruling the country for 32 of the 76 years since independence. While the army pledged to stay out of politics, Khan’s arrest raises doubts about this commitment. The military denies any involvement in the shooting incident that injured Khan last year.
Pakistan has been engaged in negotiations with the IMF to restart its bailout program since November, with the financing gap being a major hurdle. With only $2.7 billion remaining to be disbursed from the $6.7 billion program set to expire soon, substantial additional financing is crucial to complete the loan review, as stated by IMF spokeswoman Julie Kozack. Pakistan’s history with the IMF has been tumultuous, with most previous bailout programs remaining incomplete. The government secured a $1.1 billion loan in 2019 but faced multiple interruptions due to failure in meeting loan conditions and attempts to alter terms.
