Pakistan May Seek IMF Bailout to Avoid Debt Default

By Khaleeq Ahmed

Oct. 20 (Bloomberg) -- Pakistan may be forced to seek a loan from the International Monetary Fund to prevent default after foreign-exchange reserves plunged 74 percent, a government official said.

South Asia's second-largest economy, also is seeking support from the World Bank and the Asian Development Bank, said Shaukat Tarin, financial adviser to the prime minister. Reserves have fallen to about $4.3 billion in the past year, putting at risk the country's ability to pay the $3 billion in debt- servicing costs due in the coming year.

Credit-default swaps on Pakistan's $2.7 billion of dollar- denominated bonds outstanding have more than tripled since August to 2,453.7 basis points, according to CMA Datavision. Standard & Poor's, doubting Pakistan's ability to repay debt, cut the long-term foreign-currency rating on Oct. 6 to seven levels below investment grade, and said it may lower it again.

``They are going to have to bite the bullet and sign for the IMF,'' said David Fernandez, the Singapore-based head of emerging markets research at JPMorgan Chase & Co. ``It has to come now.''

Pakistan's first civilian government since 1999 is facing economic turmoil after the rupee plunged to an all-time low, the current account deficit widened to a record, and inflation jumped to a 30-year high. The nation, which only came off its last IMF program in December 2004, may need as much as $4.5 billion in loans to tide over the crisis, Tarin said.

`Comfort Level'

``If I don't feel the comfort level with the multilateral agencies and our bilateral friends in three to four weeks, then I'll have to write to the IMF,'' Tarin said in an interview in Islamabad yesterday. A default is ``out of the question.''

Pakistan faces the politically unpopular decision to seek an IMF bailout after China rebuffed its neighbor's request for cash, the New York Times reported Oct. 18. The U.S. and other nations are preoccupied with the financial crisis, and Saudi Arabia, a traditional ally, refused to offer oil concessions, the newspaper said.

The U.S. has helped Pakistan financially for its support in the global war against terrorism, providing $10 billion in funds and canceling more that $1 billion of loans. The Bush administration has urged the Pakistan government to do more to fight al-Qaeda and Taliban militants in its tribal areas, which the U.S. says the militants are using to regroup and attack the coalition forces in Afghanistan.

Pakistan's $750 million in 6 7/8 bonds due in June 2017 were quoted at a price between 40 and 43 cents on the dollar, according to a Bloomberg survey of four dealers. None of them reported trades today. The notes are lower after their initial sale in May last year at par, or 100 cents on the dollar.

A delegation from Pakistan will meet IMF officials in Dubai today and tomorrow for a ``routine economic review,'' Tarin said. Pakistan has already presented to the IMF a stabilization plan which includes removal of subsidies, tighter monetary policy and steps toward reducing the fiscal deficit, he said.

``If this plan is acceptable to them, only then will we have the IMF program,'' he said. The government is also seeking loans from the World Bank, the Asian Development Bank and U.K.'s Department for International Development, Tarin added.

Pakistan has said it has almost removed subsidies on fuel by raising domestic fuel prices six times between April and July in line with global crude costs. Subsidies on electricity are due to be removed by June 2009.

`Political Backing'

``The question is once the IMF program is put in place, will there be political backing to implement it,'' JPMorgan's Fernandez said. ``That's what the market is going to focus on.''

Pakistan has sought about $1.5 billion from the World Bank, $1.6 billion from ADB and about 500 million pounds ($864 million) from the U.K.'s DFID, apart from a request for $500 million from the Islamic Development Bank, Tarin said.

Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note. Multilateral and bilateral aid may not be timely enough, S&P said on Oct. 6.

The global credit-market crisis triggered a capital outflow from emerging markets, with Pakistan's benchmark Karachi Stock Exchange KSE 100 Index losing more than a third of its value this year. The bourse kept trading restrictions in place and sought police protection to thwart a repeat of violence on July 16, when hundreds of protesters stoned the exchange and shouted anti-government slogans.

The South Asian country's balance of payments deficit widened in the quarter to Sept. 30 to $3.95 billion from $2.27 billion a year earlier, while the current-account deficit reached a record $14 billion in the year ended June 30, according to data provided by the government.

To contact the reporter on this story: Khaleeq Ahmed in Islamabad at paknews@bloomberg.net