Pakistan's perceived default risk worsens 'owing to IMF uncertainty'

The country's default risk as measured by five-year credit-default swaps (CDS) - insurance contracts that protect an investor against a default - rose sharply overnight amid political turmoil and uncertainty about talks with the International Monetary Fund (IMF).

The CDS soared to 75.5 per cent on Wednesday from 56.2pc a day ago, according to data provided by research firm Arif Habib Limited. Pakistan's perceived risk of default, measured by the 5-year credit default swap (CDS), worsened further in a matter of days and hit 75.5%, owing to uncertainty over the International Monetary Fund's (IMF) ninth review. As per data provided by brokerage house Arif Habib Limited (AHL), Pakistan's 5-Year CDS increased from 5,620bps on November 14 to 7,550bps on November 15, an increase of 1,929.6bps.

A CDS is a financial derivative that allows an investor to swap or offset their credit risk with that of another investor. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse them if the borrower defaults.

Pakistan is currently in an IMF programme, and seeking further inflows. The IMF Staff Mission is expected in Islamabad by the end of the ongoing month but the date has not yet been finalised as the Fund wants Pakistan to first make the required adjustments.

Official sources in Washington said last week the schedule for talks between Pakistan and the IMF had been readjusted, but the negotiations are continuing. Media reports, however, claimed that the talks that were scheduled to begin in early November had been postponed until the third week of this month.

According to these reports, the talks would resume after Pakistan fulfilled its pledge to adjust sales tax on petroleum products and took other measures required under a loan agreement revived earlier this year.

But official sources, who spoke to Dawn, had said the talks were rescheduled after last month's release of a World Bank report on flood damages in Pakistan.

Pakistan is scheduled to pay $1 billion on Dec 5 against the maturity of five-year sukuk, or Islamic bonds. The finance minister has repeatedly assured for sukuk payment, but the international market is not ready to rely on assurances as the country's economy struggles to avoid default by borrowing more from the markets, donors, commercial banks and friendly countries.

The day-to-day increase in the CDS reflects a grave situation, making it increasingly difficult for the government to raise foreign exchange from markets either through bonds or commercial borrowings. The country requires $32bn to $34bn this fiscal year to meet its foreign obligations. Financial experts said the country still needed about $23bn through the remaining fiscal year. Pakistan is still in the IMF programme, which enables it to get inflows from the World Bank, Asian Development Bank and Asian Infrastructure Investment Bank.

Pakistan had promised the IMF to bring down the fiscal deficit by Rs1,500bn in the current fiscal year, but the situation is worsening as the deficit expanded in the first quarter.

The financial sector said the Fund was demanding new taxes to increase liquidity and avoid fiscal deficit expansion. The government requires at least Rs800bn, which is only possible through new taxes, something that can be difficult for the government amid a faltering economy and political unrest. The government raised Rs757bn through treasury bills against the target of Rs650bn on Wednesday.