‘Chinese response on debt flexibility positive’

• Aurangzeb hopes to secure additional funding from IMF’s climate resiliency fund
• Hints at drop in benchmark rate in SBP meeting
WASHINGTON: Finance Minister Muhammad Aurangzeb has described that China’s initial response to Pakistan’s request for extended debt maturities related to the Belt and Road Initiative as positive and encouraging.
Speaking to US media and at think tank events, Mr Aurangzeb suggested that Pakistan might achieve greater debt flexibility as it manages the burden of past borrowing. He emphasised the necessity of comprehensive structural reforms, as required by the recent $7 billion loan agreement with the International Monetary Fund (IMF).
Mr Aurangzeb is currently in Washington to participate in the annual meetings of the IMF and the World Bank. During his visit, he has also engaged in bilateral discussions with US officials and finance ministers from allied nations.
At an event hosted by Jihad Azour, IMF’s Director for the Middle East and Central Asia, Mr Aurangzeb identified key priorities, including broadening the tax base, reforming the energy sector, and privatising State-Owned Enterprises (SEOs).
In an interview with Bloomberg, the finance minister highlighted efforts to extend the maturities on debts tied to power plants to “create enough space” for reducing electricity costs. He noted electricity prices had already surged, surpassing housing costs for some residents. “We have just started that discussion and the response is encouraging,” he said, adding that negotiations were still in the early stages. He had previously addressed the issue during a visit to China in July.
During meetings with financial experts, lenders, and bankers, the Pakistani delegation emphasised that the country had entered a phase of relative stability, following the approval of the new $7bn IMF programme. They also mentioned that China had rolled over $16bn of the around $26bn in debt due this fiscal year, which began in July.
The finance minister informed Bloomberg that Pakistan must maintain fiscal discipline to increase the tax-to-GDP ratio from under 10 per cent to 13.5pc, with the aim of reducing future dependence on IMF loans. Pakistan has had 25 IMF programmes to date, making it one of the most frequent borrowers.
Instead of seeking new loans, Mr Aurangzeb expressed the hope to secure additional funding from the IMF’s climate resiliency fund during his Washington visit. He also highlighted the government’s economic stabilisation measures, noting that State Bank of Pakistan has cut its benchmark interest rate by 450 basis points over three consecutive meetings, reducing it to 17.5pc from 22pc. He hinted that the next SBP meeting, scheduled for Nov 4, might bring another rate cut.
He also attended a meeting with IMF’s Managing Director, alongside finance ministers, central bank governors, and regional financial institution leaders from the Middle East and North Africa. He emphasised the integration of social protection measures into IMF lending frameworks and called for more financing directed at climate resilience.
During these meetings, the finance minister advocated for increased debt relief mechanisms and concessional financing for vulnerable countries. He also backed the inclusion of challenges like climate risks, domestic public debt, and complex debt restructuring in the review of the Low-Income Countries Debt Sustainability Framework (LIC-DSF).
At a roundtable discussion with institutional investors organised by Jefferies International, Mr Auran­gzeb highlighted Pakistan’s favourable economic indicators, crediting the successful stand-by arrangement with the IMF. He outlined government’s reform priorities, focusing on raising the tax-to-GDP ratio, cutting losses in the energy sector, improving governance in State-Owned Enterprises (SOEs), accelerating privatisation, and controlling spending through federal government downsizing.
In another meeting, Mr Aurangzeb briefed US Assistant Secretary for the Treasury Brent Nieman on key reforms, expressing gratitude for US support in securing Pakistan’s IMF Extended Fund Facility.
At Washington’s Wilson Center, Mr Aurangzeb stressed the need to “fix our energy equation” and expand the tax net to include currently untaxed or undertaxed sectors. He warned, “We cannot get onto a sustainable growth path unless” these reforms are achieved. He also urged a shift in the economic model, stating: “The reason why we had so many boom and bust cycles… is that the DNA of our economy so far has been import-led and import-dependent. We have to change the DNA of the economy towards export-led growth.”
Published in Dawn, October 24th, 2024