Pandemic exacerbates debt vulnerabilities of Pakistan: IMF

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-Says Pakistan’s banks could reach level of public sector exposure similar to Lebanon’s

By Asghar Ali Mubarak

ISLAMABAD: The International Monetary Fund (IMF) has said that the Covid-19 pandemic has exacerbated existing debt vulnerabilities of Pakistan and led to a surge in its financing needs.
According to the IMF, across the Middle East, North Africa, Afghanistan and Pakistan (MENAP), countries responded to the Covid-19 pandemic with unprecedented scale and urgency. While this strong response helped save lives and cushion the economic blow, it also exacerbated existing debt vulnerabilities and led to a surge in financing needs.
According to the IMF, many countries were already facing high debt. With limited access to external financing, governments and large state-owned enterprises turned to domestic banks. This expanded banks’ exposure to the public sector in several of MENAP’s emerging markets, ranging from over 20% of total banks’ assets in Iraq, Jordan, and Qatar, to above 45 per cent in Algeria, Egypt, and Pakistan, and up to 60 per cent in Lebanon.
Banks’ excess liquidity in some countries and an underdeveloped institutional investor base in others, together with the lack of a more vibrant private sector, have created incentives for banks to hold government bonds until maturity, hindering domestic debt market liquidity and development.