Pakistan’s risk of default, measured by the 5-year credit default swap (CDS), on Tuesday spiked by 3.07 percentage points in a day and hit a 13-year high at 52.8%, suggesting foreign investors had lost their faith in the country.
The CDS hovered around 5% to 6% before the Covid-19 outbreak in Pakistan in February 2020. It hit the then peak of around 30% in middle of this year over the uncertainty revolving around the revival of the International Monetary Fund (IMF) loan programme.
Later on, the CDS slightly recovered amid the global lender resuming its $6.5 billion programme in late August 2022 and subsequently releasing a tranche of $1.2 billion.
However, these days it is again climbing suddenly, signalling that foreign investors saw that Pakistan would fail to repay the maturing debt.The country is due to return $1 billion to the foreign investors against the maturing of the 5-year Sukuk on December 5, 2022. The yield (rate of return) on the 5-year Third Pakistan International Sukuk remain high around 145% these days. It hovered below 10% before the Covid-19 pandemic.
The yield on the bonds maturing in 2024 and 2025 also stands high at 90% and 57.5%, respectively these days, compared with below 10% in the past. The foreign investors have panicked amid the country’s foreign exchange reserves depleting by around $9 billion in the past 10 months. They have dropped to a critically low level at around 1.10-month import cover at $7.6 billion at present compared with $20 billion (three-month import cover) in August 2021.
Finance Minister Ishaq Dar and his predecessor Mifth Ismail have taken all possible measures to avert the likely default.
