Pakistan will 'absolutely not' default on debts despite floods

Pakistan will "absolutely not" default on debt obligations despite catastrophic floods, the finance minister said on Sunday, signalling there would be no major deviation from reforms designed to stabilise a struggling economy.

Floods have affected 33 million Pakistanis, inflicted billions of dollars in damage, and killed over 1,500 people - creating concern that Pakistan will not meet debts.

"The path to stability was narrow, given the challenging environment, and it has become narrower still," Finance Minister Miftah Ismail told Reuters at his office.

"But if we continue to take prudent decisions - and we will - then we're not going to default. Absolutely not."

Pakistan was able to bring an International Monetary Fund (IMF) programme back on track after months of delay, thanks to tough policy decisions. But the positive sentiment was short- lived before the catastrophic rainfall hit.

Despite the disaster, Ismail said that most stabilisation policies and targets were still on track, including increasing dwindling foreign exchange reserves.

Central bank reserves stand at $8.6 billion, despite the influx of $1.12 billion in IMF funding in late August, which are only enough for about a month of imports. The end-year target was to increase the buffer up to 2.2 months.

He said Pakistan will still be able to increase reserves by up to $4 billion, even if the floods hurt the current account balance by $4 billion in more imports, such as cotton, and a negative impact on exports.

However, he estimated the current account deficit will not increase by more than $2 billion following the floods.

"Yes, there has been substantial loss to the very poorest people and their lives will never be made whole again. But in terms of servicing our external and local debt, and being micro- macro-economically stable, those things are under control."

DECEMBER PAYMENT TO BE MET

He said global markets were "jittery" about Pakistan, given the economy had suffered at least $18 billion in losses after the floods, which could go as high as $30 billion.

"Yes, our credit default risk has gone up, our bond prices have fallen. But...I think within 15 to 20 days, the market will normalise, and I think will understand that Pakistan is committed to being prudent."

Pakistan's next big payment — $1 billion in international bonds — is due in December, and Ismail said that payment would "absolutely" be met.

The IMF said on Sunday that it will work with the international community to support Pakistan’s relief and reconstruction efforts and the endeavour to ensure sustainability and stability.

He said a legal instrument was going to be signed soon with a "friendly country" to activate a $1 billion deferred payment facility for oil. — Reuters