Determinants of debt rescheduling in Pakistan

Abstract

Rescheduling of debt has been the subject of substantial academic research. Pakistan's debt has been rescheduled several times during the seventies, eighties, and late nineties. Using the data for the period 1972-2001, the study estimates a Probit model to assess the impact of financial and political indicators on likelihood of debt rescheduling in Pakistan. The change in financial ratios and political indicators affects the credit-worthiness and, consequently, the probability of default of a country. This study tests the hypotheses: which factors, financial or political, or both, are important determinants of debt rescheduling in the case of Pakistan. The results of the study, like the empirical studies for other regions, show that financial ratios, i.e., debt-servicing relative to exports of goods, ratio of debt-servicing to GNP, and foreign reserves to debt are significant and robust determinants of rescheduling in Pakistan, whereas the coefficient of the government intervention variable is not significant. The policy need emerging from the analysis is to keep the positive perceptions of creditor countries for debtor country's credit-worthiness. Debtor country must maintain its assets to maintain adequate international reserves to meet the debt-servicing obligations. However, expansion of industrial and agricultural output-to enable the debtor country to generate more revenue and exportable surplus-is also needed to increase the credit-worthiness of the country. Lastly, country-specific analysis is necessary for the creditor to examine the determinants of default.