The rising dependency of the Pakistani government on both internal and external borrowings poses major doubts about its seriousness in ensuring financial independence. Even though the prime minister and other high ranking officials have been promising over and over again that the IMF program would be the last, the latest borrowing statistics imply that the dream of financial independence is still out of reach.
For Pakistan to stop switching from one source of financing to another, and having to allocate an ever-increasing share of its income on servicing its debt, the problem of structural weaknesses, which cause these fiscal and external deficits, needs to be solved. According to the statistics published by the Economic Affairs Division, in the first quarter of the present fiscal year (from July to September) Pakistan borrowed $5.445 billion, as opposed to $1.815 billion in the same quarter of the last year.
Out of this amount, multilateral sources supplied $952.2 million and the bilateral sources contributed $58.1 million. This type of financing is usually available on relatively favorable terms, especially in case they are from development institutions that make concessional loans. The rest of the money, however, involved large borrowing from international capital markets and other relatively costly sources.
The country made a two tranche issue of Eurobond that helped Pakistan to obtain about $3 billion. It borrowed $1.75 billion through bonds that offered annual interest rate of 7.5pc with a tenure of five and a half years. The second transaction of $1.25 billion was made through ten-year bonds with annual interest rate of 7.9pc. This helped Pakistan get immediate foreign exchange, but this money will have to be paid back in the future. At this point, Pakistan is still suffering from poor exports and trade deficits.
The implications are not limited to the interest payments alone. Pakistan will have to ultimately find the foreign exchange to pay off the debt. Failure of export earnings to improve enough could lead the government into pressure on its reserves again and force it to borrow more to service its debt obligations. It will only lead to a vicious circle of borrowing to pay off debts, and not investing in productive areas.
Depreciation of the Pakistani rupee was estimated to be about three per cent during the last year, less than the average historical annual depreciation of about four to five per cent. While exchange rate stability helps in controlling inflation from imports and gives more certainty to the business environment, rigidity in the exchange rate can also pose problems to the economy. The key task here is to make sure that the exchange rate management helps the exports and does not hinder their competitiveness. What Pakistan needs is an effective foreign exchange strategy in tune with its economic reality along with efforts aimed at improving efficiency, lowering production cost, and diversification of exports. Otherwise, stability of the currency will not provide Pakistan with a balanced external account.
The rising trade deficit in the first quarter of the current fiscal year is another sign. With the rise in economic activities and import needs, the country requires more foreign exchange. If the level of exports does not grow as much, balance of payments gets strained again and creates the familiar pattern of boom and bust cycle. Such a pattern has been observed in Pakistan many times before – the period of stability is followed by the growth of imports, depletion of foreign reserves, resorting to urgent borrowing and economic restrains.
Pakistan’s frequent use of IMF programs is an indication of the severity of its structural problems. The country has made about 25 IMF arrangements over time, showing how often its economic policymakers have not succeeded in avoiding another balance of payments problem. Ever since 2019, each program has involved making tough up-front commitments and imposing policy conditions on the country. In addition, the government has had to deal with rolling over around $10 billion that has been placed with the State Bank of Pakistan by three friendly countries.
The government has been converting some short-term debts into long-term debts to ease the pressure of repayment. While such a process will help in improving cash flow management, and avoiding problems with refinancing at short notice, it can also lead to increased interest costs being incurred over the lifetime of the debt.
High interest rates in the domestic economy exacerbate the issue even further. Given that the policy rate is fixed at 11.5 pc, interest charges still amount to quite a bit when compared to those in many regional economies. Interest payments during the current fiscal year have been estimated at about 43 pc of total spending and 46 pc of current spending. This underscores the fiscal space taken up by previous years’ commitments.
The government therefore needs to revise its fiscal strategy. A big budget deficit, projected to be in the region of Rs7 trillion for the current fiscal year, translates into further borrowing and higher debt-servicing costs. Decreasing this deficit involves much more than reducing developmental expenditure and raising taxes on compliant citizens. It requires more revenue generation, improved targeting of public spending, effective governance, and eliminating wasteful expenditure.
Pakistan cannot finance its way to independence financially. It needs to promote its exports, make productive investments, collect taxes effectively, lower energy costs, and ensure that public borrowing adds to economic growth. Fiscal prudence must come with measures that increase income in the country and provide jobs rather than making people economically worse off. Pakistan’s claim of breaking free from a series of fund programs will never materialize unless it tackles the causes of such programs becoming inevitable for the country. The true test will not be how much the government will borrow and what stability it brings through borrowing but how well it pays its bills through its economic growth.