NationalVOLUME 14 ISSUE # 20

Debt: Chickens come home to roost

After years of reckless borrowing, the time has come to repay them. According to latest reports, the Finance Ministry estimates external public debt repayments at a staggering $31 billion in the next seven years.


The $31-billion public external debt repayments from July 2019 to June 2026 have been worked out on the basis of $74 billion external public debt calculated as of end-February 2019. However, the debt that Pakistan will contract in the next eight years, including those from the International Monetary Fund and other multilateral donors is not part of the estimates made by the Finance Ministry. Interestingly, the IMF’s previous loans are also not part of these repayments, which appear on the balance sheet of the State Bank of Pakistan.


On the debt front, it is a continually deteriorating situation. The projection is that in the near future, the total public debt as percentage of gross domestic product will increase further.

Available data shows that as of March 2019, Pakistan’s public debt stood at Rs28.6 trillion, which was equal to 74.5% of the GDP. But the government hopes that with gradual improvement in the macroeconomic situation, the ratio would decline to around 65% after five years.


It is relevant to note here that even the 65% debt-to-GDP ratio will be higher than the statutory limit of 60% set by parliament in the Fiscal Responsibility and Debt Limitation Act. The last two governments brazenly breached the limit, while the incumbent PTI

government has also not been able to control the situation.


In a bid to rescue the economy, Imran Khan has changed his team. In its recent meeting, the standing committee on finance, which monitors the working of the Finance Ministry, directed the government to explain the reasons for appointing Dr Reza Baqir as the SBP governor and Shabbar Zaidi as the Federal Board of Revenue (FBR) chairman in the next meeting. The committee members did not endorse the DG Debt estimates of reduction in the debt burden in terms of the size of the national economy. They also showed their frustration with the Finance Ministry’s decision not to share the projections of external debt repayments over the next 10 years with the parliament.


Due to talks with the IMF, the external debt repayments for the next 10 years could not be finalised.  As such, nothing is known about the future debt trajectory of the country. Many parliamentarians express doubts that the PML-N government had left behind Rs30 trillion in debt as of end-June 2018. They also say that Prime Minister Imran Khan quotes inaccurate figures about public debt in his speeches.


Political polemics apart, an internal assessment of the Finance Ministry showed that the government would repay $31.1 billion of external public debt in the next seven years. This includes $25.6 billion in principal loan repayments and $5.5 billion in interest payment on previous debt. The maximum amount of $10 billion or nearly one-third would be returned to multilateral lenders, excluding the IMF. Out of this, the World Bank-related obligations are $4.8 billion and the Asian Development Bank will be returned $4.5 billion.


The government has adopted a multi-pronged debt repayment strategy. Pakistan will repay $6.5 billion worth of loans contracted by floating sovereign bonds over the next seven years, including $2 billion in interest on these bonds. The bonds-related debt obligations are equal to 21% of the total external public debt repayments. Official sources say that Pakistan will soon launch a bond programme and its future borrowings would largely comprise those bonds. The government’s aim is now to rely more on long-term debt instruments instead of heavily borrowing from foreign commercial banks.


From 2019 to 2026, Pakistan will also repay $5.4 billion worth of foreign commercial loans, largely taken from China. Out of the $5.4 billion, an amount of $4.5 billion will be returned to three Chinese commercial banks. Pakistan will return $5.9 billion to members of the Paris Club in the next eight years. The maximum loan of $2.5 billion will be repaid to Japan, followed by $1.2-billion repayment to France. The country will also return nearly $3 billion to non-Paris Club members, mainly China, in the next seven years. Owing to the low non-debt creating inflows, there is a strong likelihood that a majority of these loans will be repaid by contracting new loans.


Due to its growing debt burden, Pakistan is now in the category of debt-distress nations. Not a good sign. But it is projected that the pace of accumulation of public debt will slow down under the IMF programme. At the same time, the high interest rate is likely to end soon and there would be tight fiscal adjustments in coming years, which would help contain the public debt.


An important condition of the IMF programme is a steep cut in expenditures, while taxes will also be raised substantially. Needless to say, tough times are ahead. There are high refinancing risks attached with the public debt which could lead to a financial crunch. Pakistan will have to play its hands carefully to avoid a default, while steering the economy to safe shores.