InternationalVolume 13 Issue # 21

Deeper into the debt trap

As per figures released by the State Bank, Pakistan’s external debt and liabilities have soared to a record $91.8 billion, showing an increase of over 50% or nearly $31 billion in the past four years and nine months. The external debt and liabilities of $91.8 billion as of March-end suggest that the figure may touch $100 billion very soon as the country faces grave challenges in meeting its growing external financing requirements. The overall public debt including domestic, external and liabilities in rupee term have touched Rs28,297 billion till March 31, 2018 indicating that each individual living in the country owed Rs136,700, keeping in view the total population of 207 million according to the latest census results.

The $91.8-billion external debt and liabilities are higher by $30.9 billion or 50.6% compared to the level recorded in June 2013 when the PML-N government came to power. Of the total external debt and liabilities, the government’s public debt obligations including foreign exchange liabilities were $76.1 billion at the end of March. In the past four years and nine months, the public debt-related obligations increased 42.5% or $22.7 billion, showed the central bank data. In June 2013, the external public debt including foreign exchange liabilities stood at only $53.4 billion.

The pace of foreign loan accumulation grew in 2017 as Pakistan acquired $6.9 billion during the year in a bid to finance swelling imports and repay external debt following failure to bridge the fiscal deficit due to low exports and insignificant increase in worker remittances. The $6.9-billion borrowing is the single largest annual accumulation of external debt in the past four years, according to the State Bank of Pakistan’s second quarterly report on the state of the economy. Since June 2013, the PML-N government has acquired a whopping $42.6 billion in external loans, which is taking its toll on the national exchequer due to the mounting debt servicing cost. Starting from July 2013, with every passing year, the quantum of external debt has kept growing due to the government’s inability to implement policies that could have ensured sufficient non-debt creating inflows.

Pakistan’s gross official foreign currency reserves as of May 4 stood at only $11.16 billion. The government took no time in consuming the entire $1 billion Chinese loan received on the second last day of the previous month. The gross official foreign currency reserves of $11.16 billion include loans of $6.13 billion the central bank has acquired from domestic banks to shore up its reserves. By excluding these short-term borrowings, the reserves are almost at the level recorded in June 2013.

Owing to the huge domestic and foreign borrowings, debt servicing is now the single largest expenditure in the federal budget, estimated at Rs1.62 trillion or 30.7% for the next fiscal year 2018-19. According to the SBP, a sum of $5 billion was spent on servicing the outstanding stock of external debt in just nine months of the ongoing fiscal year. The country paid $3.52 billion in principal loans and $1.44 billion in interest on outstanding loans. In its Debt Policy Statement 2017-18, which the finance ministry presented to the lower house of parliament early this year, the government admitted that during the last fiscal year the country’s external debt increased at a faster pace than its foreign exchange earnings. Pakistan’s external debt as a percentage of foreign exchange reserves increased to a three-year high. Similarly, the cost of external debt servicing as a percentage of foreign exchange earnings increased significantly.

Pakistan is currently not on an International Monetary Fund programme and therefore it is highly unlikely that multilaterals would extend programme loans/budget support at lower rates than available on the market. This would imply that the the caretaker government may be compelled to borrow from foreign commercial banks – a source that was unwisely increasingly tapped by the PML-N government, at rates that are close to 12 percent with an extremely short amortization period that may further compromise the flexibility to undertake policy reforms by the next elected government.

It may be added here that 2.5 billion dollars repayment on external debt is due next month. Foreign exchange reserves on 11 May, 2018, were estimated at 10.79 billion dollars as per the SBP website which would decline to 8.9 billion dollars once the 2.5 billion dollar payment is cleared and barring higher exports relative to imports (again highly likely) Pakistan would have reserves to meet less than two months of imports. Would these reserves be sufficient to provide a buffer against shocks to the economy? The IMF undertook a survey recently in which it argued that traditional “rules of thumb” that has been used to guide reserve adequacy suggest that countries should hold reserves covering 100 percent of short-term debt or the equivalent of three months worth of imports. It also said that there is a need to use “risk-weighted metric capital stock used to assess bank needs covering potential vulnerabilities from falling export income, sudden stop in short-term debt inflows, outflows from other debt and equity liabilities”.

To improve the foreign reserve position, the government recently mulled over a 28 billion rupee export package as a means to strengthen exports but it must be borne in mind that the 180 billion rupee export package announced in January 2017 failed to raise exports, while imports continued to grow widening the trade gap.

The SBP’s figures also reveal that the government borrowed two trillion rupees during the first 10 months of the current fiscal year raising the total domestic debt to 16 trillion rupees – already higher than 15.4 trillion rupees estimated in the Economic Survey 2017-18. This would further constrain the next government if it opts to go back on an IMF programme as its standard conditionality is to bring borrowing from the SBP to zero. All in all, it is imperative that the next government consult all the major mainstream parties and form a consensus on how to deal with the debt pile left behind by the PML-N government and how much, if any, to borrow to balance the books by end June 2018.