NationalVolume 13 Issue # 20

External debt: An exigent situation

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 terms 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 quarter report on the state of economy. With this addition, the total public debt reached $66.9 billion by the end of 2017.

Despite higher repayments, the increase in external debt was largely due to $2.5 billion mobilised through Eurobond/Sukuk issuance and borrowing from commercial banks during the period. In addition to this, strengthening of other currencies against the dollar resulted in $669.3 million worth of revaluation losses. Specifically, the dollar weakened against the euro and Special Drawing Rights (SDR) by 4.9% and 2.3%, respectively, which added significantly to the dollar value of Pakistan’s external debt.

A major hike came in the external debt contracted by issuing sovereign bonds and taking expensive commercial loans. 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.

According to sources in the finance ministry, the immediate problem is that Pakistan is scheduled to make some bullet debt and interest payments in the last quarter (April-June) of the current fiscal year, according to sources in the finance ministry. It is an alarming situation and the government does not have a concrete back-up plan to handle its external account.There are apprehensions that the country may not survive financially for long without the IMF support. But, according to knowledgable sources, the finance ministry has not yet prepared a plan to share with the IMF in case it needs emergency support.

The International Monetary Fund (IMF)’s first post-programme monitoring report shows Pakistan’s gross external debt in terms of exports was 193.2% in 2013, which is projected to deteriorate to an alarming 316% in June this year. During this period, Pakistan’s gross external financing requirements have swelled from $17.2 billion to $24 billion. The IMF report noted that the bound and stress tests suggest that the external debt-to-GDP ratio would be affected by adverse shocks: “While sensitive mostly to current account and exchange rate shocks, the external debt ratio would exceed 45% only under the real depreciation shock scenario.”

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.

There are unconfirmed reports that top bureaucracy of the finance ministry may be reshuffled very soon. If such changes take place, the new transitional team will be faced with the uphill task of bringing back to health the financial sector which is totally out of kilter.