The Pakistan Tehreek-e-Insaf (PTI) government of Prime Minister Imran Khan is trying to run the affairs of the country through borrowing. He used to criticize the Pakistan Muslim League-Nawaz (PML-N) government for piling up debt on the country and promised to make the country self-sufficient after coming to power. However, his government too relied on expensive foreign commercial loans to meet its expenditure.
Prime Minister Imran Khan’s recent admission that his government could not understand the affairs of the country for many months after coming to power has further eroded the confidence of the people in his ability to perform. They believe a government, which cannot understand and solve public problems in almost half of its tenure, would not be able to perform in its remaining time either. In fact, people’s problems have compounded in his rule because of bad governance. Prices of essentials, basic amenities, electricity and gas have almost doubled and unemployment is on its peak.
The government claims to have taken some harsh decisions, which have put the economy on the right path. People are facing the hardest times of their lives in the PTI government after the decisions. The rupee has lost its value by one-third, electricity and gas prices have almost doubled and economic activity has slowed down as a result of policies of the government. To compound the situation, the government has resorted to record borrowing to meet its expenses, instead of raising revenue to make the country self-reliant, which was part of the PTI manifesto. Pakistan’s debt and liabilities have been on the rise over the past few years. It also signed an accord with the International Monetary Fund (IMF) for a three-year $6 billion bailout package aimed at shoring up fragile public finances and strengthening a slowing economy.
Pakistan’s growing requirement for dollars also compelled it to obtain expensive foreign commercial loans. In November alone, it borrowed $1.1b from commercial lenders, pushing up the total debt flows in the first five months of the current financial year to $4.5b. Pakistan’s foreign loan inflows have jumped by almost 45pc to about $4.5 billion in first five months (July-November) of the current fiscal year as compared to the corresponding period in the last fiscal year. According to the Ministry of Economic Affairs, the country has received a total of about $23.6b in foreign loans during the PTI government since July 1, 2018. The government obtained $4.499b external inflows from multiple financing sources during July-November of fiscal year 2020-21. It amounted to 37pc of the annual budget estimates of $12.233b for the entire FY2020-21. In the corresponding period of fiscal year 2019-20, the external inflows stood at $3.108b, which was around 24pc of the annual budgeted amount of $12.958b.
According to a breakdown given by the ministry, of $4.499b foreign loans, about $1.3b, or 29pc, pertained to programme loans and budgetary support, mostly from multilateral lenders, to help restructure Pakistan’s economy. About $1.621b, or 36pc, was foreign commercial borrowing to repay maturing foreign commercial loans. Over $518 million, or 12pc, was received as project financing for development activities, presumably for improving the socio-economic development of the country and asset creation. Another $60m, or 1pc, was short-term credit while $1b, or 22pc, was received in terms of time safe deposits during the current fiscal year.
Pakistan received $1.878b in foreign economic assistance from bilateral and multilateral development partners during July-November against the budgetary allocation of $5.811b for fiscal year 2020-21 on concessional terms with longer maturity. The Asian Development Bank provided $712m and the World Bank $694m against the budgetary allocation of $2.257b. France, the US and China provided $33.4m, $63.8m and $21.8m, respectively.
Total servicing of external public debt was $2.45b during July-October-2020, against the annual repayment estimates of $10.363b for the entire fiscal year. Of it, $2.035b (83pc of total external public debt servicing) was repaid as principal and $415m (18pc) as interest on the outstanding stock of external public debt. The government repaid $1.295b foreign commercial loans, $695m multilateral and $102m bilateral development loans during July-October. The ministry said since the outbreak of Covid-19, the disbursements for project financing from development partners have slowed down and the pandemic has resulted in most economic activities, including work on development projects, coming to a halt. However, after easing of pandemic-related restrictions by the government economic activity is reviving, which may lead to an increase in project financing in the current fiscal year, it hoped.
Pakistan’s mounting external debt suggests the country has been caught in a debt trap as it has to borrow loans to repay its old debt. Since July 1, 2018, when the PTI government came to power, it has overburdened the nation with $23.6b in foreign debt. The external debt jumped by $10.7b in the last financial year and $8.4b in 2018-19, with debt servicing accounting for the largest budget expense. On the other hand, the government paid back $2.45b in the first four months of the current fiscal year against repayment estimates of $10.4b for the whole year despite debt payment relief by bilateral lenders in view of Covid-19.
The situation shows the government will have to borrow to repay its old loans and debt would continue to pile up. It is a dangerous situation, which cannot be left unattended for long. The government will have to increase revenue and decrease its expenses to break the vicious cycle.