NationalVOLUME 14 ISSUE # 24

No relief in sight from debt burden

Contrary to earlier projections, Pakistan’s debt burden is set to rise further in the years ahead. According to the staff level report of the International Monetary Fund (IMF), Pakistan’s external debt will peak to $130 billion within four years – a net addition of $34.6 billion or 36.3pc under the Pakistan Tehreek-i-Insaf (PTI) government.


The total external debt burden was $95.4-billion when the Pakistan Muslim League-Nawaz (PML-N) government completed its term. The IMF has now projected that the external debt may rise to $130 billion by the end of fiscal year 2022-23. This means that there will be a minimum net addition of $34.6 billion to the external debt despite repayment of $48 billion in five years during the tenure of the PTI government. In other words, the PTI government will borrow a staggering $83 billion in five years to service the old debt, finance the current account deficit and build foreign exchange reserves. It may be recalled that PM Imran Khan has severely criticised the growth in the public debt during the PML-N and PPP tenures and has now set up a commission to investigate the borrowings. But now he has resorted to the same practice.

An analysis of available figures shows that Pakistan would pay back $37.4 billion during the IMF’s 39-month programme period (July 2019 to September 2022). According to a statement issued by the Federal Revenue Minister two weeks ago, the PTI government has already returned $9.5 billion worth of external debt in the last fiscal year 2018-19. It needs to be pointed out that IMF debt projections are based on the assumption that Pakistan will fully implement structural reforms under its programme. But in case Pakistan could not fully implement the reforms, the external debt as a percentage of the national GDP could hit 60% — double the ratio left behind by the PML-N government.


As per the latest calculations, the external debt, which was $95.4 billion or 30.3% of GDP in fiscal year 2017-18, touched $104.2 billion or 36.7% of GDP last fiscal year. The $104.2-billion external debt was equal to 345% of Pakistan’s total export receipts. The projection for the current fiscal year is that the external debt will peak at $112.5 billion, which would be equal to 43.4% of GDP. In terms of export receipts, the external debt is projected at 346%. In this fiscal year, the PTI government will also return $14.9 billion in public external debt, which means it would borrow $23 billion during the year. In the next fiscal year 2020-21, the external public debt is projected to grow to $119 billion, which will be equal to 43.5% of GDP and 334% of the country’s total export receipts. In the fiscal year, Pakistan will also return $13.5 billion of public external debt. This will increase the annual external borrowings to $20 billion.


In a recent statement, the IMF said that under its 39-month programme, “external debt is projected to steadily decline after peaking in fiscal year 2020-21, returning to a more sustainable path”. For fiscal year 2021-22, the IMF has projected the external debt at $124.6 billion, which will be equal to 42.2% of GDP and 325% of exports. The external public debt repayment in this year has been estimated at $7.6 billion, which brings the borrowing requirement down to $13.2 billion. The downturn in external debt will result from a combination of positive factors, including a narrower current account deficit, non-debt creating capital inflows and a recovery in economic growth.


An underlying assumption is that Pakistan would shift its short-term borrowings to long-term debt instruments by 2021-22. This may or may not come about, depending on the circumstances as they unfold. At the same time, there are some downside risks to the projected debt path which cannot be ignored. The external debt-to-GDP ratio would be adversely affected by current account and exchange rate shocks in which case the external debt ratio would reach around 60%. Clearly, Pakistan is faced with serious debt management issues which need careful handling in a treacherous international financial situation.


The Finance Ministry has a Debt Management Department which must get its act together to tackle the looming debt storm. Pakistan has borrowed recklessly for decades, a policy which has brought it close to bankruptcy. This must change and a more prudently devised pick-and-choose policy should be adopted. In the future, more reliance should be placed on attracting foreign direct investment (FDI). For the purpose, more investor-friendly policies should be framed with an attractive package of incentives for foreign businesspeople. Equally important is the need to push exports to build foreign exchange reserves which is the only way to get out of the external debt trap. In cases where borrowing is inevitable, care should be taken to ensure that the terms are soft and the payback period is of longer duration.