NationalVOLUME 15 ISSUE # 10

Pakistan’s balance of payments crisis

Pakistan’s debt and liabilities have surged by Rs11 trillion and reached Rs40 trillion in the first year of the Pakistan Tehreek-i-Insaf (PTI) government. Pakistan’s external debt is expected climb to $103b by June 2019, and gross external financing needs would reach a record $27 billion for the next fiscal year.

To compound the situation, the Asian Development Bank (ADB) has warned the balance of payments crisis is imminent in Pakistan, if its economy grows more than 3.8% annually without fixing existing structural economic imbalances. According to a research paper, Pakistan will have to fix its exports and reduce dependency on imports to avoid the next balance of payments crisis. “In the current structural and product specialisation circumstances, if Pakistan’s economy is to grow faster than 3.8% in the medium-term, external imbalances will occur,” the report warned.

The ADB paper noted that since end-2017, the government has implemented a number of economic reforms to address the BOP crisis, including regulatory measures, reduced imports, increased interest rates, and depreciation of the exchange rate to the US dollar by almost 33%. In spite of significant currency depreciation, merchandise exports declined by 2.2%, between fiscal year 2017-18 and fiscal year 2018-19. On average, over the last decade, Pakistan has lost global market share by 1.45% per annum, with foreign exchange reserves further declining from $9.8 billion at the end of FY2018 to $7.3 billion at the end of FY2019, only enough to finance about 1.4 months of imports. “Improving Pakistan’s export performance remains the most relevant long-term structural challenge to alleviate the balance-of-payments constraint to sustained economic growth,” according to the ADB paper.

According to the International Monetary Fund (IMF), Pakistan’s external debt and liabilities would go up by $20.5 billion in the next three years under its program. It projected that Pakistan’s external debt and liabilities would go up from $104.165 billion by the end of fiscal year 2018-19 to $124.688 billion in financial year 2021-22. It projected that total public and guaranteed debt would surge by Rs11,000 billion from Rs30,000 billion in 2018-19 to Rs41,799 billion in 2021-22.

It is for the first time that Pakistan has borrowed a whopping $16 billion in foreign loans in just one year. According to the government, it aimed at avoiding default on international debt obligations and financing its imports. The $16 billion worth of foreign loans have been obtained during fiscal year 2018-19, which included 11 months of the PTI government, according to official documents. Out of the $16 billion, the PTI government took $13.6 billion loans – the highest ever by a government in a single year. The remaining $2.4 billion had been received in July 2018, during the tenure of the caretaker setup. The massive borrowing in the last fiscal year included $5.5 billion by Saudi Arabia, the United Arab Emirates and Qatar. In the preceding fiscal year 2017-18, Pakistan had obtained $11.4 billion in foreign loans. Loans of $16 billion in FY19 were the highest ever external borrowing in any fiscal year since Pakistan’s creation. About 42pc or $6.7 billion of the total external borrowing came from China alone. It included $2.54 billion in commercial loans, $1.6 billion under the China-Pakistan Economic Corridor (CPEC), $2 billion in China State Administration of Foreign Exchange (SAFE) deposit and $628.4 million for Karachi nuclear power plants. In fiscal year 2017-18, China had given $4.5 billion to Pakistan.

This is the third time in Pakistan’s history that a government has taken over $10 billion in fresh foreign loans in a single year. The $16 billion in loans were 71pc or $6.7 billion higher than the government’s own estimates. The government had to heavily rely on foreign loans due to a steep decline in foreign direct investment, negative growth in exports, higher import bills and repayment of maturing debt. The government’s decision to depreciate the rupee by over 26pc against the US dollar adversely impacted the country’s ability to repay debt.

Like the Pakistan Muslim League-Nawaz (PML-N), the PTI government also relied on short-term foreign commercial loans. Against the budgetary estimate of $2 billion, the PTI government took $4.1 billion in foreign commercial loans. The PML-N had added Rs15 trillion to public debt and liabilities in five years, while the PTI increased total debt and liabilities by Rs11 trillion in one year. More than 80pc loan was piled up by the PTI in one year in comparison with five years of the PML-N.

On the other hand, the government has retired record foreign loans worth $9.5 billion in the last fiscal year, which is also unprecedented in Pakistan’s history. External debt has increased by $2.7 billion in the PTI government, whereas in the last year of the PML-N government, foreign loans had surged by over $7 billion.

Pakistan’s total debt and liabilities have risen from Rs6,100 billion to Rs31,000 billion in the last 10 years, when Pakistan was ruled by the Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N). However, the IMF believes Pakistan’s debt is still in the limit of sustainability. “Public debt will only be sustainable with full implementation of the adjustment programme. “Under the Extended Fund Facility (EFF), a strong fiscal consolidation of 4.5pc of GDP in primary balance over four years and a recovery in growth supported by structural reforms will help public debt decrease to around 67 percent of GDP by FY-2024,” it noted. The IMF forecast the external debt-to-GDP rate to steadily decline after peaking in FY-2021 due to smaller current account deficits, capital inflows, and flexible market-determined exchange rates. Pakistan’s underlying gross external financing needs can be lower by 1.3 percentage points of GDP on average every year during the IMF programme and beyond.

It is a fact that past governments failed to make structural changes and improve governance and consequences of all their blunders, mismanagement and inaction lie on the table of Prime Minister Imran Khan and he has no option of failure. The situation is not easy to handle. The government is finding it difficult even to foot debt servicing and necessary expenditure and funds for public welfare look impossible at the moment. However, people can expect relief after two years when public debt will start decreasing and the government would have funds for public welfare.