FeaturedNationalVOLUME 16 ISSUE # 03

Pakistan’s ballooning debt

Pakistan’s total public debt skyrocketed to Rs36.3 trillion or $216 billion by June 30, 2020, from Rs24.95 trillion in June 2018 and Rs18.2 trillion in June 2013. Prime Minister Imran Khan’s government has added Rs11.3 trillion to national debt in just two years, which is already more than the borrowing by the past two governments in their five-year terms.

Pakistan’s debt has increased by Rs11.3 trillion over the last two years and the government plans to seek another $15 billion or Rs2.52 trillion foreign loans during the ongoing fiscal year to service maturing external public debt and build foreign exchange reserves. The public debt stands at 87pc of Gross Domestic Production (GDP) against 72.5pc of GDP at the end the Pakistan Muslim League-Nawaz (PML-N) government’s tenure in May 2018. The high debt-to-GDP ratio raises serious questions about the performance of the government of Prime Minister Imran Khan, who used to savage the previous governments for overburdening the people of Pakistan with foreign loans. He believed galloping loans indicated the rulers were corrupt. It is ironic that the debt situation has worsened in his government.

The government’s unprecedented borrowing spree may break all previous records. Pakistan obtained $1.8 billion in gross foreign loans in July 2020, to repay $1 billion to Saudi Arabia, which was 263pc higher than the same month of the previous year. In July 2019, Pakistan had received $495 million worth of foreign loans. Excluding $1 billion in Chinese loan, the $800 million disbursements were equal to 7pc of the annual budget estimate of $12.2 billion for the entire fiscal year 2020-21, according to the Economic Affairs Ministry. “In the first month of fiscal year 2020-21, the government has received $800 million external inflows from multiple financing sources,” the ministry reported. It was besides $1 billion in Chinese loan that Pakistan obtained in August to return the Saudi loan.

According to the ministry, Pakistan had to borrow $800 million from international lenders in July after the national economy was affected by the pandemic. “In the aftermath of the pandemic and its persistence in the country, the disbursements of project financing from development partners dried up during the last quarter of the outgoing fiscal year 2019-20. The pandemic has closed most of the economic activities across the country including development project activities. However, after an ease in the lockdown by the government, the economic activity is reviving, which might jack up project financing in the fiscal year 2020-21,” it explained.

A break-down of data compiled by the Finance Ministry shows that Pakistan’s total public debt has increased to Rs36.3 trillion by the end of June 2020, with Rs23.2 trillion domestic debt and Rs13.1 trillion external debt. The debt is increasing continuously, according to the data. The public debt was Rs6.1 trillion in 2007-08, Rs14.3 trillion in 2012-13, Rs25 trillion in 2017-18 and surged to Rs36.3 trillion in 2019-20. The public debt had increased by Rs8.2 trillion in the PPP tenure from 2009 to 2013 and Rs10.7 trillion in the PML-N term from 2013 to 2018. However, it went up by Rs11.3 trillion in the first two years of the PTI government.

According to Fitch Ratings, which recently affirmed Pakistan’s long-term foreign credit rating at ‘B-’ with a stable outlook, the situation in Pakistan after the pandemic may increase the debt-to-GDP ratio to 90pc in FY21. “Foreign holdings (in T-bills/PIBs) have stabilised since then (CVOID-19), and reserves have been restored through multilateral and bilateral disbursements. The central bank’s net forward position has increased somewhat in the past months and net reserves remain negative, even though they have narrowed,” it said. Pakistan’s current account deficit narrowed to 1.1pc of GDP in FY20, from a peak of 6.1pc in FY18, due mainly to import compression and lower oil prices. Fitch forecast a slight widening of the current account deficit to 1.7pc in FY21 due to a modest recovery in imports and declining remittances. External financing requirements have declined, in line with the narrowing of the current account deficit. However, the government’s external debt repayments remain high at about $10.3 billion (about 80pc of current gross liquid reserves) in FY21 and $8.9 billion in FY22, it noted.

The Standard & Poor’s (S&P) rating agency said the pandemic had exacerbated Pakistan’s economic downturn but forecast the real GDP to recover to 1.3pc during the current fiscal year. “We expect the sovereign’s credit metrics to remain under pressure for the next two to three years,” it observed. It said it could lower its ratings if Pakistan’s fiscal, economic, or external indicators deteriorate further, such that the government’s external debt repayments come under pressure. Indications of this would include external or fiscal imbalances higher than expected. Conversely, it may raise ratings on Pakistan if the economy materially outperforms expectations, strengthening the country’s fiscal and external positions more quickly than forecast.

Earlier, Moody’s Investors Service reaffirmed Pakistan’s stable outlook, meaning it is capable of paying back its foreign debt, after placing the country under review for downgrade amid the coronavirus pandemic in May this year. “The government’s commitment to its current International Monetary Fund (IMF) Extended Fund Facility (EFF) continues to unlock a large financial envelope that Moody’s expects will cover its external financing needs over the next 12-18 months, and provides an anchor for ongoing fiscal reforms,” the agency said.

Contrary to the ground reality, the government claims public debt management indicators have improved significantly during its second year. It accepts it has received record loans but says it repaid $9.5b last year, which has never happened in the past. However, it is a fact that the government is receiving loans to repay loans. It will have to break the vicious cycle by increasing exports and generating more revenue.