FeaturedNationalVOLUME 19 ISSUE # 19

Pakistan’s debt: A complex web of challenges

Pakistan’s foreign debt situation presents a complex web of challenges, influenced by various factors including trade imbalances, debt service requirements, and negotiations with key stakeholders. Despite efforts to manage its debt obligations, Pakistan faces hurdles in balancing its financial commitments while addressing domestic economic needs.

Pakistan’s foreign debt obligations may seem manageable at first glance. By mid-2023, the State Bank of Pakistan estimated them at $124.5 billion, which accounts for 42 percent of the GDP, a figure considered relatively modest on the global scale. However, despite this seemingly low burden, Pakistan faces challenges in balancing its trade. Its annual foreign exchange earnings from exports fall short of covering its import expenses. In the fiscal year 2022–23, Pakistan incurred a current account deficit of US$30.5 billion, excluding remittances. Nearly 90 percent of this deficit was offset by remittances from Pakistani expatriates, with the remainder primarily covered by new foreign borrowing.

The prospects for increased export earnings in 2024 are dimmed by domestic issues. For instance, the textile industry, which constitutes a significant portion of Pakistan’s exports, faced setbacks in 2023 due to factory closures caused by soaring electricity prices, hindering their ability to produce for export. While the Federal Investigation Agency’s crackdown on illegal foreign exchange dealers in 2023 stabilized the official rupee–US dollar exchange rate, it also discouraged Pakistani expatriates from repatriating their earnings through formal channels. With little hope for export earnings to rise, Pakistan’s government will soon be confronted with the urgent task of rescheduling foreign debt payments after the February 2024 elections. Negotiations with various stakeholders will be necessary, as highlighted in the State Bank of Pakistan’s latest quarterly statement. As of September 2023, the foreign debt stood at US$128.1 billion, with US$99.1 billion attributed to the government and state-owned enterprises.

Of this amount, the government owes US$37.1 billion to multilateral institutions such as the World Bank and Asian Development Bank, with terms typically featuring low-interest rates and extended repayment periods. Additionally, there is a debt of US$7.8 billion owed to the International Monetary Fund (IMF). The government has also incurred non-concessional debt through Sukuk issuance and Eurobonds, amounting to US$7.8 billion, likely carrying higher interest rates. Further liabilities stem from arrangements with foreign banks, including those of Saudi Arabia, the United Arab Emirates, and China’s State Administration of Foreign Exchange (SAFE), totaling US$11.7 billion. Additionally, US$18.1 billion of foreign debt is held by Pakistan’s banks and private enterprises. This leaves US$37.9 billion of external debt held by the government, including unspecified “commercial loans” amounting to US$6.1 billion and “other bilateral loans” totaling US$26.1 billion.

Details regarding these bilateral loans are scarce, but many are speculated to have originated from Chinese financial institutions to fund projects under the China–Pakistan Economic Corridor (CPEC), a component of the Belt and Road Initiative. CPEC, with an expected expenditure of US$62 billion, represents a significant investment in Pakistan’s infrastructure since 2014.

However, the financial specifics of CPEC remain ambiguous. While the China Global Investment Tracker indicates significant investment and contracted work in Pakistan, AidData suggests that Pakistan’s cumulative debt to China may be understated. This discrepancy arises from the method of debt reporting, with recipient countries often failing to disclose loans received from China, which are frequently disguised as foreign direct investment into Chinese-owned or affiliated companies responsible for infrastructure projects. In Pakistan’s case, many of these entities are independent power producers supplying electricity to state-owned distribution companies.

This arrangement effectively kept the new debt from appearing on the recipient country’s government’s balance sheet. However, Pakistan’s government still bears responsibility for the foreign debt incurred by independent power producers. These producers earn revenue in Pakistani rupees but must repay their debts to foreign creditors in foreign currency.

The IMF’s estimate of Pakistan’s debt service requirements for 2023–24, totaling US$25 billion, is based on Pakistan’s official reporting of foreign debt. However, it’s unlikely to fully factor in such arrangements, even though they significantly influence Pakistan’s foreign exchange needs for debt repayment.

The SBP anticipates a total of US$11.3 billion to be rolled over during 2023–24. Additionally, Pakistan’s 2023–24 government budget forecasts revenue of US$1.5 billion from the sale of Sukuk and Eurobonds, as well as US$4.6 billion from new commercial loans. Nevertheless, these measures fall short. Given the persistent negative trade balance, the new Pakistani government will urgently need to initiate negotiations to reschedule a portion of the foreign debt due in 2024. China is expected to play a crucial role in this effort.

However, with China facing challenges in its financial sector, Pakistani negotiators may find it difficult to secure concessions. While China’s debt restructuring efforts in Sri Lanka last year offer some hope, Pakistan’s debt obligations to China likely surpass those of Sri Lanka, dampening optimism.

Facing dwindling foreign exchange reserves, Pakistan repaid $2.4 billion in external public loan servicing during the first quarter (July-September) of the current fiscal year. This included significant payments to the IMF, World Bank, Asian Development Bank, Islamic Development Bank, as well as bilateral creditors such as Saudi Arabia, China, Japan, and Non-Paris Club countries. Additionally, payments were made to commercial banks and for interest on international bonds.

In conclusion, Pakistan stands at a critical juncture in managing its foreign debt burden. With looming debt service requirements and persistent trade imbalances, urgent action is imperative. Negotiations with creditors, particularly with China, will play a pivotal role in reshaping Pakistan’s debt repayment strategies. However, navigating through these negotiations amidst China’s financial sector challenges poses significant hurdles. Nonetheless, proactive measures, prudent fiscal policies, and effective debt management strategies are vital to steer Pakistan towards financial stability and sustainable economic growth in the face of its formidable foreign debt challenges.