Many renowned economists have recently warned that Pakistan is dangerously enmeshed in a severe debt trap as the country’s external debt is projected to swell to $110 billion by 2020.
As per the figures released by the State Bank of Pakistan in November 2016, the total central government debt as on 30.09.2016, stood at Rs19.9 trillion, “excluding liabilities”, and of which the domestic debt constitutes Rs14.4 trillion while external debt makes up Rs5.5 trillion. During the first quarter (July-September) of this fiscal year, the government added to the debt by some Rs858 billion, taking the debt to GDP ratio to nearly 69.50%, which in June 2016 stood at around 66.50%.
This is an alarming trend, as contrary to earlier predictions, the national debt, instead of coming down, is going up. Last year, in order to hide its inefficiencies, the government had made a clever move to avert criticism over mounting debt by amending the Fiscal Responsibility and Debt Limitation Act of 2005, through a Finance Act that literally changed the debt limits. The finance ministry not only diluted the law but also got relaxed the statutory limit of restricting the public debt at 60% of GDP. Both the previous PPP government and the present PML-N governments have violated this condition, but with the help of new legislation the PML-N government has set a new statutory deadline of June 2018, to bring the debt back to 60% GDP level, as against the earlier deadline of June 2013.
It is the considered opinion of economic experts that Pakistan’s debt sustainability indicators have significantly worsened in the past years and especially in the last three years due to a high increase in foreign exchange and refinancing risks resulting from reckless high cost borrowings. The average time to maturity of public debt fell in fiscal year 2015-16, which in turn has increased the refinancing risks and similarly, the short term foreign currency debt as a percentage of official liquid reserves and net international reserves increased in fiscal year 2015-16, which in turn increases the foreign currency risk.
The government’s argument is that its debt management strategy sets target ranges for currency, refinancing and interest rate risks, and though quite a few indicators are currently in the red, they still fall within the limits prescribed in its Medium Term Debt Management Strategy 2016-19. In support of its stance, it quotes global statistics showing that amidst a high prevalent global debt phenomenon, Pakistan’s debt at around $83 billion for a population base of 200 million is quite manageable as compared to Greece $367 billion, Ireland $865 billion, Spain $1 trillion and Italy $1 trillion. But the comparison is fallacious as all these countries are examples of failed economies. Further, they are part of a single monetary block that gets balanced through a complex system of intra-regional monetary balancing mechanism overseen by a European central bank. Pakistan is neither a European economy nor does it have the luxury of printing the second leading reserve currency of the world.
Pakistan’s debt profile presents an even bleaker picture when one starts to discover the nature of its historical debt and the one that has been piled up in recent years. The historical debt profile has little to show for itself: the national infrastructure fails to match that of any developed economy; public support systems of health, housing, utilities, education and social benefits remain unsatisfactory; poverty levels stuck at about 30% or more; an extremely narrow and small industrial base; and a top heavy public administration system that despite being inefficient has become further entrenched over time.
To make matters worse, during the past three years, the government has been borrowing recklessly, acquiring expensive foreign and domestic debt at commercial rates. Though it has repeatedly claimed that it is increasing its credit only to the extent of budget deficit requirements, the reality is quite different. The increase in federal government’s debt from July-September 2016, added up to Rs858 billion, whereas, the budget deficit in the same period was only Rs450 billion.
Borrowing in itself is not essentially a bad thing as long as it can be spent in a productive manner. If all the borrowing had been put to productive use in self-sustaining projects, it would have generated growth. But this was not done. The growth continues to remain elusive at under 5% , while independent economists say it is closer to 4%. But the point is that unless the GDP growth rate goes up to 6.50% or beyond, the present level of debt may is unsustainable. The problem is compounded by the fact that Pakistan’s exports are rapidly declining and foreign remittances have also slowed down considerably – both these trends are likely to continue in the near-term.
Pakistan’s external debt to export ratio is projected to be at 442% by 2019-20, which will make it un-serviceable. Exports, which used to finance 80% of imports in the early 2000s, now finance less than 50% of imports. Over the last decade, our exports have grown by merely 4% compared to 12% in Bangladesh and 10% in India. As for remittances, since they are negatively correlated with oil imports (bulk of remittances coming from the Gulf countries), the former are naturally slowing down due to oil prices being low.
Pressure on the balance of payments has been rising and a weakening reserves position is making the job of economic planners difficult in ensuring timely loan repayments. Repayment obligations will swiftly grow on commercial debt besides the maturity of $2 billion Sukuk bonds during the same period. Repayment to the IMF will soon start as well. Many economists believe that if Pakistan does not mobilise $10 billion within the current financial year, it could face a default situation as is being anticipated by some international agencies, including Bloomberg.
Pakistan has been placed among four out of 10 countries that would default soon on repayment of external debt. Venezuela has already defaulted, while the other three countries in line are Pakistan, Egypt and Ecuador. With the rising debt burden, the economy presents a dismal picture. Our foreign exchange reserves are debt driven, circular debt in the power sector is touching dangerous levels and all state enterprises are in the red. Unless the government moves quickly, the debt trap may strangulate the national economy.