FeaturedNationalVolume 13 Issue # 16

Pakistan’s financial fiasco

Pakistan’s public debt has gone through the roof and every Pakistani owes Rs130,000 as the five-year tenure of Pakistan Muslim League-Nawaz (PML-N) government is about to end. Losses of public sector enterprises have exceeded Rs1.2 trillion and circular debt of the power sector has reached over Rs1 trillion. Long power cuts have started with the advent of the summer. The situation is worse than what Pakistan faced in 2013, when the Pakistan Muslim League-Nawaz (PML-N) government came to power.


An “experienced” team of politicians and economists has brought Pakistan to a point where the next government will find itself in deep trouble to run the affairs of the country. After almost five years of a rosy picture of the economy, people have suddenly realised that all international surveys and reports of Pakistan’s economic turnaround were not completely true. More weaknesses and flaws of the present government will be exposed in the interim setup and the next government would tell the people that the national exchequer is empty and it has to repay huge internal and external loans. The situation repeats itself with the installation of a new government after every election in Pakistan.


According to the International Monetary Fund (IMF), Pakistan’s external debt will climb to $103b by June 2019. In its latest assessment, it put Pakistan’s gross external financing needs at a record $27 billion for the next fiscal year and warned that arranging the financing at favourable rates would be a challenge due to risks to the country’s debt sustainability. For additional borrowings, Pakistan’s external debt would jump to $103.4 billion by June 2019, up from this June’s projected level of $93.3 billion. Pakistan’s public debt would remain higher than the limit prescribed in the revised Fiscal Responsibility and Debt Limitation Act. Certain tables in the report, which the IMF withheld in the past, show the adverse implications of the PML-N government’s borrowing spree over the past four- and-a-half years. The policy of building foreign currency reserves through expensive loans and ignoring the export performance has come to haunt the policymakers. The IMF said the elevated current account deficit and rising external debt servicing, in part driven by the China-Pakistan Economic Corridor (CPEC)-related outflows, were expected to lead to higher external financing needs.


External financing would surge to $24.5 billion by June this year and the country’s needs are expected to rise to around $27 billion by the end of fiscal year 2018-19 and would go up to $45 billion by FY23. At the time, Pakistan’s external financing needs will be equal to 10% of the national output, which is a dangerous level. However, the more alarming part is the growing challenges to arranging foreign loans. Pakistan has so far remained successful in contracting external borrowing that softened the impact of rising external imbalances on foreign exchange reserves. While the level of external debt has remained moderate, continued mobilisation of external financing at favourable rates could become more challenging in the period ahead against the background of rising international interest rates and increasing financing needs. Continued scaling up of CPEC investments could accelerate the build-up of related external payment obligations and Pakistan’s capacity to repay could deteriorate at a faster pace, with faster depletion of foreign exchange reserves having adverse effects on economic growth, it noted.


The IMF projections show a bleak picture for the next five years. Public and publicly-guaranteed debt is projected to remain close to 70% of GDP by 2023 under the baseline scenario. In the absence of strong consolidation measures, the fiscal deficit is expected to remain close to 6% of GDP in the medium term, resulting in elevated debt levels. Adverse shocks, notably to economic growth and the primary balance, could lead to public debt ratios rising well above 70%, it added.


In the meanwhile, circular debt in the power sector has almost doubled from the levels in 2013. It is over Rs 922 billion. It has accumulated in over four years after the PML-N government repaid Rs 480 billion after coming to power. According to the Asian Development Bank, there has been limited action in addressing the underlying causes of the circular debt, which has kept investments at less than desired levels until 2017. “One underlying factor for the rise in circular debt is a lack of focus on the transmission and distribution aspect of power supply amid the country’s increased focus on adding capacities. The losses in the transmission and distribution system continue for a long time,” it noted.


Power outages have also increased in the country with the start of the summer. Though the government claims there is no loadshedding in the country, yet forced power shutdowns continue. Urban areas are facing four to six hours of power suspension daily and the situation is worse in rural areas, which suffer at least eight hours of loashedding. In December 2017, the government had declared around 5,300 feeders load-free across Pakistan and said there would be no loadshedding on feeders with below 10 percent losses. Officials claim that electricity generation was 9,279MW in December 2013, and demand was 11,800MW, having a shortfall of 2,522MW. They say the situation has changed now and the country has surplus power. However, power theft, non-payment of bills and administrative issues lead to power cuts. As the government grapples with economic issues, losses of Public Sector Enterprises (PSEs), including the PIA and Pak Steel Mills, have exceeded Rs1.2 trillion. Experts believe the IMF has underestimated the losses and they have already crossed Rs1.6 trillion. Privatisation of the loss-making enterprises was part of the manifesto of the ruling party but it failed to act in four-and-a-half years. It plans to sell them off in its last days, but it will not work. It will create doubts about the privatization process and the opposition would resist it.


When the PML-N came to power in 2013, the biggest problem of Pakistan was terrorism. The issue has been resolved to a large extent but the government cannot claim its credit. It was not even willing to launch a military operation against the Taliban, but the army decided to take a decisive against militants and it has almost purged the country of them. Widespread corruption, large fiscal deficits, low expenditure on education and health, electricity shortages, high inflation, rising prices, soaring unemployment and low economic growth were other issues, but the government failed to address them. Power cuts have improved in the government but bills have almost doubled. All other challenges have compounded after years of inaction. The next government will have to face even bigger challenges and it would have to take tough decisions to put the country on the path to real progress.