FeaturedNationalVolume 14 Issue # 11

Pakistan’s loan black hole

The Pakistan Tehreek-i-Insaf (PTI) government of Prime Minister Imran Khan has received about $7b in loans from China, Saudi Arabia and the United Arab Emirates (UAE) in its first four months but Pakistan’s foreign reserves continue to plunge, raising serious concerns about its ability to meet financing requirements.

Pakistan has averted a serious balance of payment crisis after receiving loans from friendly countries and it is expected to obtain much more in coming weeks and months, but its foreign reserves continue to deplete on a weekly basis. After Saudi Arabia provided financial assistance to Pakistan in early December, the reserves rose above $8-billion. However, they started falling rapidly and stood at $7,287.5 million in the last week of December, down $170 million, as compared with $7,457.3 million in the previous week. Pakistan’s current account deficit has swelled to an all-time high of $18 billion in the outgoing fiscal year, while the budget deficit rose up to around 6.6pc of GDP. Pakistan requires approximately $12 billion for balance of payment support by the end of June this year. It means Pakistan needs almost $2 billion every month to meets its financial requirements.

The government is desperately seeking financial support to fill the alarming gap. The United Arab Emirates (UAE) has finalised the terms and conditions of a support package of about $6.2 billion to help Pakistan address its balance of payment challenge. The package involves $3.2b worth of oil supplies on deferred payment, besides a $3b cash deposit. The UAE package is exactly the same size and terms and conditions as given by Saudi Arabia. Pakistan will get a total saving of about $7.9b on oil and gas imports from the two friendly countries, accounting for more than 60 percent of annual oil import bill of about $12-13b. It includes about $3.2b each of oil supplies on deferred payments from the UAE and Saudi Arabia and about $1.5b trade finance from the International Islamic Trade Finance Corporation (ITFC). The total financing support from the UAE and Saudi Arabia, including the ITFC’s trade finance, would be around $13.9-14b, when cash deposits of $3b each from the two countries are also included. It is besides a deep-conversion oil refinery to be set up as a joint venture of Pakistan and Abdu Dhabi — worth $5-6b at Khalifa Point and an expected petro-chemical complex by Saudi Arabia at Gwadar Oil City. The government has also started discussions with Qatar for relief in terms of reduction in LNG prices or a relaxed payment schedule.

Pakistan has already received $2b in cash deposit from Saudi Arabia at an interest rate of 3.18pc while the third tranche of $1b is due in the first week of February. The Saudi oil facility would also start rolling out this month with an average $274 million per month. Pakistan is currently importing about eight cargoes of LNG every month, costing $4.2 to $4.5b a year and more than one-third of this could be financed through ITCF support. With support from Qatar, Pakistan is expecting about $9b cushion on the oil and gas import bill. China has also pledged additional $2b for Pakistan. Talks are already underway to receive $6-7b from the International Monetary Fund (IMF).

The government may have reasons for celebration after receiving the huge loans, but critics say the way it has launched a borrowing spree in the world, it will surpass the previous Pakistan Muslim League-Nawaz (PML-N) government in loan growth in just three years. According to estimates, the PTI government is projected to add over Rs10 trillion to public debt during its first three years, due to rigidity in expenditures, increase in interest rates and currency devaluation. The debt will be equal to the burden added by the PML-N in its five years. Pakistan has shared the projections with the IMF, suggesting that public debt could be Rs36 trillion by June 2021. The government also plans to raise loans through commercial borrowings from Chinese, European and Gulf banks and sovereign bonds.

According to the government’s own estimates, the debt to the GDP ratio will remain closer to 70pc by June 2021, which could be lower than the level left by the PML-N but far higher than the target set in the Fiscal Responsibility and Debt Limitation Act of 2005. When the PML-N government completed its term in 2018, public debt was Rs24.95 trillion, according to the State Bank of Pakistan (SBP). During the Pakistan Peoples Party (PPP) tenure (2008-2013), public debt surged from Rs6 trillion to Rs14 trillion. During the next five years of the PML-N, it hit the Rs25 trillion mark. By June this year, public debt could hit Rs29.4 trillion, equal to 75pc of GDP. It was 72.5pc at the end of the PML-N term, far above the statutory limit of 60pc of GDP. The key reason for the likely increase in public debt by June will be a minimum of Rs2.2 trillion budget deficit, caused by growing debt, government expenditures and low tax revenues. Interest payments, which were Rs1.5 trillion in June 2018, could increase to Rs2 trillion by June due to increase in the discount rate by the SBP and currency devaluation of over 20pc in the fiscal year. During the second year of the PTI government, public debt would further jump to Rs32.6 trillion. There is projected addition of Rs3.2 trillion to public debt from July 2019 to June 2020. The assessment is based on Rs2.4 trillion budget deficit and nearly 6pc further devaluation of the rupee.

The PTI leadership was critical of the PPP and PML-N governments for overburdening the country with debt, when it was in the opposition. However, it has adopted the same policy after coming to power. The gloomy picture makes it clear the government will not be able to fulfill its election promises. It will have to take urgent and out-of-the-box measures to improve tax revenues and exports.