NationalVOLUME 19 ISSUE # 4

The enigma of Pakistan’s loans

The two coalition administrations led by Imran Khan and Shehbaz Sharif collectively obtained a record-breaking sum of nearly $20 billion in foreign loans during the last fiscal year, purportedly for the benefit of Pakistan’s impoverished population.

Ironically, amidst this massive financial influx, an incident unfolded in Sargodha involving a young man named Kabeer Khan, a resident of Khan Muhammadwala in Tehsil Bhera. Despite the injection of “billions of dollars” into the country, Kabeer was caught stealing a mere 10-kg bag of flour, leading to his swift punishment by fellow villagers. They not only subjected him to physical assault but also shaved his head, moustaches, and eyebrows, blackened his face with ink, and paraded him around the village for what they considered a trivial offense. The bewildering episode concluded in a matter of hours, highlighting the stark contrast between the hyperbolic promises of financial prosperity and the grim reality faced by ordinary citizens.

While the theatrical display in Sargodha dissipated quickly, the perpetual drama of accumulating billions of dollars in loans for the betterment of the Pakistani populace persisted unabated. The most recent loans, exceeding $19.7 billion, were acquired by the current and outgoing coalition governments in the fiscal year 2021-22 from various sources, including multilateral institutions, bilateral agreements, and contributions from overseas Pakistanis. These figures, disclosed separately by the Ministry of Economic Affairs (MoEA) and the State Bank of Pakistan (SBP), raised questions about the true purpose of these loans.

Contrary to official narratives of improving the lives of the poor, skeptics argue that these loans primarily serve to repay debts incurred by previous administrations. The whereabouts of the earlier loans remain shrouded in mystery, discouraging inquiry into their ultimate utilization. Regardless of the conflicting perspectives on the loans’ intended beneficiaries, the relentless cycle of accumulating vast sums of international funds in the name of Pakistan’s prosperity persists with each successive government deeming it essential to secure ever-increasing loans.

In the fiscal year 2021-22 alone, the beloved motherland amassed a staggering $20 billion in foreign loans, marking a 27% increase from the previous year. The primary motivations behind this borrowing spree were revealed to be the repayment of maturing foreign debts and the financing of imports, crucial for maintaining open channels of financial support amid challenging economic circumstances. Notably, the borrowed amount exceeded the previous fiscal year by $4.2 billion.

According to data from the Ministry of Economic Affairs, $16.7 billion in foreign loans were received in the last fiscal year, falling short of the disbursement targets set, which predominantly pertain to project financing requiring additional efforts. The State Bank of Pakistan’s figures disclosed that nearly $2 billion was acquired for the Naya Pakistan Certificates, and an additional $1 billion originated from the International Monetary Fund (IMF). A substantial 82% of the newly acquired foreign loans were allocated to bridge the budget deficit and artificially sustain foreign currency reserves. The remaining 18% was designated for development projects ($2.5 billion) and financing a new fighter jet project, underscoring the government’s commitment to national defense as a topmost priority.

The intricate data also revealed that the $2 billion loan under the Naya Pakistan Certificates was secured at a 7% interest rate in dollar terms, yielding a return of up to 11% in local currency. A noteworthy observation from the data indicated that out of the nearly $20 billion, $15 billion in loans were obtained during Imran Khan’s tenure as prime minister. Over the course of his 43-month rule, Khan’s government accumulated a total of $57 billion in gross loans. Until a sustainable economic trajectory is established, free from reliance on foreign lending, policymakers appear to be left with no alternative but to persist in the cycle of borrowing.

Despite amassing substantial loans, Pakistan continues to grapple with economic challenges, prompting meticulous scrutiny of virtually every transaction by the central bank to sustain existing reserves until the International Monetary Fund (IMF) renews its loan program. The finance minister regularly reassures Pakistanis that a substantial IMF tranche is imminent.

The escalating reliance on loans to bolster foreign currency reserves and bridge budgetary gaps has led to a significant surge in the cost of servicing the debt—a complex matter not easily comprehensible for the general populace.

In the fiscal year 2021-22, Pakistan secured $4.9 billion in foreign commercial loans from banks, including a notable $2.24 billion in June from a consortium of Chinese commercial banks. Despite these efforts, economists contend that the country’s prospects for obtaining major commercial loans and issuing sovereign bonds have diminished, exacerbated by two credit rating agencies downgrading Pakistan’s outlook to negative. Consequently, concerns about default have led to the trading of Pakistani bonds at a discount.

Statistics from the State Bank of Pakistan (SBP) and the Ministry of Economic Affairs (MoEA) reveal that bilateral lending for project financing in Pakistan stood at only $597 million, excluding publicly guaranteed debt. Publicly guaranteed debt amounted to $1.53 billion, encompassing $486 million for Karachi’s nuclear power plants (K2 and K3) and $1.03 billion for the fighter jet project.

In another narrative of parallel loans, Pakistan secured $4.7 billion from multilateral creditors, falling short of the budgeted amount by $665 million. Among multilateral development partners, the Asian Development Bank (ADB) disbursed $1.6 billion, while the World Bank released $1.5 billion, below the budgeted $2.3 billion. The Islamic Development Bank (IDB) contributed $1.3 billion for crude oil imports. Additionally, the government raised $2 billion through long-term bonds, including $1 billion through the historically expensive Sukuk with an interest rate nearing 8%.

Pakistan’s “friends” continue to provide financial assistance, exemplified by Saudi Arabia’s contribution of $3 billion in cash deposits last year. Despite the substantial funds in the hands of Pakistanis, if individuals like Kabeer Khan resort to stealing 10-kg flour bags, it becomes challenging to hold the prime minister and chief ministers accountable. The consistent pattern of acquiring more and more loans by each successive prime minister reflects the limited options available to address the country’s economic challenges.