Economic Musings…

Spearhead Analysis – 06.01.2017

Compiled by Spearhead Research

Pakistan’s external debt is predicted to cross the staggering US$75 Billion mark. The debt situation has steadily worsened over the course of the last year as the government has continued with its policy of incessant borrowing from local and foreign institutions. While contracting loans is not unique to this government, the rate of increase in loan accumulation is certainly unprecedented.

The year 2016 proved to be a record setter in terms of the debt contracted by the government. Pakistan’s foreign debt stood at Rs.74 Trillion (US$72.98 Billion) after the first half of 2016 and during the last fiscal year, Pakistan’s debt increased by a record US$7.9 Billion. In the space of three-odd years, the government has taken US$25 Billion in foreign loans, out of which US$11.95 Billion was used to service existing loans. During the same period the government has borrowed US$30 Billion (Rs. 3.1 Trillion) from local banking institutions.

Summing up, Pakistan’s total debt (local and foreign) has increased by US$55 Billion in the three year tenure of the present government. The loans from the Chinese institutions related to CPEC are a separate thing altogether, and with limited information on these loans it is difficult to estimate the precise impact. In the face of the continuing pressure on the Rupee against the dollar and the considerable loss in value of Rupee in the open market there is speculation of an imminent devaluation. This would considerably increase the debt burden in rupee terms on the foreign debt. With reduced inflows from exports, remittances, and FDI; higher outflows from profit repatriations and rising imports; and, lop-sided non-revenue-generating investments the fiscal pressures are likely to continue to mount.

Debt Predictions

As per data from the Trading Economics (, Pakistan’s external debt will cross US$75.54 Billion (Rs.79 Trillion) once the fiscal details are made available by January 2017.

The debt is further expected to cross US$79.35 Billion (Rs.83 Trillion) in the next six months, and at the current rate analysts are predicting that by 2020 the foreign debt will reach US$87.1 Billion (Rs. 91.2 Trillion).

Truly alarming figures by any count.

Pakistan’s Debt Due in 18 Months

Pakistan has to pay US$11.5 Billion within the next 18 months. Different international monetary funds are owed amounts, as per details below:

  • Pakistan has to pay a sum of US$8.76 Billion to International Monetary Fund (IMF), World Bank, and Asian Development Bank.

  • US $160 Million has to be paid in Saudi Riyals to Islamic Development Bank.

  • Pakistan has to pay US$1.6 Billion to China within 18 months.

  • Japan has to be paid back Yen 192 Billion.

  • Paris Club from France is owed Euros 625 Million.

In the face of limited inflow options, further debt will need to be contracted to service these existing commitments.

Debt History

A look back at Pakistan’s debt history provides some interesting insights:

  • Pakistan received US$121 Million in debt from 1951 to 1955.

  • This figure nearly had tripled over the next five years.

  • By December 1969, the external debt of Pakistan amounted to US$2.7 Billion.

  • Pakistan’s total external debt was US$3 Billion by December 1971.

  • The foreign debt figure then increased to US$6.3 Billion in 1977.

  • The external debt was US$21.9 Billion by 1990.

  • It then touched the level of US$35.6 Billion by 2000.

  • The foreign debt and liabilities by July 2013 stood at US$61.9 Billion.

  • By July 2014, Pakistan’s foreign debt soared to US$63.4 Billion, showing an increase of US$1.5 Billion within a year.

  • By July 2015, the foreign debt rose to US$65.1 Billion recording an increase of another US$1.7 Billion.

A steady rise is evident over the years with little effort to build capacity within the country to reduce the reliance on borrowing.

Interesting Facts

  • With a foreign debt of Rs.74 Trillion and a population of 190 million (est), each Pakistani owes Rs.389,473.68 in debt. (The amount is higher when considering local debt.)

  • With a predicted foreign debt of Rs.79 Trillion and a population of 190 million (est), ach Pakistani will owe Rs. 415,789.47. (The amount is higher when considering local debt.)

  • When the debt is converted to US$1 notes, it can be wrapped around the world 284 times (293 times with $79 billion).

Heed the Alarm Bells

Alarm Bell Number 1: 

  • From July to September, the federal government’s net revenue receipts stood at Rs.369 Billion. For the same period, the federal government’s debt servicing liability stood at Rs.413 Billion. The federal government’s net revenue receipts are not even enough to cover debt servicing. For the record, net revenue receipts have never ever been at such a low ever.

  • The federal government must borrow to cover its needs such as defence; pensions – both civil and military; expenses of running the civil government; public order and safety affairs; environment protection; health affairs; culture and religion; and, allocations for social protection among the many other heads.

Alarm Bell Number 2: 

  • For the first five months of the current fiscal year, the repatriation of foreign exchange in the form of profits and dividends on foreign direct investment stood at US$591 Million, while the total foreign direct investment stood at US$460 Million. Pakistan paid out US$131 Million more than what Pakistan received as foreign direct investment.

  • Foreigners are taking out more dollars from Pakistan than the dollars being invested into Pakistan by foreigners – a worrisome and untenable situation.

Alarm Bell Number 3: 

  • From July to November, our exports stood at US$8.7 Billion, and our imports stood at US$17.3 Billion. Pakistan’s goods deficit stood at a colossal US$8.6 Billion and the current account deficit reached US$2.6 Billion, widening by an alarming 91 per cent year-on-year. On a pro-rata basis, an annual current account deficit in excess of US$6 Billion is deemed unsustainable.

Alarm Bell Number 4: 

  • Between June 2013 and June 2016, the government took US$9.7 Billion in loans from the World Bank, ADB, and Islamic Development Bank. It borrowed US$6.2 Billion from the IMF. Bilateral loans amounted to US$3.6 Billion while bonds issued stood at US$3.5 Billion. It borrowed US$1.85 Billion from commercial banks. That is a total of US$25 Billion over three years (over the same period, US$11.95 Billion was spent in the repayment of previous loans). All these new foreign loans would have to be paid back in dollars. With exports down and foreign investors repatriating profits Pakistan has a major inflow and outflow problem.

Alarm Bell Number 5: 

  • On October 13, the IMF completed its 12th and the final review under the US$6.2 Billion Extended Fund Facility (EFF). The budget for 2016-17, under the direction of the IMF, kept a cap of 3.8 per cent of GDP on the budgetary deficit. The IMF plan has come to an end and the election is coming up. It seems we now have to prepare for a ballooning budgetary deficit.

Alarm Bell Number 6:

  • The government continues to build up the foreign exchange reserves through borrowings. Clearly an untenable situation as genuine inflows should be contributing to reserves and not borrowings, which have to be paid back with interest.

In an interesting article “Economy in 2017: Way Forward”, Mr. Kamal Monnoo has adequately summed up the economic plight of the country and provided some valuable suggestions, which have been summarized here.

Focus on falling exports:

The textile sector contributes about two-thirds of the national exports and this sectors performance appears to be in free fall. Given the widening current account deficit and the pressure on foreign exchange outflows which are likely to further increase in the coming months through: external debt repayments, firming up oil prices, rising imports and fast increasing profit/dividends repatriation – stabilising exports is critical for 2017. The main issue that confronts our manufacturing is that of competitiveness (difference of about 10% with regional competitors) and there are only two quick-fix solutions: a) devalue currency by about 10%, or b) provide incentives in shape of outright rebates through the banking channel (not FBR) and abolish non-applicable surcharges from the power bills of the industry.

Recommendations include a gradual 5% currency devaluation, 5% outright export rebate directly payable by the central bank into exporters’ accounts and abolishing of all line-loss surcharges being unfairly charged to the industry. As it is it is proving difficult to sustain pressure on international parity of the Pak Rupee Not only will this be a small cost to pay to retain home grown foreign exchange inflows, but it would save us a great deal of future pain on account of capacity closures and unemployment – markets once lost can be difficult to recover.

Re-strategise Taxation:

Revenue collection drives in Pakistan have gone in the wrong direction, as the current culture and environment favors the un-documented sector over existing, honest tax payers. For taxation measures to flourish the government needs to incentivise people into becoming tax-filers. Good moves would be to: lower taxation slabs per se; bring the much-awaited reforms in FBR itself, ones that distance the tax collector from the taxpayer; and replace coercive cum draconian tax collection targets with well defined targets. Last but not least, the sales tax or the GST (general sales tax) also needs amending. India recently re-packaged its GST with a much lower slab and one that simplified the previous cluttered state and federal tax system with a clear aim to create a common market across the country. We need to undertake a similar exercise.

 Re-think Emerging Energy Mix:

 With CPEC (China Pakistan Economic Corridor) taking root and nearly US$35 Billion to be invested in the energy sector, the main thrust at present is on coal generation. While increasing the share of coal generation mix from its current level in Pakistan is not a bad idea, we need to keep an eye on where our coal’s share is going to end up in the overall energy generation mix, i.e., once investments in the energy sector under CPEC get completed. At the current pace, by 2025 the coal’s share could be as high as 55%-60%, which would be undesirable not only from an environmental perspective but also financially. Given that our indigenous coal is still to be mined, an over dependence on imported coal could prove to be a flawed policy. The CPEC energy funds should be re-allocated with revised priorities favoring Hydel, renewable, and nuclear options.

Focus on Investment & Creating Jobs:

The Indian government recently announced sweeping changes to open up its economy to investment. The new rules spell out a plan to develop more business friendly policies with a clear objective to spur job creation. The idea is to remove all difficulties in doing business in India and to ensure that Indian manufacturing not only sustains itself but also expands to capture a wider global share. Pakistan falls in the bottom quarter of the world with regards to “ease of doing business” and perhaps 2017 can be the year where the government unleashes a new plan to resurrect a struggling industrial environment.

Re-negotiate Adverse Trade Deals:

Our trade deals with some of our main trading partners like China, Indonesia, Malaysia, Turkey and Thailand need to be re-negotiated. In a changed global trading environment more and more countries are having a re-think on how and with whom to trade. While increased trade is welcome, it should not be at the cost of home industry and with huge cum consistently running trade deficits. The earlier we re-work our unfavorable trade agreements, the better.

Re-prioritise Government Spending:

To support growth, economic policy must review the political economy. It shows most obviously in tax policy, but equally in expenditure priorities. While development budget has increased in 2016 over 2015, questions remain about project selection, transparent procurement, and effective project management. Allocation on the other hand on some key sectors remains dismally low. Such as: higher education, health and especially the water sector. Overall investment in people per se is well below par and it will be good to see the government to shift its focus on social development sectors in 2017.

Transform at least one PSE into a winner:

The hallmark of success for any government in economic governance is that public sector enterprises (PSE) under its tenure perform well. PML-N was selected for its business prowess, but sadly the performance of state enterprises has instead slumped. This does not come as a surprise since the government over the last three and a half years has failed to provide an apex management structure or to assemble a competent team, with its focus mainly being on disinvestment. Nearly all-emerging and successful economies owe much of their success in the sheer ability of their respective governments to combine private sector entrepreneurial juices with the might of state’s resources in churning out global corporate winners. Examples being: China, Brazil, Russia, India, UAE, etc. Airline is one industry where most leading airlines today are beneficiaries of this model. To give confidence to the nation and its people, if the government can resolve to turn around at least one big state enterprise in 2017, it can set the pace for others to follow – PIA should be the likely pick.

It seems that given the rising debt levels and reduced inflows, and gross issues of mismanagement and mis-governanace the government has its work clearly spelt out. There is a need to show political will, management acumen, and institute governance structures to achieve what is good for the country. It can be done; all it requires is sincerity and resolve. Let’s hope the process can be started in 2017.