Dr. Ashfaque H. Khan after his article “Rising Debt: A Threat to National Security”, has published a follow-up article on the issue titled: “Pakistan’s Debt: An Update”. He continues to highlight the fact that the if the pace of debt accumulation is not checked, Pakistan’s public debt in general and external debt in particular would reach unsustainable levels by 2019-20. These articles are one of many, that have brought this issue to the fore and forced the Finance Minister to respond in a particularly ‘belligerent’ manner.
On January 29, 2000, the then government constituted a Debt Reduction and Management Committee to assess Pakistan’s debt situation, analyze its evolution, ascertain its impact on the economy, provide recommendations to bring debt under control, and suggest the definitions of debt – both public and external – consistent with global practices.
The Committee completed its work and submitted the Report under the title “A Debt Burden Reduction and Management Strategy” to the then Finance Minister. The Committee defined External debt as:
Public and Publicly Guaranteed Debt
- Medium and Long Term Debt
- Other Medium and Long Term Debt
- Euro Bond
- Short – Term Including IDB
- IMF Debt
- Central Bank Deposits
- Private Non-Guaranteed Debt
- Debt Obligation to Residents in Foreign Exchange
- Bearer Certificates
- US & Bond
- Other Foreign Obligations
- Foreign Currency Accounts
- FE-25 Deposits
Public debt included debt payable in rupees and debt payable in foreign exchange converted in rupee by multiplying with the exchange rate. After the approval of the Debt Committee Report by the Cabinet in February 15, 2001, the Ministry reconciled the debt numbers with the Economic Affairs Division, SBP and the Ministry of Finance to arrive at one number for debt – both public and external – for Pakistan. The debt numbers of Pakistan were also reconciled with the IMF and the World Bank.
The present finance minister changed the definition of both public and external debt in June 2016. The deteriorating public debt to GDP ratio has remained perpetually in violation of the Fiscal Responsibility and Debt Limitation Act 2005, and the finance minister perhaps thought it right to change the definition of debt. The redefined debt through amendment in the Fiscal Responsibility and Debt Limitation (FRDL) Act 2005 was never discussed at any forum – be it public, print or electronic, or parliament. The FRDL Act 2005 was ‘silently’ amended as was the definition of debt – both public and external. Many independent economists have since then expressed serious reservations over the revised definition of external debt, which incidentally in not aligned with the IFIs definition (IMF and World Bank).
The difference between Finance Minister’s external debt and the one used by the IFIs is highlighted in the Table below:
Pakistan’s External Debt and Liabilities (Million $) 2015-16
|Finance Minister Definition||Amount||Standard Definition||Amount|
As opposed to the Finance Minister’s definition of debt ($57,757 million), the external debt on the basis of standard definition amounted to $73,063 million as of end-June 2016. During the first quarter (July – September) of 2016-17, it has further increased to $74,638 million. The Finance Minister has added $12.164 billion external debt and liabilities in three years as against $14.738 billion in five years by the previous government.
External Debt and Liabilities Forecast
Dr. Ashfaque had forecast for the year 2015-16 that Pakistan’s external debt and liabilities would reach $69.8 billion and that exports would reach $23.2 billion. The debt crossed $73 billion in 2015-16 – $3.26 billion more than the forecast. Exports stood at $22 billion – $1.2 billion less than the forecast. Extraordinary increase in external debt on the one hand and extraordinary decline in exports on the other have further aggravated the debt burden of the country and Pakistan.
Dr. Ashfaque has revised the forecasts for the period 2016-17 to 2019-20. Pakistan’s external debt and liabilities are projected to rise to $80.3 billion in 2016-17, projected to rise further to $88.5 billion in 2017-18 and expected to reach $110.0 billion by 2019-20. Accordingly, external debt servicing is projected to be $7.0 billion in 2016-17 and expected to reach $10.0 billion by 2019-20. Exports of goods and services is projected to be $25.6 billion in 2016-17 and projected to rise slowly to $30.1 billion by 2019-20. Accordingly, Pakistan’s external debt and liabilities as a percentage of exports of goods and services are projected to rise from 266.4 percent in 2015-16 to 313.7 percent in 2016-17 and further to 365.4 percent by 2019-20. Similarly, external debt servicing as percentage of exports of goods and services is projected to rise from 24.1 percent in 2015-16 to 27.3 percent in 2016-17 and to 33.2 percent by 2019-20. External debt servicing will consume one-third of exports of goods and services by 2019-20.
Financing requirements for the current fiscal year (2016-17) are estimated at $14 billion, that is, $7.0 billion for debt servicing and $7.0 billion to finance current account deficit. Financing requirement is projected to rise to $22.5 billion by 2019-20, that is, $10 billion will be required to service external debt obligations and $12.5 billion to finance current account deficit. It is expected that the current account deficit will deteriorate owing to the rise in import bill on two counts – firstly, oil prices are expected to rise from the current level in the next three years and secondly, CPEC-related imports are expected to gain momentum. Exports are not expected to match the increase in pace consistent with the rise in import.
Financial flows from traditional sources, foreign investment and financing from China for the CPEC-related projects for the next four years are presented in Table 3. Financial inflows of $8.5 billion are likely to be received in 2016-17 and are expected to rise to $11.0 billion by 2019-20. Most important element in external balance of payment is the likely financing gap. This is the gap between the likely foreign exchange requirements and the likely inflows of external financing from various sources.
Table 4 documents the financing gap for the next four years. A financing gap of $5.5 billion is expected in 2016-17 but this gap is projected to rise $11.5 billion by 2019-20, which will not be possible to fill without the massive injection from the IFIs including the IMF.
Questions linger with no apparent answers in sight. How is this gap going to be financed is a million-dollar question? Who will bridge such a large gap? Can the IFIs including the IMF come forward to bridge the gap? Will there be a benign IMF again in a changing global political scenario?