Debt: Pile it On

Spearhead Analysis – 21.12.2017

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

Pakistan’s borrowing binge continues to follow an upward trajectory. The Government appears oblivious to the Debt burden that it has piled on over the past four years, and appears to be committed towards borrowing more in an effort to plug the deficit gaps. Apart from the ongoing domestic and external borrowing, which continues to raise the level of Public Debt, the recent month has seen a number of transactions as the Foreign Exchange reserves continue to slide and fiscal deficits continue to rise.

Pakistan has raised US$1 Billion in a five-year Sukuk offering at 5.625%; and, US$1.5 Billion in a ten-year Eurobond transaction at 6.875%. The order book for the sovereign papers was over US$8 Billion.

The country is also set to receive a US$7.5 Billion loan from the Asian Development Bank (ADB) over the next three years. The loan would be for projects in the energy, transport, education and health sectors with the following major sectoral allocations:

  • Energy: US$ 2.28 Billion
  • Transport: US$1.76 Billion
  • Clean Water and Urban uplift: US$1.68 Billion
  • Agriculture and Rural uplift US$1 Billion
  • Education: US$250 Million
  • IT related: US$200 Million
  • Health: US$120 Million

In addition, there would be funding for the canal system in Punjab and for the uplift of the education system in Sindh.

The World Bank has approved a loan of US$825 Million:

  • US$400 Million for Improving Pakistan’s Public Finance Management (PFM) through the introduction of a new law. The PFM reform programme is financed by the International Development Association (IDA), with a maturity of 25 years, including a grace period of five years. The PFM loan aims to address the inefficiencies in the performance in the health and education sector through the enactment of a robust public finance management law, which will lead to decentralisation of payment and empower the front-line service delivery managers.
  • US$425 Million for upgrading the country’s power transmission system to support increased generation capacity under the National Transmission Modernisation Project-I. This loan is on commercial terms for 21 years, including a grace period of six years.

Earlier, Pakistan had availed a US$800 Million loan from ADB for improving the transmission system but implementation was marred by severe delays. One hopes that this time around the debt would achieve its purpose and bring about the planned improvements within the policy and infrastructure framework.

The US President signed into law a US$700 Billion Defence Bill that includes reimbursement to Pakistan of US$700 Million for supporting US military operations in Afghanistan. The US Congress earlier passed the National Defence Authorisation Act (NDAA) 2018, allowing up to US$700 Million in Coalition Support Fund (CSF) for Pakistan. However, half of this amount was withheld and its release is pending certification by the US secretary of Defence that Pakistan is taking steps to curb the activities of the Haqqani network. To date there is still no indication that the required certification is forthcoming. The law also requires the Pentagon to monitor the assistance to Pakistan to ensure that funds are not used to support militant groups. The NDAA 2018 also expresses concern over the alleged persecution of different political or religious groups in Pakistan.

The current inflows from the multilateral agencies are project specific with stringent conditions aimed at bringing about improvement within the governance and infrastructure spheres. The US assistance comes with strict conditions to tackle the threat from terrorism and to make Pakistan toe the US policy. These inflows have coincided with the ‘adjustment’ in the value of the Pak Rupee, which is now trading in the Rs.110.00-110.75 range against the USD. Recently, there has been apprehension that Pakistan might need to seek another bailout package and this time around the multi-lateral agencies such as the IMF may place more stringent lending conditions on Pakistan, given the ‘belligerent’ US policy stance towards Pakistan. This could not only translate into an effort to impact the scale of CPEC, but could also lead to further depreciation of the Pak Rupee. Perhaps the current controlled slide in the value of the Rupee was the start of Pakistan’s economic capitulation to curry favour with the lending agencies. There is certainly more to come given the needs of the economy and the seemingly limited options available to the Government.