The Chain of Debt

Spearhead Analysis – 18.05.2018

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

Over the past 70 odd years the external debt and liabilities of Pakistan have risen from around US$40 Billion till June 2007 to approximately US$92 Billion in March 2018 (estimated to cross US$95 Billion by June 2018). The PPP led government in its last tenure managed to add US$20 Billion plus to the external debt and liabilities, while the current PML-N government has so far added around US$35 Billion to this amount. Huge increase in debt by two successive governments with no corresponding increase in revenue generation or reforms of the financial sector. The country continues to suffer on account of meagre inflows from Foreign Direct Investment, Exports, and Inward Workers’ Remittances; while, there has been a rapid rise in outflows through imports, dividend and profit repatriation, and repayment of interest and principal amounts on debt. This has resulted in fragile foreign exchange reserves that have primarily ben shored up through accumulating debt. Unfortunate, that none of the governments have been able to contain the debt nor institute fiscal reforms and have always relied on the lender of the last resort, The International Monetary Fund (IMF), to bail them out and in the process accumulate more debt, without instituting the IMF suggested structural reforms.

The State Bank of Pakistan (SBP) stated that the External Debt and Liabilities rose by over US$8.3 Billion till March 2018, while public external debt reached a level of US$72 Billion during this time period. The under-performing public sector enterprises (PSEs) owed US$2.741 Billion as foreign debt, while loans obtained by private sector stood at US$7.645 Billion. The total public debt, including domestic and external borrowings and liabilities, reached a level of Rs. 28,297 Billion (US245 Billion) at the end of March 2018 (calculated at an exchange rate of 115 to the USD). This puts the overall public debt at a level of 82.3 per cent of the GDP, much above the 60 per cent policy threshold. During this period the current account deficit rose to over US$12 Billion, which combined with the rapidly falling foreign exchange reserves appears to point towards another potential IMF bailout.

The architect of the predicament facing Pakistan, the absconding ex-Finance Minister and his Ministry officials when confronted by the issue of rising debt and liabilities, conveniently shifted the fiscal goal-posts and amended the definitions to provide a false sense of relief. This process started in 2013 when the PML-N led government assumed office, and immediately announced that the Circular Debt of around Rs.500 Billion had been repaid. Today, when the same government is at the end of its tenure that same Circular Debt has ballooned to an amount of almost Rs.1 Trillion, with no end in sight. It has been a similar story with the debt and liabilities, and no amount of masking by the government can hide the fact that the country is drowning in a quagmire of debt. 

Pakistan faces serious challenges. Of the total external debt and liabilities, the public debt obligations including foreign exchange liabilities were US$76.1 Billion till end-March 2018, up almost 43 per cent or US$23 Billion. The government’s continued reliance on debt, has resulted in issuing high-cost sovereign bonds and acquiring high-interest commercial loans. Pakistan has been increasingly relying on commercial loans from China and has so far contracted in excess of US$2.2 Billion from Chinese financial institutions to bolster the faltering reserves.  The IMF’s first post-programme monitoring report showed that Pakistan’s gross external debt in terms of exports, which stood at 193.2 per cent in 2013, is projected to rise to 316 per cent by June 2018. At the same time the gross external financing requirements have risen to US$24 Billion.

Pakistan’s foreign exchange reserves as at May 11, 2018 stood at $10.798 Billion, with another US$6.628 Billion held by Commercial Banks. The Central Bank foreign exchange reserves include loans of US$6.13 Billion acquired from domestic banks. Excluding these borrowings, the reserves are at the same level as 2013, while the debt and liabilities have risen by almost US$35 Billion during this period.

As a result of the ongoing borrowing, debt servicing has become the single largest expenditure in the Federal Budget, estimated to be Rs.1.62 Trillion or 30.7 per cent for FY2018-19. In FY2017-18 the country repaid US$3.52 Billion in principal and US$1.44 Billion in interest on the outstanding loans. The economy, while having grown 5.78 per cent is showing signs of strains in recent months due to the worsening balance of payments issue and the IMF has stated that as a result of the ongoing macroeconomic imbalances the pressure would continue to mount and the growth rate could be negatively impacted in the coming fiscal year.

The Government and its coterie of officials appear oblivious to the problems that have been created for the country. They conveniently redefine the debt parameters to accommodate additional debt, and have been unwilling to institute the required fiscal reforms for revenue enhancement as an alternative to debt accumulation. Mired in self-created and self-inflicted controversies and following a path of institutional confrontation the government since 2013 has failed to address the real problems facing Pakistan, and has instead portrayed a false sense of security through contracting debt to meet expenditures. The Circular Debt, foreign exchange reserves and exports all point towards a dismal track record of underperformance, and Pakistan is virtually at the same level as in 2013, with the additional burden of a huge chain of Debt.