Drowning in debt

Pakistan’s rising foreign debt is feared to touch the new height of $105 billion in the next three years, as the reckless borrowing by the rulers continues unabated from multilateral agencies, bilateral creditors and the foreign private banks.

And the heavy reliance on foreign loans is challenging the very sustainability of the country’s burgeoning debt profile which by 2019 is likely to become the biggest problem for the next government.

The political compulsions of the government are said to be forcing it to borrow and just borrow from all sides, including those of non-traditional sources to manage its day to day financial affairs, despite building $21 billion foreign exchange reserves.

Why did the Pakistan Muslim League-Nawaz (PML-N) government borrow close to $1 billion from Noor Bank of Dubai, Dubai Bank and the UBL Dubai - all three operating from Dubai, is mind boggling. Since the International Monitory Fund’s (IMF) $6.67 billion bailout package is ending by September this year, the government reportedly panicked, and thus borrowed extensively to ensure sufficient resources before contesting the next election in 2018.

Like the previous Pakistan Peoples Party (PPP) government, the present government too thought it fit to seek incredible amounts of foreign loans in the absence of any oversight by any institution. The Parliament had passed a Fiscal Responsibility and Debt Limitation act in 2005 that sought to ensure that the country’s debt should not go beyond 60 percent of the Gross Domestic Product (GDP). 

But unfortunately the debt has risen to over 63 percent of the GDP with no government giving any heed to the very idea of debt sustainability, which according to critics and the independent economists is reaching to a point of no return. This could even cause problems to the national sovereignty in the near future.

It is common knowledge that the World Bank in one of its recent risk reports said that Pakistan’s debt would further increase, as all governments were extensively borrowing. It also said that as the time for election was coming nearer, the present government would spend more by borrowing more.   

“Our foreign debt now at little over $70 billion would surely be reaching as high as $105 billion, when the financial year 2018-19 ends,” predicted the renowned economist Dr Ashfaque Hasan Khan.

“My forecasting as an individual has proved correct compared to the whole lot of officials of the ministry of finance and IMF officials about Pakistan’s ever increasing foreign debt, which many people regard a ticking time bomb,” he said.

Giving the details, he said that when the 8th review of the Pakistani economy was completed by the IMF, foreign debt was $68 billion that later reached to $70.2 billion during the 9th review, just in three months and it “is not alarming”, he asked.

He said that the professional ability of the IMF staff dealing with Pakistan has exposed it because it was weak and comprised of people who did not have any interest in Pakistan and its falling economy. “Pakistan is not on the priority list of the IMF ... The forecasting being done by the IMF and the officials of the ministry of finance is a gutter forecasting as they could not assess how much debt would accumulate after the 9th review”, the noted economist said. There is no doubt that they lack forecasting ability.

Former economic advisor to the ministry of finance, Sakib Sherani too was critical of the rapidly increasing foreign debt and said the speed with which the government was borrowing, there was no way to save the country from foreign dependency. “I don’t find any logic whatsoever on the part of the government for this reckless borrowing,” he said, adding that his debt numbers and numbers of Dr Hafiz Pasha and Dr Ashfaque were almost the same with some minor difference. For example, he said that he saw the country’s debt to be close to $95 billion by 2018-19.

The IMF driven three-year programme, he pointed out, was meant to ensure considerable increase in the foreign exchange reserves, but the way Pakistan’s foreign debt was accumulating, it was certainly very frightening. The accumulation of the foreign debt, he said, did not include $45 billion being provided by China for China-Pakistan Economic Corridor (CPEC). “God knows what would happen when Chinese loans will also be included in the overall foreign debt.”

Sherani also said that the total public debt and liabilities would be between Rs26 to Rs28 trillion by the end of 2018-19. “The finance minister has spent more time in wooing foreign investors than catering to the requirements of Pakistan.”

The traditional way of augmenting reserves, he said, was to enhance exports and foreign remittances. While exports are declining, home remittances are stagnating which is not good for the country, he believed. “The government must understand that debt issue is fast becoming a challenge and the sooner the government realises, the better it would be, failing which I foresee a horrific picture of the economy,” the former advisor said, who also writes regularly on economic issues.

The IMF in a Selected Issues Paper uploaded on its website after the completion of the Article 1V consultations after the ninth review did not talk much about the foreign debt, neither did it suggest ways and means to bolster foreign exchange reserves to get rid of both expensive and inexpensive loans.

Perhaps that was why the Fund document was largely termed as disappointing both by the independent economists and some of the newspaper editorials. Its estimation of real exchange rate was not considered accurate, which was more politically motivated than based on reality, reflecting a lack of knowledge about the actual conditions prevailing in Pakistan.         

Though the government did not plan to seek any fresh loan after the expiry of three years Extended Fund Facility (EFF), the government is expected to seek post programme monitoring by the IMF to remain relevant in terms of obtaining loans from other multilateral agencies and foreign banks.

Insiders maintain that the Economic Affairs Division (EAD) that releases details of foreign loans could be asked to stop sharing debt data with the media to avoid speculation. If that happens it would simply amount to concealing debt numbers which are frequently also used by the opposition politicians to embarrass the government.

Coming out of the IMF programme, it is said, would be used as a stunt at the time of the next general election by saying that the government has broken the begging bowl of the Washington based lending agencies. During Pakistan Muslim League-Q the then Prime Minister Shaukat Aziz, now facing treason charges along with former President Musharraf, had also claimed the same at the end of the IMF programme.

Why is the present government relying too much on foreign loans is a question that is being discussed in all official and unofficial quarters. How has the Nawaz Sharif administration acquired over $5 billion loans from multilateral and bilateral sources during the first six months of 2015-16 is the talk of the town.

Likewise obtaining a massive amount of $18 billion during a two and a half year term by the current dispensation is also a matter of frequent discussion in media, with ministers and party stalwarts unable to defend the government.     

The government is projected to seek over $9 billion by June this year from the IMF, World Bank, Asian Development Bank (ADB) and other bilateral and multilateral resources including foreign banks. These banks offer short term loans on high mark-up but Pakistan is perhaps the only country in our part of the world which prefers such loans.

Since the motto of every government in Pakistan has always been to pull through (what is regarded in Punjabi as Dung Tapao), by obtaining foreign loans during its term, hardly any focus is given over the piling up of foreign debt.

The total debt and liabilities that include local and foreign debt, estimated at Rs17 trillion some few years ago, are further getting heftier and heftier with the passage of each day, making every Pakistani with more and more debt burden. A few years ago every Pakistani was understood to be under a debt burden of Rs60,000 which has now escalated to over Rs100,000 now.

According to the latest figures released by the EAD, Pakistan provisionally received $1.395 billion including S1.355 billion loans and $40 million grants in December against $1.6 billion of the corresponding period last year. While the EAD chose not to divulge the reports of getting $18 billion foreign loans till September 30, 2015, which included 3.5 billion bonds and $4.77 billion from the IMF, to the media, it did concede to receive $9.18 billion foreign loans during the current financial year.

When it comes to discussing the rising debt burden Dar often accused independent economists of spreading despondency. According to Dar, these economists are creating misperceptions about the country’s debt. He always maintains, in line with basic economic theory that the GDP ratio is the critical indicator of the sustainability of debt and not the rise in the total debt from one year to the next. But his critics including those of the opposition politicians are focusing on the rise in local and foreign debt since Dar took over the portfolio of the finance ministry in absolute as opposed to percentage terms.

The real problem, many people including the independent economists, is the release of data by the Federal Bureau of Statistics (FBS) which works under the ministry of finance and as such cannot give anything independently. Thus the bureau is criticised by everyone.

Nevertheless, the central bank, unlike the FBS after years of towing the line of the ministry of finance, has pleasantly started working out some credible numbers including those of the debt. The State Bank  of Pakistan’s annual report maintains that while in 2013-14 the debt to GDP ratio was 65.1 percent, it came down to 64.8 percent in 2014-15. But who does not know that even this ratio is more than 60 percent allowed under the Fiscal Responsibility and Debt Limitation Act of 2005.

The part of the problem is that the IMF paid only lip service and never gave its honest opinion over the issue, forcing its critics to say that the IMF was partner in crime. In its eighth review, it ironically noted that the time-bound condition of a Debt Policy Coordination Office (DPCO), as a middle office responsible for updating MTDS and monitoring its implementation, coordinating the credit risk management functions, has been met.

But the million dollar question is that whether the debt office is fulfilling its responsibilities to gauge the debt sustainability and its impact on macroeconomic stability. The answer is no, because had this office contributed in any manner, the stock of debt would not have risen to the present alarming level. For that to happen, the present and future governments would have to limit their borrowing and make sincere efforts to increase the country’s revenue and external resources, particularly through increasing exports and home remittances. Exports would increase when there is some reasonable exchange rate coupled with the release of over Rs150 billion refunds to the exporters. Remittances would stop stagnating when overseas Pakistanis get some genuine incentives including certain respect as and when they visit their homeland.

The writer is a senior journalist based in Islamabad