Money Matters

Tyranny of external debt

By Ihtasham Ul Haque
Mon, 09, 16


The country’s rising external debt is fast becoming unsustainable and likely to start causing serious problems to the economy after 2018 - the election year in Pakistan - when the new government would have no options but to once again go back to IMF for certain emergency lending.

The Pakistan Muslim League-Nawaz (PML-N), government may pull through till 2018, after which the new ruling party would have to knock the doors of the Washington-based lending agency to help improve the precarious balance of payment position. By that time, a bailout package would become inevitable. 

So the claims of breaking the begging bowl by the present government do not seem true. Exports, home remittances, and foreign direct investment (FDI) are all falling, leaving no room to manoeuvre in terms of managing new external resources.

The record $8 billion borrowed by the present government shows that all is not well on the external front.

“This government may catch up till 2018, but things will be frightening for the new government to manage resources. Also, by then, the IMF may not be forthcoming without slapping tough conditions given the fast changing regional geopolitical situation and the global security environment,” said a source, which has been interacting with various governments in the country.

He said the government was not realising that the balance of payment position was becoming unmanageable and unsustainable, and posing serious risks to the country’s fragile economy.

Earlier, the PML-Q government of former Prime Minister Shaukat Aziz had claimed the breaking of begging bowl by saying good bye to IMF, and had prematurely terminated the lending programme. The then government had refused to seek the loan for the remaining two quarters.

Like PML-Q, the present PML-N government is also saying it has achieved the economic stability, and is not facing serious challenges. The prime minister and his cabinet colleagues are saying this perhaps in the backdrop of the mighty $46 billion China-Pakistan Economic Corridor (CPEC) project, which offers opportunities and challenges simultaneously.

Is the corridor the singular solution to the multiple economic problems of the country? The answer is certainly in the negative. The reality is that all the governments in Pakistan thrived without conceiving and implementing home grown economic policies. They always embarked on the easier route that was to seek loans and borrow externally, creating problems for their successors in terms of improving the balance of payment position.

The CPEC, which aims to integrate 60 economies under the ‘One Road One Belt’ vision of President Xi Jinping, is an investment that is exclusively benefiting Pakistan and China; developing their infrastructural and physical projects on a massive scale.

No doubt new rail and road links through the CPEC will greatly support transport, energy, mining, oil and gas exploration, textiles, automotive, agro-based industry, and consumer good sectors, besides supporting the small and medium enterprises in Pakistan.

The projects under the CPEC will have short, medium, and long term benefits, but will they offset Pakistan’s consistent balance of payment problems? That is anybody’s guess. China is extending mostly soft term loans, but still they are loans, and will have to be returned.

In case Pakistan does not improve its balance of payment position by increasing exports, home remittances, curtailing unnecessary imports, and increasing foreign direct investment, it will be unable to service its foreign loans, including that of China, which is certainly a time-tested friend.

There is a growing consensus that Chinese support through the CPEC will help achieve economic stability in the longer run. But in the short and medium term, Pakistan will have to rely on its traditional sources of foreign earnings by enhancing exports, home remittances, and FDI.

At the same time growing dependence will have to be curtailed by seeking less and less external loans which have become an easy source of managing acute financial affairs of the present and past political and military governments.

Before the present government took over in June 2013, Finance Minister Ishaq Dar had said on more than one occasion that if PML-N came into power, it will not seek any IMF bailout programme and that the economy will be improved by implementing the party’s economic agenda.

But then time came when Dar Sb and his government decided to approach the IMF for emergency lending to avoid default, which seemed imminent because of the fast declining foreign exchange reserves. The finance minister argued at the time that the ruling party had to go for an IMF option because of the very scary balance of payment position. He used to say that the government eventually sought the IMF bailout package to retire loans taken by the previous Pakistan Peoples Party government. 

The fact of the matter is that independent economists and financial writers had been warning about the imminent default situation. They used to say the PML-N government could not escape IMF emergency lending programme especially due to an economic mess left behind by the Zardari-led PPP government.

The situation today is equally disturbing, though the scale of corruption is perhaps not as high, despite Imran Khan’s and other opposition parties’ assertions on account of the infamous Panama leaks against the prime minister and his immediate family.

Given the current $73 billion external debt and liabilities, it is not difficult to understand the problems our government is facing to service its debt. The matter compounded when the country witnessed a huge 77 percent decline in FDI (from $4.4 billion in 2014 to $952 million in 2016) coupled with 30 percent reduction in exports (from $2.1 billion to $1.5 billion) and 20 percent cut in home remittances in the month of July this year.

The central bank officials, however, maintain that they would meet $20 billion target of home remittances set for the current financial year. But they do concede that all is not well regarding exports and FDI which continue to decline, while imports are surging un-proportionately causing problems to the fragile balance of payment position.

When the IMF will release the last tranche of $6.67 billion Extended Fund Facility (EFF) programme, the government find it tough to maintain the current $22 billion level of foreign exchange reserves. These reserves will be hit when the government repays its foreign debt, including that of the IMF. It is feared that the matter will worsen by 2018 when the new government has to repay, especially in light of the weak reserves.

The government has so far spent only $3 billion instead of $11 billion on CPEC related projects. Delay in project financing from the Chinese counterparts as well the Chinese government is also creating financial problems for the government.

The only way forward is to increase exports, home remittances, and FDI to meet the balance of payment issue. It is frightening that Pakistan’s total debt and liabilities have risen from Rs21.5 trillion to Rs22 trillion in 2015-16.

The writer is a senior journalist based in Islamabad