Money Matters

The big sweat

February 5, 2018
By Mehtab Haider.

Pakistan’s external debt and liabilities are entering into the danger zone and excessive speed. The outstanding amount crossed the $85 billion mark by the end of September of the current financial year 2017/18.

Pakistan’s external debt and liabilities are entering into the danger zone and excessive speed. The outstanding amount crossed the $85 billion mark by the end of September of the current financial year 2017/18.

The combinations that worsened the situation and piled up the debt burden on the country are lethal. As Pakistan’s external debt and liabilities increased, the country’s foreign currency reserves kept on depleting. The reserves depleted consistently and in a gradual manner, posing fresh threats to the debt sustainability of Pakistan further hampering its ability to repay sovereign obligations.

During the week-ended on January 26, 2018, the reserves held by the State Bank of Pakistan (SBP) decreased by $299 million to $13.234 billion due to external debt servicing and other official payments. The foreign exchange reserves of commercial banks stood at $6.120 billion as compared to $6.107 billion during the previous week.

The rising debt in absolute number itself is not bad phenomena for any country if it enhances its debt carrying capacity to pay back all obligations on its external accounts. Contrary to the world, in Pakistan there are some basic and fundamental problems for conducting analysis on economic issues as everyone picks up a figure which suits him or her for the purpose of point scoring.

On the same lines, Ministry of Finance in its latest annual feature report titled Debt Policy Statement tabled before the Parliament argued that developed countries like United States, United Kingdom and Japan also carry debt and maintain levels as high as 80 to over 100 percent of their GDPs, well over Pakistan debt to gross domestic product (GDP) levels. Even in the developing country peer group, Egypt, Sri Lanka and India carry higher debt to GDP levels than Pakistan. The debt to GDP ratio in US stands at 82 percent, Japan 119.9 percent, UK 80.4 percent, India 67.7 percent, Sri Lanka 79.7 percent, Egypt 93.6 percent, and Pakistan 61.6 percent.

But the economic wizards had forgotten to mention here that the developed countries were not facing massive current account deficits, whereas in Pakistan the increasing deficit on external account was eating away the country’s foreign currency reserves.

Some estimates suggest that the country’s external debt and liabilities could touch $95 billion by end June 2018. Such mammoth jump in the external debt and liabilities must be a cause of concern for all and especially for the elected Parliament, as the government tabled its latest report on debt policy statement last week.

At a time when the Parliament is vying to ensure its supremacy and respect, the parliamentarians would have to become relevant in the debate of policy formulation for controlling debt accumulation. How many times have the parliamentarians raised the issue of debt burden in the context of tabled Debt Policy Statement? This should be an element of soul searching for all members of the elected Houses.

Most of them have not even bother reading the tabled report. Those sitting in parliament would have to earn the respect, and to earn the respect they would have to intervene for relevant changes in the policy making process.

The Parliament are more responsible as they stamped changes in Fiscal Responsibility and Debt Limitation Act (FRDLA) through Finance Bill 2017, in which targets are envisaged up to 2030. They instead also changed the definition of debt.

Only time will tell how many will participate in the debate in the upcoming session of the Parliament on the rising debt burden in context of the latest report submitted by the Finance Ministry.

The DebKt Policy Statement (DPS) had estimated that total public debt stood at Rs22,059 billion while total government debt was Rs20,193 billion at end September 2017. Gross public debt increased by around Rs652 billion during first quarter of 2017-18. Out of this total increase, increase in domestic debt was Rs521 billion while government borrowing from domestic sources for financing of fiscal deficit was Rs433 billion. This differential is mainly attributed to increase in government credit balances with the banking system.

Similarly, Finance Ministry stated that external public debt (without liabilities) recorded an increase of around Rs131 billion which was predominantly driven by translational losses on account of appreciation of international currencies against US dollar and depreciation of Pakistani rupee against the dollar.

In US dollar terms, according to Finance Ministry’s definition, the external public debt increased by around $0.9 billion during the first quarter of 2017-18 and recorded at $63.4 billion at the end of September 2017. Government mobilised $1,468 million during first quarter of 2017-18, mainly from multilateral sources ($642 million), commercial loans ($472 million) and bilateral sources contributed $354 million (mainly from China amounting to $317 million). Government also repaid $1,349 million during the first quarter of 2017-18.

The external debts and liabilities stock stood at $83 billion till the end of June 2017 out of which external public debt was $62.5 billion. The external debt and liabilities increased by $9 billion out of which external public debt contributed $4.8 billion during 2016-17 compared with increase of $6.8 billion recorded in external public debt stock during 2015-16.

Despite higher gross external disbursements during 2016-17, the growth in external public debt stock was contained to eight percent compared with 13 percent during the preceding fiscal year. This was owing to higher external debt servicing coupled with revaluation gains registered on account of appreciation of US dollar against other international currencies.

External public debt servicing went up by 48 percent to settle at $6,440 million during 2016-17 compared with $4,340 million during the preceding fiscal year.

The higher repayments against multilateral loans, Eurobonds, Paris Club Countries and commercial loans mainly led to this increase. In addition, the government repaid Safe China Deposits amounting to $500 million.

A country can achieve external debt sustainability if it can meet its current and future external debt service obligations, without debt rescheduling or the accumulation of arrears and without compromising growth. External public debt repayment obligations for Pakistan are not more than an average of $5 billion per annum until 2022. However, the Finance Ministry conceded that the external public debt repayment would peak to $6.5 billion by year 2020.

Former finance minister and renowned economist Dr Hafiz A Pasha when contacted said the country’s external debt liabilities could be touching $93 to $95 billion by end June 2018 and added that they already stand at $88 billion after the issuance of $2.5 billion Sukuk and Eurobond by the government in November last. He said earlier he had projected the external debt liabilities at $90 billion, but now it would range between $93 and $95 billion by the end of the current fiscal year.

Former Economic Advisor and Professor Dr Ashfaque H Khan said the EDL would definitely touch $95 billion mark by the end of the current financial year. It would be more worrisome as the country’s debt carrying capacity was not increasing at a speed similar to the rising debt accumulation pace.

He said the government claimed that the debt to GDP ratio was much higher in some developed countries like US and Japan. They, however intentionally skip mentioning the reality that these countries were not facing balance of payment crisis and their foreign currency reserves were not decreasing. It is like comparing apples with oranges.

The writer is a staff member