Pakistan’s external debt falls to 26pc of GDP in FY24

KARACHI: Pakistan’s external debt to the gross domestic product (GDP) ratio decreased to a six-year low of 26 percent in the last fiscal year, largely due to a limited increase in foreign currency borrowings and a reduced current account deficit.

The external debt was at 32 percent of GDP in FY23.

Data from the State Bank of Pakistan on Thursday showed that the country’s total external debt and liabilities (EDL) increased by 3.4 percent or $4.6 billion to $130.502 billion at the end of June 30, 2024.

The public external debt grew to $98.256 billion at the end of FY24, compared with $94.881 billion in the previous year. The country’s public external debt, excluding foreign exchange liabilities, increased from $84.047 billion in FY23 to $86 billion at the end of FY24.

The public external debt, including public sector enterprises, rose to $106.262 billion in FY24 from $102.541 billion a year ago.

While the country’s foreign debt increased in absolute terms, it decreased in relation to GDP due to improvements in the balance of payments and exchange rate stability. This reduction in the debt burden was aided by a substantial drop in the current account deficit, which decreased from $17.48 billion in FY22 to $3.2 billion in FY23, and further to $0.68 billion in FY24. Additionally, foreign remittances increased to $30.25 billion in FY24 from $27.33 billion in FY23. Despite ongoing debt repayments, the SBP’s forex reserves stood at $9.27 billion as of August 9.

“External Debt to GDP has fallen to 6 year low in FY24 at 26 percent of GDP from 32 percent in FY23 due to relatively lower increase in foreign currency borrowings than local currency,” said Topline Securities in a note.

Pakistan’s debt-to-GDP ratio has reached a six-year low at 70 percent in FY24, as the nominal GDP has grown faster than debt, largely due to higher inflation. Additionally, Pakistan’s external debt servicing as a percentage of total exports has decreased to 35 percent in FY24 from 51 percent in FY23.

“This ratio indicates how much a country’s export revenue will be used up in servicing its debt, thus how vulnerable the payment of debt service obligations is to an unexpected fall in export proceeds,” it said.

The increase in the external debt-to-export ratio indicates that external debt is rising faster than exports. However, in FY24, this ratio has decreased to 253 percent compared to its peak of 314 percent in FY20.

Furthermore, the foreign debt servicing to foreign exchange reserves stands at 195 percent for FY24. This ratio shows the percentage of external debt repayments due within one year in comparison to the country’s reserves. It is anticipated that this ratio will decrease to 89 percent for FY25.

“We have taken external debt repayments at $10 billion (net of rollover) for FY25 in line with SBP guidance and reserves for all years we have taken as average of beginning and end of the year,” it said.

Mohammed Sohail the CEO of Topline Securities said contrary to popular belief, Pakistan’s debt ratios are steadily improving. “Timely reforms and strict adherence to the IMF conditions will accelerate this positive trend in the coming years,” Sohail added.

The end-FY24 debt-to-GDP ratio was expected to decrease due to fiscal consolidation. However, debt sustainability risks remain there given large gross financing needs and the persistent challenges in securing external financing.

In FY25, Pakistan needs to repay $26.2 billion in external repayments, including $22 billion in principal and $4 billion in interest. It’s anticipated that $16 billion will be rolled over. In July, $1.1 billion has already been repaid, and the remainder of the fiscal year will see $9 billion repaid.

Finance Minister Muhammad Aurangzeb said that Pakistan has secured assurances from China, Saudi Arabia, and the United Arab Emirates to roll over debt for a year. The country awaits final approval for its new $7 billion loan programme with the International Monetary Fund.