Pakistan’s reliance on foreign commercial loans up

ISLAMABAD: Pakistan’s reliance on foreign commercial loans has increased as Islamabad generated $3.4 billion or 32 per cent of total external loan inflows of $10.7 billion obtained for supporting the balance of payment position during the fiscal year 2019-20.

According to the Annual Report on Foreign Economic Assistance (FEA) for 2019-20 released by the Economic Affairs Division on Friday, it was stated that during FY 2019-20, an amount of $6.5 billion has been disbursed by multilateral and bilateral development partners as compared to $4.1 billion last year, registering 59% growth. In addition, the government raised $3.4 billion from foreign commercial sources to meet its external debt obligations and support the balance of payments. Out of the total disbursement of $10.7 billion, 97% were loans and 3% were grants.

Disbursements of $10.7 billion during FY 2019-20 were mainly under the projects and programme loans/grants from multilateral, bilateral development partners and financial institutions.

The composition of disbursement is as follows: $5,645 million or 53% of total disbursements were from the multilateral development partners mainly from Asian Development Bank, Islamic Development Bank, Asian Infrastructure Investment Bank and World Bank. $3,373 million or 32% of total disbursements were from foreign commercial banks mainly to refinance maturing commercial debt of past periods. $1,644 million or 15% of the disbursements were from bilateral development partners particularly Saudi Arabia, China and the UK.

Increased level of inflows from our multilateral and bilateral development partners is indicative of their commitment to support development priorities of the government as well as strengthening of institutional capacity to implement the reforms in the priority areas of revenue, fiscal management, debt management, PSEs, energy sector reforms and ease of doing business.

These inflows are long term and on concessional terms with lower cost which is a reflection of healthy composition and quality of our external public debt. After commercial banks, the ADB is the largest development partner with disbursement of $2,824 million (26%) followed by the World Bank (13%), the IsDB (8%) and Saudi Arabia (7%). During the period under review, 74% of the total disbursements were programme financing/budgetary support, 19% project financing while the remaining 7% commodity financing was mainly from the Islamic Development Bank for purchase of crude oil. Out of this, the total budgetary support component, $4.6 billion were the programme support and the remaining $3.3 billion were arranged as re-financing by the Finance Division from various foreign commercial banks.

The sectoral composition of project assistance is summarised in Figure 8. The largest sector in terms of disbursements is Transport & Communication (32%) followed by Rural Development & Poverty Reduction sector (11%), Education (11%), Energy and Power sector (10%) and Health sector 9%.

As of June 30, 2020, Pakistan’s total external public debt stands at $77.9 billion. The external public debt was $73.4 billion last year so it grew at the rate of 6%. The composition of external public debt (Figure 9) demonstrates that Pakistan’s external public debt is derived from three key sources. The major source is multilateral debt (comprising 51% which is derived from three key sources.

As of June 30, 2020, 70% of total external public debt consists of loans on fixed interest rates while the remaining 30% loans are obtained on floating interest rates. The government paid an amount of $10.4 billion during FY 2019-20 on account of debt servicing of external public loans. It consists of principal payment of $8.5 billion and interest payment of $1.9 billion. Details are as under:

For the period under review, net transfers to the government were $1,810 million. A positive net transfer reflects that during the period, the government has retired less loans in comparison to the new loans. Interestingly, the stock of external loans which was obtained via market-based instruments has declined by $2,062 million (bonds and commercial borrowing) and the share of concessional external loans with longer maturity increased by $3,871 million (multilateral and bilateral loans). This indicates qualitative improvement in external public debt stocks.

Despite the elevated level of external debt servicing, Pakistan has successfully discharged its record debt servicing during FY 2019-20 by successfully mobilizing external resources and shifting focus from short-term commercial high-cost liquidity to long-term concessional flows. This also reflects the prudent external debt management by the government and growing confidence of our development partners, the report concluded.