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February 1, 2016

Pak external debt, debt-to-GDP ratio alarming

National

February 1, 2016

IMF paints a bleak and frightening picture of Pak economy; country’s economic managers fail to initiate apt, timely fiscal reforms; historically Pakistan has been borrowing with pride, pleasure; in June 2015, every Pakistani owed about Rs101,338

LAHORE: Now that the International Monetary Fund (IMF) has estimated that Pakistan's external debt obligations would surge to $70.2 billion by end of the current fiscal, up from the $66.457 billion mark in September 2015, alarm bells might certainly have started ringing for the country's candid economic wizards to respond to the situation. The IMF has also predicted that Pakistan's debt-to-GDP ratio is all set to touch the 65 percent mark within the next few months.

Interestingly, not very long ago, some key functionaries of the incumbent PML-N government had claimed that the country's debt-to-GDP ratio had dropped to 59.1 percent in October 2015 from a high of 64 percent in 2013.

On the contrary, the IMF estimates, calculations and projections are painting a very different picture altogether.

The picture is both bleak and frightening.

Pakistan may still not be the most indebted of countries, but its poor debt-to-GDP ratio bears ample testimony to the fact that country's economic managers, serving successive regimes, have not succeeded in initiating appropriate, comprehensive and timely fiscal/monetary reforms that were otherwise required to raise revenues, restructure the loss-making Public Sector Enterprises and contain the non-targeted subsidies dished out to the energy sector.

Plunged into a vicious debt trap, Pakistan has historically borrowed loans with a lot of "pride and pleasure," primarily to repay its outstanding debts. 

Here follows the synopses of Pakistan's debt history:

Research shows that the need for foreign assistance had begun shortly after independence and Pakistan had received $121 million from 1951 to 1955.

This figure nearly had tripled in the next five years as Pakistan had started to play an increasingly important role in the Cold War.

At the end of December 1969, the external debt of Pakistan had amounted to $2.7 billion including the debt of Bangladesh.

Therefore, Pakistan’s total external debt was $3 billion by December 1971 or at the time when the East Pakistan tragedy had rocked the country.

This foreign debt figure had then subsequently increased to $6.3 billion in 1977, soon after the late General Ziaul Haq had held the reins of the country.

Between December 1969 and December 2012, the external debt of Pakistan had jumped by 2,354 percent, from just $2.7 billion to $66.243 billion.

Pakistan's external debt was $21.9 billion in 1990, $22.8 billion in 1991, $24.8 billion in 1992, $27.6 billion in 1993, $31.1 billion in 1994, $32.7 billion in 1995, $34.7 billion in 1996, $35.8 billion in 1997, $35.8 billion in 1998, $36.5 billion in 1999 and $35.6 billion in 2000.

The debt-to-GDP ratio was 78.5 percent in 1995, 73.3 percent in 1996, 73.4 percent in 1997, 74.1 percent in 1998 and 76.2 percent in 1999. 

We all know that both Nawaz Sharif and late Benazir Bhutto had enjoyed two stints each in office between 1988 and 1999.

Further breakdown of the period shows that the external debt had grown at an average annual rate of 9.3 per cent during the 1990-91 to 1994-95 period.

The rate of accumulation had slowed down to an average of almost one per cent per annum during the 1995-96 to 1998-99 period.

External debt had grown at an average rate of 5.2 percent per annum during the first nine years of the 1990s.

Pakistan's accumulated disbursed and outstanding external debt (short, medium and long term) had stood at $ 30.2 billion at the end of June 1999. 

When General Musharraf had taken over in October 1999 by toppling Nawaz Sharif, Pakistan’s total public debt as percentage of its GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1 percent & 528.3 per cent respectively in 1998) and India (47.2 percent & 384.9 percent respectively in 1998).  

The debt-to-GDP ratio was 81 percent in 2000, 83 percent in 2001, 87.9 perent in 2002, 81.8 percent in 2003, 75.9 percent in 2004, 68.3 percent in 2005, 63.5 percent in
2006, 57.5 perent in 2007,

54.9 per cent in 2008, 59.6 percent in 2009, 60.7 percent in 2010, 61.5 and 60.1 percent in 2012.

By the end of 2004, the total external debt was resting at $33 billion.

At the end of June 2007, when General Musharraf was still in power, the loans had soared to $40.5 billion. 

However, the country's real GDP had increased from $60 billion to $170 billion during 2000-07, while its per capita income had increased from under $500 to over $1000 during this period.

During the Musharraf regime from 2001 to 2008, the foreign donors had disbursed gross amount of $22.469 billion as loans and grants, but the country had to pay back $17.220 billion as debt servicing ($11.260 billion as principal amount and $5.595 billion as interest repayments).

Between June 1999 and December 2012, Pakistan’s foreign debt has registered an upsurge of nearly 120 per cent, up from at $30.2 billion to rest at a whopping $66.243 billion.

These foreign debt obligations had risen to $55.9 billion by the end of June 2010, and stood at $ 59.5 billion by end March 2011.

The former PPP-led coalition government had borrowed huge amount of Rs8,136 billion from internal and external resources during its five years constitutional tenure to finance its budget deficit.

The break-up of Rs8,136 billion as follows: Rs1,233 billion borrowed in financial year 2008-09, Rs1363.8 billion in 2009-10, Rs1566.5 billion in 2010-11, Rs1860.5 billion in 2011-12 and Rs2112.3 billion in fiscal year 2012-13.

From 2009 to 2015, Pakistan's democratic governments had received gross foreign assistance of $27.483 billion, but had paid back $22.111 billion as debt servicing including $16.436 billion as principal repayment and $5.675 billion as interest repayment.

It is imperative to note that during the PPP regime, the country’s public debt had increased substantially by Rs6,924 billion between March 2008 and March 2012, reaching a monstrous figure of Rs11,726 billion.Ironically, during the first 60 years of its independence, the country’s public debt had stood at just Rs4,802 billion!

It goes without saying that since the rupee-US dollar parity has worsened from Rs51.77 in fiscal 1999-2000 to well over Rs100 now, Pakistan's miseries on this front have compounded fast.

History shows that there have been only three occasions when Pakistan's balance of trade has recorded a surplus. The first was in 1947-48 when the import requirements of the newly born country were not yet well defined. 

Second, in 1950-51, the balance of trade surplus was caused by the Korean War boom leading to an increase in the international prices of Pakistan's major primary commodities. Third, it was the devaluation of Pakistan rupee in May 1972 and diversion of exports from former East Pakistan to foreign markets that had helped achieve a surplus in 1972-73. 

In its Annual Report 2012–2013, the State Bank of Pakistan had stated:" The country's public debt is still 63.3 percent of GDP – higher than the ceiling of 60 percent under the Fiscal Responsibility and Debt Limitation Act (FRDL) of 2005. Comparing with other countries, Pakistan's debt is significantly above the average for emerging and low income countries. It also shows that unlike other emerging economies, Pakistan's debt burden is rising. Such mounting debt will have adverse consequences for the economy: it will hold back economic growth; limit the scope for discretionary (monetary and fiscal) policies; increase vulnerability to exogenous shocks; raise the tax burden on captive payers, which will discourage investment; and create more uncertainty in the economy."

According to the State Bank of Pakistan, the country's Debt to GDP ratio had averaged 69.75 percent from 1994 until 2014, reaching an all time high of 87.90 percent in 2001 and a record low of 54.90 percent in 2007. 

In June 2015, every Pakistani was owing a debt of about Rs101,338. This figure was Rs90,772 in 2013, Rs80,894 in 2012 and had stood at only Rs37,170 in early 2008.

During the question hour in the Senate a few days ago, Finance Minister Ishaq Dar had stated on record that Pakistan has borrowed a staggering $1.42 billion from foreign countries and financial institutions during the past three months.

Of this $1.42 billion, according to the IMF, the government had opted to borrow $956 million from the commercial banks without competitive bidding to meet its foreign currency reserves related requirements.

The debt-to-GDP ratio is simply a measure of a country's debt compared to its economic output. It also indicates the country's ability to pay back its debt.

Basically, a low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt. 

The World Bank and the IMF define debt-to-GDP ratio as:"A country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth." 

It certainly is not a cardinal sin to borrow money, because the most advanced of nations happens to be the most indebted of all.

While they resort to heavy borrowing to stimulate their respective economies, the men at the helm of affairs of developed nations also ensure that they are not imprudent enough to neglect other vital sectors such as creation of employment chances for their jobless compatriots.

In its September 29, 2014 edition, the "Forbes" magazine had viewed: "If the government is borrowing to stimulate its economy, for example, to create work programmes for the unemployed, then it hopes that this will shorten the duration and severity of the economic downturn. In any event, excess government borrowing for whatever reason, has to be repaid and that’s where this ratio is useful. Although there is no specific percentage to indicate when a critical point is approaching, a lower ratio is better."

The calculation of any country's debt-to-GDP ratio is simple.

Suppose "country A" has debt in the amount of $1.5 million and a GDP of $1.0 million. To calculate its debt-to-GDP ratio, you would divide the amount of its debt by its GDP. In this case, it will be $1.5 million / $1.0 million = 150 per cent.

Hence, "country A’s" debt-to-GDP ratio is 150 per cent since its debt is 50 per cent greater than its GDP.

A research undertaken by the "Jang Group and Geo television Network," by taking into account the latest available figures quoted by the CIA World Fact Book, World Bank and the IMF, reveals that the following are the world's 25 most indebted nations:

The United States ($18.772 trillion on December 2015), France ($5.750 trillion on March 31, 2014), Germany ($5.547 trillion on March 31, 2014), Luxembourg ($3.472 trillion on March 31, 2014), Japan ($2.861 trillion on March 31, 2014), Italy ($2.651 trillion on March 31, 2014), Netherlands ($2.527 trillion on March 31, 2014), Spain ($2.306 trillion), Singapore ($1.813 trillion), China ($1.680 trillion), Switzerland ($1.611 trillion), United Kingdom ($1.524 trillion), Australia ($1.396 trillion), Canada ($1.337 trillion), Hong Kong ($1.29 trillion), Belgium ($1.287 trillion), Sweden ($1.146 trillion), Austria ($820 billion), Norway ($737 billion), Russia ($599.82 billion), Denmark ($593.22 billion), Portugal ($548.8 billion), India ($455.9 billion), Brazil ($428.3 billion), South Korea ($425.35 billion) and Turkey ($405.22 billion).

Among the key Muslim countries, Saudi Arabia's foreign liabilities stand at $134 billion but its debt-to-GDP ratio is an exemplary 1.60 per cent only.

In Indonesia's case, it is 25.02 percent (total external debt of $298.1 billion), it is 90.50 percent in Egypt (total external debt of $ 48.76 billion), 86.68 percent for Jordan (total external debt of $8.34 billion), 52.80 percent for Malaysia (total external debt of $230.870 billion), 49.95 percent for war-ravaged Yemen (total external debt of $6.73 billion), hardly 37.02 for Iraq (total external debt of $50.27 billion), just 30.01 per cent for Syria (total external debt of $11.64 billion), a magnificent 18 per cent for Bangladesh (total external debt of $36.21 billion) and 16.36 percent for Iran (net external liability of $9.45 billion).

But despite featuring amongst the most indebted nations, the debt-to-GDP ratios of various developed economies are simply fabulous.

Here follow the debt-to-GDP ratios of the most heavily indebted countries:

The United States (102.98 per cent), France (95 per cent), Italy (132.30 per cent), India (66.10 per cent), China (41.06 per cent), Japan (230 per cent), Spain (97.70 per cent), Netherlands (68.80 per cent), Germany (74.70 per cent), United Kingdom (89.40 per cent), Brazil (58.91 per cent), Russia (17.92 per cent), Canada (86.51 per cent), Australia (33.88 per cent), South Korea (35.98 per cent), Portugal (130.20 per cent), Belgium (106.50 per cent), Singapore (99.30 per cent), Austria (84.50 per cent), Denmark (45.20 per cent), Sweden (43.90 per cent), Switzerland (34.20 per cent), Turkey (33.00 per cent), Hong Kong (32.00 per cent), Norway (26.40 per cent) and Luxembourg (23.60 per cent).

In order to measure the financial and economic strengths of the most heavily indebted countries mentioned above, here follow their respective GDPs (as estimated by the IMF in 2014): 

The United States ($17.348 trillion), China ($10.357 trillion), Japan ($4.602 trillion), Germany ($3.874 trillion), the United Kingdom ($2.950 trillion), France ($2.834 trillion), Brazil ($2.346 trillion), Italy ($2.148 trillion), India ($2.051 trillion), Russia ($1,861 trillion), Canada ($1.785 trillion), Australia ($ 1.443 trillion), South Korea ($1.410 trillion), South Korea ($1.410 trillion), Spain ($1.407 trillion), Netherlands ($881 billion), Turkey ($798 billion), Switzerland ($704 billion), Sweden ($571 billion), Belgium ($534 billion), Norway ($499.82 billion), Austria ($437.58 billion), Denmark ($342.36 billion), Singapore ($307.87 billion), Hong Kong ($290.90 billion), Portugal ($229.95 billion)and Luxembourg ($65.68 billion).

Here follows the net international investment position (the difference between a nation's external financial assets and liabilities) of these countries under review:

Hong Kong (+6,398.765 billion Hong Kong dollars), Singapore (+710.039 billion Singapore dollars), Norway (+5,383.157 billion Norwegian Krones), Switzerland (+768.343 billion Swiss Francs), Japan (+366,856.000 billion Yens), Netherlands (+421.278 billion Euros), Belgium (+199.930 billion Euros), Luxembourg (+20.761 billion Euros), Denmark (+728.010 billion Danish Krones), Germany (+1,055.879 billion Euros), China (+1,776.400 billion US dollars), Russia (+310.980 billion US dollars), South Korea (+134.200 billion US dollars), Canada (+137.173 billion Canadian dollars), Austria (+8.669 billion Euros), Sweden (-13.393 billion Swedish Kronas), India (-353.674 billion US dollars), France (-418.373 billion Euros), United Kingdom (-444.537 billion Pounds), Italy (-447.864 billion Euros), Brazil (-776.537 billion US dollars), United States (-7,019.700 billion US dollars), Turkey (-437.029 billion US dollars), Australia (-866.700 billion Australian dollars), Spain (-999.948 billion Euros) and Portugal (-193.075 billion Euros).

As far as the United States and Japan are concerned, despite their adverse debt-to-GDP ratios and their ever-rising debt burdens, they have continued to accumulate foreign assets.

The US Council on Foreign Relations had opined a short while ago: "The dollar's status as the world's reserve currency has become a facet of US power, allowing the United States to borrow effortlessly, sustain an assertive foreign policy and afford large debt-financed military commitments. Since 1982, the country has run a current account deficit every year but one, steadily piling up obligations to foreigners."

It had added: "Because foreigners have been eager to hold dollar assets, they have willingly enabled this pattern, pouring capital into the United States and financing the nation's surplus of spending over savings. Capital has tended to flood into the United States especially readily during moments of geopolitical stress, ensuring that the nation has had the financial wherewithal to conduct an assertive foreign policy precisely at moments when crises demanded it."

Similarly, with a debt-to-GDP ratio of 230 per cent and despite being indebted to the tune of $ 2.861 trillion, Japan has the ability to finance its deficit on its own. It has run an account surplus for most of the last three decades, selling and investing more overseas than the other way round.

The Japanese government bond market is the world's largest. It is also one of the least international. Roughly 96 percent of government securities are domestically held by the Japanese banks, insurance companies and pension funds so there is little worry about capital flight.

Much of Japan's government debt is held publicly and financed by the country's once-ample private savings. About 95 percent of Japan's debt is owned by its citizens, not foreign hedge funds; it's unlikely that those citizens would dump their bond holdings.

Japan's notably thrifty households sit on 1,500 trillion yen ($20 trillion) in savings. The Japanese government is in deep debt, but the rest of Japan has ample money to spare.

This particular factor makes the country less vulnerable to outside pressures that might cause it to default. And in theory, it gives the government plenty of leeway to print money---a spendthrift's prerogative it holds in common with the United States.

Japan, therefore, can boast the luxury of being able to issue debt in a market full of willing buyers.

However, Japanese financial institutions possess about 40 percent of government bonds. If bonds prices suddenly fall, the value of these assets would nose-dive and the financial system could plunge into turmoil.

On September 1, 2011, the "New York Times" had stated: "Japan has long been able to borrow at low nominal rates because of unwavering appetite by domestic investors for government debt. For years, Japan has managed its gargantuan debt load, and bond buyers have been willing to lend the government money at some of the world's lowest interest rates."

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