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Rising external debt: another dismal picture of economy

Surrounded by declining foreign exchange reserves and weakening capacity to repay, Pakistan’s external debt and liabilities rose sharply to almost $89 billion at the end of December, reported the State Bank of Pakistan (SBP).

Former finance minister and eminent economist Dr Hafiz Pasha had predicted in December 2015 that by June 2019, Pakistan’s external debt and liabilities would touch $90 billion. With six months to go, the likelihood of external debt and liabilities crossing $90 billion is extremely high. Pakistan’s total external debt and liabilities as of December 2017 stood at $88.9 billion, higher by $5.8 billion or 6.9 percent over six months ago. There was an increase of $13.2 billion in the amount of external debt and liabilities in just one year.

In December 2016, external debt and liabilities amounted to $75.7 billion. At the time, Pakistan’s gross official reserves were $18.6 billion, which have already down to $12.8 billion. The main increase came in the external debt contracted by issuing sovereign bonds and taking expensive commercial loans. In the first half, debt obligated by issuing Sukuk and Eurobonds increased by 52 percent to $7.3 billion.

The distressing figures indicate the government’s incompetency to protect enough non-debt creating inflows to meet external account requirements. Due to huge domestic and foreign borrowings, debt servicing is now the single largest charge on the federal budget. A sum of $3.62 billion was spent on the servicing of outstanding stock of external debt in just six months, according to the central bank.

The country paid $2.7 billion in principal loans and $988 million in interest on outstanding loans. The government had admitted before the National Assembly that Pakistan’s external debt bearing capacity has deteriorated further. In its Debt Policy Statement 2017-18, which the Finance Ministry submitted to the lower house of parliament, the government admitted that during the last fiscal year the country’s external debt increased at a faster pace than its foreign exchange earnings did. As per the latest figures released by the State Bank of Pakistan every Pakistani is now indebted by Rs130,000. The debt situation of Pakistan continues to increase at a frightening rate as the latest figures and statistics released by the State Bank of Pakistan indicate.

From July to December 2017, the foreign debt of Pakistan has recorded an increase of $6 billion. Pakistan’s external debt in percentage of foreign exchange reserves also increased to the three-year high. Similarly, the cost of external debt servicing in percentage of foreign exchange earnings significantly increased.

 

Due to the widening current account deficit, independent economists have lately estimated the gross external financing requirements in the range of $24 billion to $26 billion for the current fiscal year. The government’s conservative estimates put the figure at $18 billion. The financing gap is estimated at roughly $6 billion for the remainder period of the current fiscal year, which would either be met through more foreign loans or drawing official foreign currency reserves.

It appears that the federal government has borrowed enough in the preceding quarter to make the external debt payments and build the depleting foreign exchange reserves.

The detailed analysis revealed that public external debt has highest share of 63 percent in the country’s total external debt and liabilities. Public external debt posted an increase of 6.6 percent or $4.408 billion in the first half of this fiscal year. Out of total external debt and liabilities, external public debt stood at $70.511 billion in December 2017 compared to $66.103 billion at the end of June 2017.

During the period under review, among public debt, long-term debt portfolio increased from $55.547 billion to $59.445 billion. The IMF debt surged by $147 million to reach $6.256 billion. In addition, PSEs debt went up by $237 million to $2.943 billion in December 2017. With an increase of 4 percent or $184 million, bank borrowing reached $4.703 billion at the end of December 2017 compared to $4.519 billion in June 2017.

Private sector debt also showed an upward trend surging by 11 percent during the first half of this fiscal year. Private sector debt stood at $7.236 billion at the end of December 2017, up from $6.505 billion in June 2017. Similarly, during the period under review, debt liabilities to direct investors moved up by $244 million to $3.498 billion at the end of first half of this fiscal year.

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