Addressing the post budget press conference, the Federal Minister for Finance Miftah Ismail said, “We have no intention to go for the bailout package.” The Minister for Finance disclosed that the government had secured $1 billion financing and it had no intention for getting any further bailout package from International Monetary Fund (IMF) and expressed confident that foreign exchange reserves would further improve in the coming days.
If the government is not going to the international lenders like IMF for bailout, then what will it do in the fiscal year 2018-19? The government plans to borrow $11.6 billion from external sources such as from bilateral, multilateral, euro bond and commercial banks. “Total inflows of external financing are expected to be $11.6 billion during 2018-19 with project loans of $4.8 billion and programmer loans of $1.8 billion” according to the official document. The government plans to borrow $3.1 billion from countries like Germany, China, Japan, America, Saudi Arabia and others and $3.5 billion from multilateral sources. Moreover $3 billion will be collected from raising bonds and $2 billion from commercial banks. The country’s forex reserves have declined to $10,917 million during the week ended on April 20 pushing the country into a ‘balance of payment crisis’ situation. The deteriorating external account position and the country’s ballooning import bill has forced the government to lobby for more loans from a friendly country in order to cover the three-month import bill.
Placing the claim and confidence of the finance minister on one side, the debt statistics of Pakistan reveals an alarming situation. The country will have to pay Rs1,620 billion in interest payments for the next fiscal year 2018-19 against the estimates of borrowing loans from external and internal sources. The country will pay Rs1,391 billion as interest to domestic banks and Rs229 billion to foreign institutions in the fiscal year 2018-19. Moreover, the country will repay an amount of Rs21,905 billion to domestic and foreign lenders in the next fiscal. In the current fiscal year 2017-18, the country has already paid Rs1,526 billion as the interest payment to both domestic and foreign lenders. An amount of Rs1,332 billion paid in servicing of domestic and Rs194 billion of foreign debt.
The country has virtually come in a debt trap, which is bad omen for the economy. The country witnessed a significant increase in its overall debt in the past four years. The overall debt, estimated at Rs9.5 trillion in 2013 rose to Rs12.7 trillion in 2016. Similarly, the external debt at $73 billion in 2016 increased substantially from $61 billion in 2013. The exports were estimated at $27.4 billion in 2016, compared to $31.5 billion in 2013. These estimates show the country’s weakness to service future external debt liabilities. The country’s rising external debt and liabilities continue to burden its economy.
The debt-to-GDP ratio actually indicates a country’s ability to pay back its debt. 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 country’s poor debt-to-GDP ratio amply debunks that country’s economic managers have not been successful in initiating timely fiscal and monetary reforms to raise revenues.
One reason for the depletion of central bank’s forex reserves is the sudden spike in imports of heavy machinery under the China-Pakistan Economic Corridor (CPEC). The most important reason is, however, the country’s growing obligations of debt servicing.
The surge in CPEC imports of machinery and equipment are likely to keep trade account under pressure. The external sector’s stability depends on strong position of foreign exchange reserves, which will boost through foreign exchange receipts. What is the long-term solution to the country’s debt problem is to bring improvement in the export performance. In short term, the government avoids to borrow from the international lenders and take impressive measures to reduce the ever widening fiscal deficit.
The deterioration of macro-economic indicators reveals structural problems in the country’s economy. Present government borrowed $25 billion in foreign loans in the first three years of its tenure. The total level of public debt and liabilities has swollen to 75.9 percent of GDP in FY 2016 up from 72.2 percent in FY 2015 and it is worsening onwards. With the rising debt burden, declining exports and remittances from overseas workers, the country is actually facing a balance of payment crisis. Given the drying up foreign remittances in the kerb market, lower inflows and higher demands; the exchange companies in Pakistan are facing tough times due to dearth of dollars. With a widening trade deficit and low foreign direct investments, the country largely depends on its remittances to improve the balance of payment position.
Some observers believe that the country’s remittances have been stable for the last few years despite lower exports and FDI. The remittances declined after a restructuring of property valuations on sale and purchase of land throughout the country. Overseas Pakistanis were sending their hard earned money back to Pakistan for the purchase of property and earning a profit.
Despite tall claims of the present government about putting the economy on growth track, it is undeniable fact that, poverty level would increase in the coming days as dependence on foreign loans would hurt economy, ultimately pushing more and more people below the poverty line. The ruling elite are not ready to give up their luxuries and VIP status in a country where up to 40% of its 180 million population live below poverty line — on less than $1 a day or less.
There is nothing wrong with debt in itself. Private businesses borrow happily, as long as the rate of return on the debt-financed investment is higher than the cost of borrowing. The surging debt is a burden for Pakistan because its GDP growth is not faster than the rate at which debt is serviced. The cost of external debt is incurred in foreign currency, hence a surge in the debt burden depletes foreign reserves, triggers devaluation and increases the cost of debt. The external debt service-to-exports ratio at 20 percent for 2016 was better than the 22.5 percent in 2015, according to State Bank of Pakistan. The country’s exports are stagnant depicting a decline.