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External debt: a lot of challenges ahead

In the shaping of economic growth of any country, researchers revealed that external debt plays both an optimistic as well as pessimistic role mainly in the developing countries. It is useful when any government uses external debt for investment-oriented projects like infrastructure, energy, and agricultural sector. Furthermore, external debt would affect negatively when it is utilized for private and public consumption purposes, which do not bring any return. Moreover, a low level of external debt impacts economic growth positively, but this relationship becomes negative at a higher level.

Pakistan is also in one of those developing countries which have a higher debt rate burden. According to the International Monetary Fund (IMF), $27 billion worth of Pakistan’s external debt will mature in 2-year – the mounting repayment burden that carries grave implications for bailout package. Ministry of Information, Government of Pakistan also recorded that Pakistan’s foreign debt from 2008 to 2018 increased substantially by $60 billion, reaching $97 billion from $37 billion. The several mega projects were executed until 2008, which included development of Islamabad and construction of Tarbela and Mangla dams, naval bases, Gwadar and motorway besides equipping the armed forces with modern weapons.

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The Ministry also recorded that the money was sent abroad unlawfully by Hundi and Hawala means and fake accounts were also used for the purpose. Sources mentioned that the $27 billion maturing external debt is equal to 27 percent of Pakistan’s total external debt and liabilities as of end February. After counting financing requirements of the current account deficit, the country will need $46 billion to $50 billion in the upcoming 2-year to remain afloat, according to assessments of the government and some private sector experts. Overall statistics mentioned in the IMF’s report showed that the country’s debt-to-GDP ratio is predicted to remain high, at 77 percent of GDP by June this year.

Pakistan’s External Debt & Liabilities – Outstanding In 2018 (Mn US$)
Item Mar Jun Sep Dec
A. Public external debt73,02475,35776,34078,464
1. Government external debt62,93764,14265,38265,574
2. From IMF6,3436,0955,9625,901
3. Foreign exchange liabilities3,7445,1214,9966,989
B. Public sector enterprises (PSEs)2,7582,6712,8462,681
C. Banks4,6264,4164,4524,790
D. Private Sector8,3149,0719,2409,330
E. Debt liabilities to direct investors – Intercompany debt3,6713,8263,8573,843
Total external debt92,39395,34296,73599,108

For sustainable development of the country experts suggested to reduce negative external debt shocks by implementing active management strategies. The best policy for this purpose Government of Pakistan needs to utilize domestic debts instead of external debts. Other strategies are that borrow loan with long maturity and with fixed policy rate and use external debts in productive projects so from projects earning government can easily payback this amount to lenders. Presently the IMF’s Public Debt Sustainability analysis in Market Access Countries considers emerging market states to be at higher risk of debt distress where public debt exceeds 70 percent of GDP.

Statistics also showed that the Government of Pakistan has already crossed this dangerous threshold at the end of the previous government when debt-to-GDP ratio soared to 72.5 percent. Different studies also urged that in the case of Pakistan the basic objective of the external debt is to increase development activities. This could also be possible by growing exports earning by export led-growth strategies. Different guide lines, monitoring system should be adapted to controlled external debt at sustainable level.

 

Different strategies like fiscal and monetary policy and macro variables like inflation, exchange rate policy, pricing policy and interest rate policy should be strengthen in order to spur confidence of foreign and as well as local investors. Because of political unrest and terrorism, the Government of Pakistan faces a lot of challenges in the last couple of years due to this Pakistan has lost its financiers’ confidence. Now it’s time to get back investors confidence and they invest in our country due to which Pakistan can get rid of heavily reliance on external debt.

It is also suggested that the Government of Pakistan can overcome this challenge through implementing right policies but will need sort of support through debt relief initiatives. It is also recorded that it would be challenging for the IMF to oversee a program where Pakistan’s external financing needs in 2-year will be close to $50 billion and its gross official foreign currency reserves are at the same time protected at a level sufficient to finance 3-month of imports.

Statistics also showed that Pakistan’s gross financing needs in 2-years could hit a minimum $50 billion and it will have to get short-term debt rolled over besides securing new loans to meet external obligations. According to IMF report, Pakistan will have to contract almost $35 billion in the upcoming 2-year to meet the financing needs. The amount that will have to be rolled over or rescheduled into long-term loans will be over $15 billion in just 2-year.

Conclusion

No doubt, the external debt burden is a well-known phenomenon for the developing nations and can be called as a common characteristic of the fiscal sector of the economies. If the rate of national saving is low then the country will go toward borrowing loans to stabilize the economic growth, that’s why economies tends to take external loans.

Without making a strong economic base by focusing on industry and the agriculture sector, along with political stability, a country cannot rely on sources such as FDI, remittances and foreign assistance to meet the fiscal gap. Therefore, the present government needs to upgrade industries and improve agricultural production while reducing the trade deficit, which in turn would reduce the external debt burden.

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