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Review of external debt

External debt plays both a pessimistic as well as optimistic role in shaping economic growth in any country mainly developing. Various studies recorded that external debt is useful when the government uses it for investment-oriented projects like energy, infrastructure and agriculture sector. And it will affect pessimistically when it is utilized for private and public consumption purposes, which do not bring any return. Additionally, a low level of external debt impacts economic growth optimistically, but this relationship becomes negative at a higher level.

Researchers noted that external debt is a significant source of public financing in developing countries and carries the potential to play a key role in enhancing economic growth. Traditional studies regarding economic growth has emphasized the optimistic role of debt in economic development. It assists sustain growth by declining the investment-savings gap, brings funds for spending on modern technology and rises productivity. Furthermore, Pakistan’s investment-savings gap has drastically increased over time. In 2013, statistics showed that the country’s external debt was recorded $60.9 billion, which rose to $65.4 billion during 2014. In 2016, it stood $73.1 billion. Now, by March 2017 it has already risen by greater than $2 billion to $75.7 billion. This continuous rise in external debt, even after considering the arguments explained above, is not sustainable for the country’s long-term growth.

In Pakistan, external debt is being sustained against different collaterals, like government buildings, which may lead to the sovereignty issue.

Statistics showed that the external debt and liabilities currently have crossed $105 billion mark till end March 2019. Pakistan’s external debt and liabilities have gone up to $105.841 billion from $95 billion during the first 9-month of FY2018-19, showing grave challenges on debt servicing. The external debt and liabilities raised $10 billion under the tenure of the incumbent regime. The disbursement of foreign loans has so far remained slow during FY2019, but the reliance on foreign debts is on the increase owing to external account gap.

Researchers mentioned in the different studies that debt becomes essential to complete the government’s financial requirements, which otherwise can be met only by growing the tax rates – the latter being an unpopular decision for the masses and hence not pursued by most governments.

In case a Government of Pakistan is facing a budget deficit, the best alternative is to find other sources (borrow) for bridging such a deficit. The story of Pakistan with regard to external debt is self-explanatory. The Government of Pakistan lacks human, financial and physical capital and has a vulnerable macroeconomic situation. It is natural then that external debt is required to supplement local savings. It is also urged that borrowing is indeed as old as the nations. The reason behind this is the incapability of countries to create enough savings for infrastructure investment and growth. The reason behind inadequate savings is, in turn, low income levels, which are mostly consumed rather than saved. Countries borrow for financing public expenditures, without massively growing tax rates, so that an enabling environment is created for people to invest funds in dissimilar productive sectors of the economy.

Statistics also revealed that Pakistan owes a debt to Paris Club ($11.3 billion), multilateral and other donors ($27 billion) and international bonds like Eurobond and Sukuk ($12 billion). The Government of Pakistan has also acquired commercial loans to the tune of $8.8 billion and a short-term loan of less than 1-year reached at $1.1 billion. The outstanding loan of IMF reached at $5.765 billion.

 

The Government of Pakistan’s borrowing policy over the last decade has brought the country to the brink, as the debt servicing has now become the biggest issue on expenditures front in the federal budget in the wake of huge local and foreign borrowings, which might cross Rs2.25 trillion at the end of FY2019. Statistics also showed that amid growing discount rates that have now hiked to 12.25 percent, Pakistan’s total debt and liabilities skyrocketed to Rs35 trillion, which is growing at high speed in the wake of a soaring budget deficit.

According to the State Bank of Pakistan (SBP), the first 9-month period of the current fiscal under the rule of the incumbent regime, the total debt and liabilities went up by Rs 6 trillion, growing from Rs28.87 trillion in June 2018 to Rs 35 trillion till end March 2019. The total debt and liabilities in the percentage of gross domestic product (GDP) have reached 91.2 percent.

Sources furthermore, also recorded that the overall debt and liabilities have pushed up at a more accelerated pace owing to an increased budget deficit and its financing requirement and hike in discount rates. The policy rate has been raised by 150 basis points, going up to 12.25 percent from 10.75 percent. The country’s total debt reached at Rs 33.026 trillion, counting government local debt Rs18.17 trillion and Public Sector Enterprises debt Rs1.378 trillion. Total liabilities reached Rs 2.067 trillion till end March 2019.

Pakistan’s Debt And Liabilities ( as percent of GDP) (Provisional)
DetailsJune-13June-14June-15June-16June-17June-18March-19
Total Debt and Liabilities73.072.472.377.678.686.991.2
Gross Public Debt63.863.563.367.767.072.574.4
Total Debt of the Government FRDLA Definition60.158.158.361.361.466.968.5
Total External Debt & Liabilities27.025.624.226.627.433.738.7
Commodity Operation and PSEs Debt4.34.24.65.25.66.46.6
Guaranteed Debt & liabilities2.42.22.42.62.52.92.5
Non-guaranteed Debt & liabilities1.92.12.22.53.13.64.1
Government Domestic Debt42.543.344.446.946.547.747.2
Conclusion

The Government of Pakistan took various steps to overcome the debt issue, like the debt limitation law, loan write-offs and rescheduling of debt and liabilities. However, to reduce reliance on foreign debt, we need to strengthen industrial and agricultural sectors and massively raise exports. Unluckily, this is not happening in the country. Pakistan’s exports have declined while public debt has increased.

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