Mar 9 - 15, 2009

Pakistan's foreign debt servicing bill has inflated with an accelerated pace during the last year. During the last six (6) months, the country has paid over $2.6billion in debt servicing with borrowed money.

The plan of the government to go for borrowing of about $12billion from the International Monetary Fund (IMF) will expose the country to a huge debt servicing that will eat up of about 50% of total tax revenues of the state.

Looking worried, a serious official of the Ministry of Finance told this correspondent that the fast pace with which the burden of foreign debts is mounting along with the amount of debt servicing, it is feared Pakistan would land in to the worst debt trap. What would be left after debt servicing would hardly cover the defense and administrative expenses, leaving nothing for development, he said.

During the current financial year 2008-09, Pakistan is expected to pay about Rs700billion in debt servicing. The government is expecting to collect tax revenues of about Rs1300billion. After providing Rs300billion for defense expenditure the remaining amount would be hardly enough to meet salaries and pension of the state functionaries leaving country with nothing for development except fresh loans. Thus we are heading towards the worst debt trap, he lamented.

While Pakistan is already indebted to IMF's 23 months period bailout package of $7.6 billion under Stand By Arrangement, the Advisor to Prime Minister on Finance Shaukat Tarin has unveiled another plan to seek more loan of $4.5 billion from the Fund, which will lead to total loan of $12.1 billion, the official said.

'There is no economic activity in the country because of the high discount rates of 15 percent. The economic growth is feared to remain at 1 to 1.5 percent provided the country witnesses the 4.5 percent growth in agriculture depending upon the wheat crops production which is not likely to meet the target of 25 million tones,' he pointed out.

If the massive slow down in growth continues in the next two to three years, the country's debt sustainability capacity would deteriorate to alarming levels, the official said. 'This will leave no fiscal space for any development.'

Pakistan's public debt is expected to go up by over Rs2 trillion by the end of 2008-09, the highest ever increase in a single year. The public debt is estimated to rise by 34 per cent to Rs7,931 billion by June 30 from Rs5,901 billion in 2007-08 because of massive depreciation in the value of the rupee and external loans obtained for budgeting the balance of payments. According to figures compiled by the ministry of finance, the foreign currency debt will reach Rs4,811 billion and domestic currency debt will stand at Rs3,120 billion by the end of June 2009. The public debt share as a percentage of the GDP will rise to 59 per cent from 56.3 per cent in the last financial year. It will be a violation of the Fiscal Responsibility and Debt Limitation Act, 2005, which asks for a gradual reduction in public debt.

Pakistan's external debt and liabilities (EDL) as a percentage of foreign exchange earnings rose to 127.2 per cent by end-June 2008, from 124.1 per cent at end June 2007, suggesting that external debt and liabilities are growing at a faster rate than its foreign exchange earnings.

According to the Debt Policy Statement 2008-09, tabled by the finance ministry's Debt Office before parliament, Pakistan's EDL as a percentage of forex reserves stood at 297.2 per cent by the end of 1999-2000, and witnessed a sustained decline until end June 2006 when it reached 121.6 per cent, a reduction of 60 percentage points in six years. The previous two years i.e. 2006-07 and 2007-08 have been a setback to this declining trend.

At the end of the first quarter of the current fiscal year 2008-09, total public debt amounted to Rs6,572 billion, showing a massive addition of Rs671 billion in just three months since the start of current fiscal year in July 2008.

Falling from a high of 79.8 per cent of GDP in 2001-02, total public debt had reduced to 55.2 per cent of GDP by the end of 2006-07. However, due to a combination of negative factors, public debt increased to 56.3 per cent in 2007-08, making it the first time in seven years that the country has seen a reversal in declining trends. The ratio in percentage terms declined to 49.1 per cent until September 2008. As a percentage of government revenues, total public debt saw a steady decline from 589 per cent in 1999-2000, to 371 per cent by the end of 2006-07, an average decline of 31.1 percentage points per year.

However, in 2007-08, growth of public debt outpaced that of government revenues, leading to an increase in public debt as a percentage of government revenues to 394 per cent. This ratio has declined to 329 per cent of the projected revenue for the first quarter of the current fiscal year. The unprecedented oil and commodity price shocks and no or inadequate policy response to address the challenges resulted in a surge in fiscal and current account deficits.

The situation has further deteriorated by a sharp depreciation of the Pakistani Rupee vis--vis US Dollar. The value of the rupee has depreciated from 60.63 at the end of 2006-07 to 66.10 by end June 2008, i.e. by 8.3 per cent. The depreciation of the rupee against the dollar has had a translational impact of Rs224 billion. In other words, Pakistan's public debt increased by Rs224 billion in 2007-08 only because of Pak Rupee depreciation vs. the US dollar.

Further depreciation of the rupee in the first quarter of 2008-09 has had a translational impact of Rs447 billion on the stock of total public debt. The significance of this depreciation is highlighted by the fact that even though the stock of foreign currency debt has gone down in dollar terms, there has been an increase in rupee terms of Rs414 billion in the first quarter of 2008-09.