"Pakistan's foreign debt
problem has become even more serious than its domestic debt problem
From Shamim Ahmed
Jan 17 - 23, 2000
Pakistan's debt burden which has already assumed alarming proportions
is likely to grow further in the coming year because of continuing reliance on loans and
foreign assistance and mounting debt maturity. If appropriate measures are not taken with
immediate effects to check the current trend, it may become difficult to avoid debt trap
leading to a default and its adverse consequences on the national economy.
Dr. Parvez Hassan, former Chief Economist of the World Bank, while
addressing the annual meeting of Pakistan Institute of Development Economics (PIDE) in
Islamabad, warned that Pakistan debt burden had reached a dangerous point. He disclosed
that Pakistan's public debt exceeded 90 percent of its GDP and 600 percent of its annual
revenues with external debt touching 35 billion dollars (about 350 per cent of its foreign
exchange earnings) and domestic debt exceeding 1900 billion. Quoting an official report
news agency PPI, now says that the external debt is expected to grow faster in the coming
years, because of continuing reliance on foreign assistance and mounting debt maturity.
The report said that in order to keep the external debt within manageable limits and to
reduce country's vulnerability to external shocks, there is an urgent need for a long-term
and comprehensive debt strategy based on the principle of self-reliance. The report
suggests avoidance of high cost short-term borrowings, urgent measures for attracting
direct foreign investment, generation of higher exportable surpluses and pricing structure
in the economy, as tangible measures to overcome the crisis.
In his exhaustive paper on "Pakistan's debt problem, its changing
nature and growing gravity", Dr. Parvez Hussan had observed, tha all borrowing
decisions were adhoc in the past. The institutional capacity to monitor debt levels,
analyse debt management issues and give advice on annual borrowing plans has been almost
non-existent. "The new economic team should rectify this and set up a high-level
"Debt Bureau" either in the Ministry of Finance or the State Bank to undertake
the debt management functions, "he suggested".
Despite substantial debt relief and some debt reduction from the Paris
and London Clubs totalling nearly US $ 5 billion the foreign exchange situation remains
very difficult. He said that exceptional financing from the International Monetary Fund
(IMF) the World Bank and other sources would continue to be needed at least in the next
The debt burden was made much worse by the inability or unwillingness
of elected leaders to reduce the fiscal deficit significantly. Real revenue growth during
the period from 1996-99 has remained zero per cent per annum. Fiscal deficit as a
percentage of GDP remained at 6.1 per cent on an average in the same period. These and
other developments resulted in the rapid increase of implied real interest rate on debt
from 3.5 per cent in 1988-96 to 6.5 per cent in 1996-99, on an average.
Stagnation or fall in exports and revenues, coupled with a quantum jump
in external debt in the total public debt composition, had created a vicious debt-trap.
Pakistan's total public debt as a percentage of revenues was 423 per cent in 1976-77 that
had gone up to 604 per cent in 1998-99. As a result, cost of interest payment had also
jumped up from 32.9 per cent in 1992-93 to 42.6 per cent in 1998-99. The debt is now
driven largely by interest rate costs, observed Dr. Parvez Hassan. He stated that it was
not surprising that the debt indicators, which relate to debt or debt service to revenues,
have shown much greater deterioration in the 1990s than in the 1980s. Thus real debt has
continued to grow even though the primary fiscal balance is now in surplus.
"Pakistan's foreign debt problem has become even more serious than its domestic debt
problem that was reflected in the near default and subsequent rescheduling of external
debt. Pakistan's debt crisis was essentially triggered by the unsustainability of the
level of the current account balance of payments deficits and the pattern of their
financing. During the eight years 1991-98, Pakistan ran current account balance of
payments deficit of over US $ 28 billion, or on an average of 5.5 per cent of GDP.
The alarm bells on the external debt, however, did not ring in this
period partly because balance of payments financing needs were being taken care of by the
short-term foreign currency deposits, volatile portfolio investment and fixed cost direct
foreign investment in the power sector.
Dr. Hassan said that debt problem cannot be separated from broader
issues of economic strategy and management, notably trend in savings, exports and
government revenues and quality of public resource use. In the near terms, say over the
next two to three years, he said, Pakistan will have to live with the macro-economic
consequences of the heavy debt.
According to the latest official report Pakistan's external debt
(Short-medium and long terms) stood at 30.5 billion dollars (it perhaps does not include
over 4. billions in the freezed FCA still uncashed). Indicating a rise of $ 1.65 billion
or 5.7 per cent during fiscal 1998-99 as compared to a rise of $ 1.62 billion or 6 per
cent in the preceding year. Despite decline in disbursements of foreign aid, external debt
increased during the years reflecting the impact of temporary suspension of amortization
payments in the wake of economic sanctions imposed after the nuclear detonation in May
At this level it constituted 51.7 per cent at the country's GDP in
fiscal 1998-99 as compared to 48.4 pet cent in the previous year. This rise in the debt
GDP ratio (in rupee terms) despite sharp decline in disbursements is largely attributable
to lower growth in GDP during the year, conversion of external debt figure into Pak-rupees
at more depreciated exchange rate and lower amortisation payments because of temporary
suspension of debt service payments on selective basis. The break-up of external debt
revealed that long-term debt rose by $ 1.53 billion, (6.8 per cent) while short
medium-term debt increased by $117 million (1.9 per cent). The maturity structure of
outstanding debt indicated a steady decline in the share of long-term confessional debt in
total debt, reflecting increasing recourse to short-term borrowings.
Comparison of standard debt ratios revealed that ratio of Pakistan's
external debt to export of goods and services (including workers remittances) at 302.5 per
cent during 1998-99 was much higher than 146.2 per cent of developing countries and 201.0
per cent of South Asia, as a group, during 1998. Similarly debt service (including workers
remittances) at the level of 26.4 per cent was also considerably higher when compared with
17.6 per cent of developing countries and 17.9 per cent or South Asia.
Pakistan's ratios of external debt and debt service payments also
exceeded the prescribed debt sustainability normal limits of 225-250 per cent and 20.25
per cent respectively.
The ousted government of Nawaz Sharif has been publicising the fact
that there has been significant retirement of its domestic rupee denominated debt with the
banking system or over Rs. 62 billion during 1998-99. This was hailed as a great
accomplishment by the government in reducing the burden of outstanding debt. But what was
not highlighted is that there had simultaneously been a massive build up of external debt,
which is larger than domestic debt. External debt has increased by over Rs. 290 billion in
1998-99. This dwarfs the retirement of domestic debt by almost five times. What explains
this dramatic change in the composition of public and publicly guaranteed debt in 1998-99.
The answer lies in the debt relief obtained from the Paris Club. This has enabled Pakistan
to defer the repayment of some of the external debt. Consequently, the net inflow of
foreign assistance is substantially higher. Given the borrowing requirements of the
government (depending upon the size of the budget deficit), the need for domestic
borrowing has diminished correspondingly.
Like the previous governments the present regime also seems to be fast
sinking into the country's marshy economic situation. Nothing substantial has been done on
this front except the rescheduling of eurobonds. That amounts only to postponement of
liabilities. A noted economist, Dr. Akmal Hussain has rightly warned the government should
proper ground for another rescheduling as Pakistan would, most likely, be unable to meet
its liabilities when the rescheduled loans full due in 2002. What is imperative in the
country's prevailing economic conditions is the compulsive need for reorientation of our
fiscal approach from external assistance to the boosting of agricultural and industrial
production, which has unfortunately remained static for years now. It is rightly
apprehended that it will be difficult for the country to survive economically, if the
present trend of dependence of foreign help will persist for a few years more. It is,
therefore, essential that the fiscal policies should not only reduce the existing external
debts, but should also leads the nation towards cherished goal of self-reliance.