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A formidable financial obligation on Pakistan's economy

May 20 -June 02, 2002

The financial managers have really shown the class of their skill by arresting the ever-increasing burden of the external debt on Pakistan's economy.

In 1999, Pakistan's total external debt was estimated at $38 billion. Today in 2002, the size of the debt remains the same despite frequent flow of aid from donor agencies. This magical performance was possible only due to productive use of the aid, successful rescheduling of the debt and debt retirement on regular basis.

The present government during past two and half years has repaid at least $4 billion, which includes the most expensive commercial loans. As a result of retirement of the commercial loans Pakistan will be saving at least 30 per cent of the amount it use to pay for the financial charges or debt servicing.

According to State Bank of Pakistan, as of end-December 2001, Pakistan's total sovereign external debt and liabilities (EDL) were $38 billion which includes $33 billion debt and $5 billion foreign exchange liabilities.

In terms of external debt, public and publicly guaranteed debt amounted to $28.9 billion. This primarily represents project loans contracted by the government, as well as loans contracted by non-government entities such as public utilities etc. In addition, commercial and IDB credit (cash loans kept abroad that are used to finance imports and L/C based credits from IDB) amounted to $0.6 and 0.3 billion respectively.

On the other hand, private loans and credit amounted to $2.3 billion. These loans are generally L/C based and include supplier credit, buyer's credit (when the credit-providing agency buys the goods and sends them to Pakistan). Another component of external debt is IMF loans; the stock of this item in end-December 2001 is $1.9 billion.

The country also owes $5 billion as foreign exchange liabilities. These are different from external debt in the sense that repayments are not structured by any set schedule. It is not generally solicited and is primarily held by residents.

Interestingly, the increase in total stock of external debt liability may not necessarily be due to borrowing alone. In fact since Pakistan borrows in multiple currencies which are then converted to US dollar for reporting purpose, any appreciation in the currency of the creditor would have an adverse impact on debt obligations.


The restructuring of external debt by Paris Club creditors is another issue of interest, but at the same time, mired with confusion due to technical jargon. With historical perspective, Pakistan has benefited in the past from a number of debts rescheduling from the Paris Club. The first two rescheduling agreements, which were concluded in 1972 and 1974, were based on ad-hoc terms.

The first rescheduling that involved $234 million was the result of payment difficulties following the separation of East Pakistan in 1971. Subsequently, the unprecedented increase in oil prices in 1974 compelled Pakistan to seek debt rescheduling of $650 million. Following then second oil shock and the appreciation of dollar; Pakistan requested another rescheduling of $260 million by January 1981. However, this concession was granted on classic terms.

Following the acute balance of payments difficulties after the nuclear detonations in May 1998, Pakistan again approached the Paris Club in January 1999. With the cut off date of September 1997, the Paris Club provided cash flow relief under "Houston terms" of $3.3 billion against payments falling due between January 1999 and December 31, 2000.

Since Pakistan was unable to build its repayment capacity even after the end of the consolidation period in December 2000, another round of rescheduling was sought from sovereign creditors in January 2001. The Paris Club agreed to restructure debt worth about $1.8 billion under "Houston terms". This included arrears as on November 30, 2000 and payments falling due between December 1, 2000 and September 30, 2001. Although Pakistan successfully completed the IMF's Standby Arrangements, the need for the third rescheduling in three years was obvious by the end of consolidation period in September 2001.

However, it was Pakistan's enhanced international status following September 11 that allowed for extraordinary terms from Paris creditors.

This extraordinary agreement granted a repayment period for 38 years with 15 years as grace period on ODA credit. This means that the first payment of the restructured amount will be made in May 2017 and the final payment is to make in November 2039. On the other hand, maturity period for non-ODA credit is 23 years, which includes a 5-year grace period.

The present economic managers have achieved the first objectives of the economic reforms and that is the economic stability. The economy has a breathing space and if the given facility is utilized productively, and the policy of getting rid of the foreign debt continues, this would provide opportunity to the younger generation to live gracefully among the comity of nations.