FOREIGN DEBTS ON PAKISTAN

S.M. ABBAS ZAIDI,
Research Analyst
, PAGE
Sep 1 - 7, 2008

Foreign debt has always been a sensitive national issue because heavy external borrowings are not used productively, thus becoming a burden on the national exchequer in our economic development. Heavy indebtedness also provides diplomatic leverage to the donor and tends to inflict on the exercise of national sovereignty.

Pakistan's total foreign debt and liabilities have risen above $46 bn, showing an increase of 14%. The country's foreign debt surged by $5.80 bn to $45.28 bn during the last fiscal year and a rise of $3 bn was recorded in just the first three months of 2008. Over the past sixty years, debts have been piled up by successive governments seeking foreign assistance for an ever widening range of economic activities, even in areas, where indigenous resources could be more profitably employed or in sectors in which there has been no justification for any investment, local or foreign. It is estimated that Pakistan has contracted loans worth US $80 bn, repaid $70 bn and has yet to repay $35 bn; addiction to aid has also serious implications for the economy. Unable to service its debts, Pakistan has frequently been seeking debt rescheduling and relief after adopting an inconsistent approach unaware of the magnitude of worsening debt burden.

CURRENT SITUATION

Pakistan's public debt, in rupee terms, has increased by more than Rs 740 bn in less than half a year due to devaluation of the local currency against the US dollar. Pak Rupee shed its value by more than a fifth against the US dollar during the last few months. Pakistan's total public debt reached US $ 46.3 bn by end June, 2008. With a single rupee decline in the value of Pakistan currency against the US dollar is adding up to an amount in its public debt. Though Pakistan's foreign debt is denominated in dollars, but the decline in the local currency's value against the American currency is pulling more domestic resources to pay off huge foreign liabilities. In July 2007, every US dollar was equal to 60.4 Pak Rs. It took a deep dip after March and traded at Rs 69 in June 2008. Currently dollar reached to the peak of Rs 76.90 in the open market. The main factor is the expensive imports, decline in foreign investment, less exports than imports, fast decline in the central bank foreign exchange reserves and highly speculative exchange market are the main reasons of falling Pak rupee against the US dollar.

PAKISTAN'S EXTERNAL DEBT AND LIABILITIES

million US $

ITEM

30/6/06

30/06/07**

30/06/08**

1.Public and Publicly Guaranteed

32898

35349

40243

a ) Public Debt

32603

35110

40047

A. Medium and long term(>1 year)

32434

35085

39334

Paris club

12785

12694

13928

Multilateral

16631

18532

21451

Other bilateral

835

931

1129

Military debt

130

83

41

Commercial Loans/credits

153

137

120

Euro/Sukuk/Global Bonds

1900

2650

2650

Local Currency Bonds(TBs & PIBs)

0

58

15

B. Short Term (<1 year)

169

25

713

IDB

169

25

713

b ) Publicly Guaranteed Debt

295

239

196

i) Paris Club

0

0

0

ii) Multilateral

190

155

132

iii) Other bilateral

85

71

60

iv) Commercial Loans

12

8

4

v) Sandak Metal Bonds

8

5

0

2. Private Non_guaranteed Debts (M&LT:>1 yr)

1585

2002

2612

3. Private Non_guaranteed Bonds

0

250

275

4. IMF

1491

1407

1337

Total External Debt (1 through 4)

35974

39008

44467

5. Foreign Exchange Liabilities*

1586

1473

1817

Special U.S $ Bonds

247

156

121

Foreign Currency Bonds (NHA / NC)

109

88

66

National Debt Retirement Program

0

0

0

Central Bank Deposits

700

700

1200

NBP/BOC Deposits

500

500

400

Other Liabilities (SWAP)

30

30

30

FEBCs/FCBCs/DBCs

7

5

4

Total External Liabilities (1 through 5)*

37560

40481

46284

Official Liquid Reserves

10765

13345

8577

* Excluding FEBCs/FCBCs & DBCs from 30/06/99 , **Provisional

Source: SBP

IMF

Pakistan, a repeat customer of the IMF, last took an IMF loan worth $1.3 bn in 2001 to help fight poverty and offset the effects of a regional war on the economy. Currently, Pakistan's economy is going through its toughest period after six years of healthy growth. Currently, high oil prices have depleted Pakistan's foreign exchange reserves to levels worth less than three months of imports, sparking alarm among investors that Pakistan may need to take up loans from the IMF to pay for imports.

WORLD BANK

The Bank's Country Assistance Strategy FY 06-09 envisages a flexible lending program of up to US$6.5 bn a substantial increase over the previous period. This includes between $200 and $850 mn annually from IBRD. The current portfolio consists of 22 projects, with total commitments of US$2.3 bn. During FY07 the Lending was US$ 990 mn while in FY08 the lending on March was US$250.2 mn.

ASIAN DEVELOPMENT BANK

Pakistan has received about $18.59 bn in loans since joining ADB in 1966. The bank also disbursed $12.3 bn at of the end of 2007. The lending program in 2007 was a record that included almost $2.0 bn in loans and $20.2 mn for technical assistance grants. ADB is working with the Government and the private sector to improve the country's infrastructure and basic public services.

CONCLUSION

Due to inflationary expectations, people are going towards dollarization, preferring American currency over Pak rupee. It is believed that this time the State Bank of Pakistan, which in the past supported the falling of rupee by throwing dollars in the market, was not in a position to hold up the local currency especially when the foreign investment is low and the major source of foreign currency earning is declining. In October 2007, the foreign exchange reserves with the central bank stood at US $ 16.4 bn that declined to US $ 9.92 bn out of which US $ 3 bn are lying with the commercial banks. Therefore, it is essential to take long term measures, rationalization of imports and shifting of goods transportation from roads to railways, can give reduction in oil imports and Govt also, needs to control the imports of non expenditure items as it is giving rise to foreign debt.