AN ALARMING GROWTH IN PAKISTAN'S DEBT BURDEN
SYED FAZL-E-HAIDER (email@example.com)
Feb 1 - 7, 2010
International Monetary Fund (IMF) has recently estimated that the country's external debt will increase by another $2 billion in 2011-12 and cross $72.6 billion in 2015-16. The country's total external debt is likely to grow alarmingly by more than 43 per cent over the next five years, to about $73 billion in 2015-16 from about $50.76 billion early this year, according a report released by the IMF. The debt will increase by about 13 per cent, or $6.4 billion, to $57.1 billion by the end of the current fiscal year and is estimated to increase by $7 billion, or 12.3 per cent, to $64 billion by the end of the next fiscal year.
Pakistan agreed in November 2008 to an IMF emergency loan package of $7.6 billion to avert a balance of payments crisis and shore up reserves. The fund increased the loan to $11.3 billion in July and released a fourth tranche of $1.2 billion in December. Critics say that the country is heading toward another financial crisis in the year 2010-11 due to the government's dependence on IMF loans.
The key reasons behind an alarming increase in Pakistan's debt burden include large fiscal and current accounts deficits, depreciation in exchange rate and uncontrolled borrowing.
The country's trade gap widened to $1.32 billion in the sixth month of the fiscal year started July 1, from $868 million a year earlier, according to the Federal Bureau of Statistics (FBS). Exports fell 2.9 percent to $9.2 billion and imports dropped 16.3 percent to $15.9 billion in the six-month period. The textile industry, which accounts for two-thirds of the country's exports, is still struggling to revive growth amid rising interest rates.
Pakistani rupee took a sudden slide against the US dollar crossing the psychological barrier of Rs84 for a dollar after the country's central bank shifted entire load of oil import bills on private sector from December 14. Market pundits predict the rupee is to remain under pressure, as the country's external debt continues to pile up and the foreign investors continue to shy away.
Depreciation of the local currency can increase country's debt servicing burden, as historical trends suggest that exchange rate has minimal effect on exports because most of the exported goods use imported inputs. The country pays around $3 billion a year in debt servicing.
The central bank is due to announce monetary policy for February and March by the end of this month and the analysts expect that key policy rate to remain unchanged under the IMF pressure. The State Bank has projected the country's real GDP growth in the current fiscal year 2009-10 to be around annual target of 3.3 per cent, higher than 2 per cent growth seen in the last fiscal year. On the other hand, IMF has forecast the country's economic growth for this fiscal year at 3 per cent.
At the end of fiscal year 2007-08, the country's public sector debt stock stood at 57.4 percent of GDP, with domestic public debt 31.2 percent of GDP and external public debt 26.2 percent of GDP and debt service was about 15 percent of exports of goods and services. Interest payments on domestic debt accounted for only 12 percent of total interest expenditure, partially reflecting that official creditors account for the bulk of total external debt. A significant burden for the budget is the interest payments 4.7 percent of GDP, accounting for 32.6 percent of total revenue excluding grants and 26.3 percent of current expenditures.
The country's foreign debt and liabilities have risen by $15.01 billion during the last three and a half years from $35.834 billion at the end of June 2005 to $50.85 billion at the end of December 2008. Last year, the IMF increased its loan for the country to $11.2 billion. The additional IMF loan has further enhanced the country's debt servicing obligations, thereby squeezing the resources meant for developmental projects.
The IMF is the biggest contributor to the total foreign loan received by the country in the current fiscal year. Similarly, the Asian Development Bank (ADB) has provided $700 million and Islamabad expects an additional $500 million under Accelerating Economic Transformation Program before the end of this fiscal year. China has also provided $500 million as budgetary support to the country. Islamabad has also received $500 million interest-free loan from the World Bank to help stabilize the economy in the face of political and economic turmoil and investor uncertainty.
According to a recent IMF report, the public and publicly guaranteed debts, including IMF loans will increase by 45 per cent from $47.26 billion on June 30, 2009, to more than $68.1 billion in 2015-16. The amount will increase to $53.3 billion during the current fiscal year and $59.9 billion by end of next year. The total medium- and long-term debt, which stood at about $41.5 billion at the end of June last year, will increase to $48.2 billion next year and reach $67.6 billion in 2015-16.
The Asian Development Bank will have the single largest share in the external debt, which will increase from $9 billion in July last year to about $15.8 billion in 2015, by more than 75 per cent in five years. The World Bank debt will increase by about 29 per cent from $12 billion to $15.5 billion by 2015. Bilateral debt is likely to increase by 96 per cent from the current $16 billion to $31.28 billion in 2015-16.
The critics say that even the foreign assistance could not prevent the deterioration of the economy, as irrationally high interest rates and tight monetary policy of the central bank is holding back its growth. The experts believe that the country's entry into an IMF program has caused a significant economic slowdown and the government is facing a major challenge in managing a slowing economy. Though the central bank has so far cut discount rate from 15 percent to 12.5 per cent, yet it is still highest in Asia and it is not enough to reduce the bank's lending rate and to stimulate the country's economy. The high interest rates are the main reason behind the fall in the country's industrial output. Further reduction in discount rate by 300 basis points can provide some relief to the ailing industry and trade.