EVER-RISING EXTERNAL DEBTS

SITUATION IS LIKELY TO GET WORSE IN THE WAKE OF FLOOD

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Aug 16 - 22, 20
10

Over the last few years, Pakistan's external debt has been on the rise mainly due to massive borrowing. The International Monetary Fund and other multilateral financial institutions have been more than generous in providing the assistance. Sustainability of debt servicing in the coming years is being openly questioned.

At times, it seems that the present regime is borrowing with least idea how the debt will be paid off. One gets the feeling that the huge amounts have been borrowed to complete the term with least discomfort.

The real point of concern is Pakistan's external debt and liabilities increased by $3.29 billion to $55.62 billion in FY10 as compared to an outstanding debt of $52.33 billion in FY09. The main factor for adding to the burden was receipt of $3.98 billion during FY10 from the IMF. As a result, quantum of IMF loan at end of June 2010 swelled to $9.132 billion from $5.148 billion at end of June 2009.

One of the concerns is that while foreign debt has increased significantly over the last three year, government has not evolved any strategy to retire this debt. One of the options is that government should mobilise three billion dollar by issuing convertible bonds of OGDC, PSO, and PPL. While this may be a workable option market conditions are not favorable because 1) the financial crisis is not fully resolved and most of the developed countries are facing double dip recession.

The issue can be best understood when one looks at the country's foreign debt servicing, rising up by 17 per cent to $5.46 billion against previous payment of $4.68 billion. Out of which, $4.48 billion was paid as principal amount of foreign loans and $980 million on account of interest payment. Therefore, the principal amount in overall payments of debt servicing was 82 per cent, whereas 18 per cent was on account of interest payment.

According to State Bank of Pakistan domestic debt of Pakistan soared by Rs792 billion during FY10 to a record level of Rs4.65 trillion from Rs3.86 trillion on June 30, 2009, mainly due to significant rise in budget deficit. Hike in debt was mainly driven by non-realisation of committed pledges by donor countries, shortfall in revenue and higher current expenditure.

Floating debt significantly surged by Rs495 billion to Rs2.39 trillion in FY10. Similarly, unfunded debt was up by Rs185.7 billion to Rs1.45 trillion. Similarly, permanent debt rose by Rs116.3 billion to Rs794 billion.

It becomes evident that over the last three years, Pakistan is relying more on domestic debt to fiancÈ the budget deficit mainly arising from the shortfall in revenue collection and high current expenditure.

Within the floating debt category, the highest increase was witnessed in borrowing through auction of treasury bills. The government borrowed additional Rs431.3 billion taking the total stock to Rs1.23 trillion.

Within the permanent debt category, the maximum hike was recorded in borrowing through PIBs, Prize bonds and GOP Ijara Sukuk by Rs64.3 billion, Rs38.6 billion and Rs14.4 billion respectively.

FUTURE OUTLOOK

The IMF has already expressed its willingness to accommodate Pakistan's request for additional funding. Its Pakistan-based staff is already in touch with the government and busy in assessing the quantum of losses. That floods will cause major harm to the economy is the growing concern of the donors. The country continues to suffer from fragile economy due to the adverse impact. Donors and investors are becoming more concerned over disaster impact on already fragile economy.

The floods are very likely to cause major harm to the economy in terms of loss of output and budgetary consequences in the prevailing circumstances. Therefore, support from the international community becomes a must.

Recent rains and floods have caused substantial economic losses to Pakistan and it is feared that Pakistan may not be able to meet many of the targets agreed with the IMF. Some people go to the extent of demanding moratorium simply for the rehabilitation of the displaced persons, which demands sizeable funds. While agriculture contributing nearly one-fourth of the GDP is almost inundated, agro-based industries may witness an acute shortage of raw material.

While economic growth has picked up, Pakistan has struggled to meet some of the targets under the program, especially on increasing tax revenue to allowing for greater government spending. It is believed that the last tranche would be released without any review

IMF Managing Director Dominique Strauss-Kahn has already assured Pakistan its willingness to discuss ways to help Pakistan in recovering from the devastating impact of floods.