Research Analyst
June 13 - 19, 2011

Pakistan's debts have undergone substantial changes during the last three years. High fiscal deficit led to accumulation of huge debts in absolute and relative terms. The debt profile moved towards shorter end of maturity. Developments in both external and domestic debt are of key concerns to debt management.


2005-06 2,894 1,300 4,194
2006-07 2,869 1,300 4,169
2007-08 3,134 1,200 4,334
2008-09 4,728 1,600 6,328
2009-10 5,641 1,723 7,364
2010-11 (July-Sep, 2010) 1,669 500 2,169

During FY10, external debt servicing totaled at US$7.364 billion that is 16.4 percent higher than the previous year. A segregation of this aggregate number shows a payment of US$4.632 billion in respect of maturing EDL (external debts and liabilities) stock while interest payments were US$1.009 billion. US$ 1.732 billion was rolled over. Among the principal repayments, US$897 of multilateral debt and US$600 million of International Sukuk Bond accounted for most of the share whilst short-term scheduled banks' borrowing observed heavy repayments approximating to US$1.181 billion.

Similarly, hefty interest payments worth of US$877 million on foreign currency public debt contributed to the bottom line. In FY11, the central bank deposits were mostly rolled over. During July-September 2010, the servicing on external debt was recorded at US$2.169 billion. Out of the grand total, principal repayments were US$1.436 billion and interest payments were US$233 million. The rollovers amounted to US$500 million in the first quarter of 2010-11. Over the last two years, the debt servicing levels have notably increased. Notwithstanding, with the IMF- SBA repayments set to initiate in the second half of FY 2011-12, the servicing will increase to much higher levels.

On the other hand, the excessive increase in external debt caused problems for Pakistan in the past, while imprudent domestic borrowing plagued the economy during 2010-11.

Gross external debt at a given point of time is the amount of disbursed and outstanding liabilities of residents of a country to non-residents. Countries use external debt in order to fill the gap between desired expenditure levels and domestically available resources. Governments also issue foreign currency debt in order to signal their commitment to stable exchange rates and prices. A key incentive for governments to use foreign debt heavily is that it minimizes current interest costs, but doing so leaves the country vulnerable to certain risks. The government manages its debt in order to raise the required amount of resources subject to the lowest possible medium to long-term cost and consistent with a prudent degree of risk.

Poor debt management poses risks for both the public and private sectors in the form of economic instability, insolvency, debt distress, and fiscal crisis. In order to prevent such eventuality, a government needs to identify the various risks to its debt stock, and formulate strategies to counter or minimize these risks.

Risks can be classified into two main categories: market risk and country's specific risk. The stock of outstanding debt of any country is vulnerable to market risks regardless of the origin, size, average tenure, and other characteristics of the debt. Market risk is measured in terms of potential increase in debt servicing costs associated with the changes in market conditions such as interest rate risk, exchange rate risk, and credit risk. Country specific factors include the economic, social, and political stability of the country, and investor's sentiment about the economy.


2004 36.1
2005 32.7
2006 29.5
2007 28.3
2008 28.2
2009 32.3
2010 31.6
2011 Q3 28.2

Empirical evidence suggests that external debt slows growth only if it crosses the threshold level of 50 per cent of GDP or in net present value terms, 20-25 per cent of GDP. EDL increased from US$37.9 billion at end-June 2000, to US$55.9 billion by the end of June 2010, and stood at US$59.5 at end-March, 2011. During the same period, EDL as a percentage of GDP decreased by 23.5 percentage points of GDP, falling from 51.7 per cent on end-June 2000 to 28.2 per cent by end-March 2011. During the last two years, EDL has increased in absolute terms, but decreased in relation to GDP. This shift in momentum has highlighted the crucial role played by current account deficit and exchange rate stability on the country's debt burden.

Pakistan benefited from a relatively stable rupee and significant reduction in financing of current account which facilitated a reduction in the debt burden. Entering into the IMF Stand-by Arrangement (IMF-SBA) program enabled Pakistan to shore up foreign exchange reserves and prevent the economic malaise, but it has also translated into a significant increase in outstanding external debt.


FDI, foreign aid and remittances are not the real indicators of economic growth. It will be very difficult in the upcoming years to repay the external debts. The government should focus on reducing foreign or external debts. It should not depend on the loans from international financial institutions to run economic affairs.