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Trapped in vicious external debts

Dr. Ikramul Haq

It is now officially confirmed that the coalition Government of Pakistan Tehreek-i-Insaf (PTI) secured over $13 billion in foreign loans in the fiscal year 2019-20 alone! It was the second highest amount in history. Resultantly, the PTI Government and those who later come into power will keep on borrowing just to repay maturing external debts taken by their predecessors. During the previous fiscal year, Pakistan received gross loans of $13.2 billion from bilateral and multilateral lenders including, the International Monetary Fund (IMF) and commercial creditors.

According to a report, quoting data compiled by the Ministry of Economic Affairs, during the last two years, Pakistan secured $29.2 billion in foreign loans that include $26.2 billion by the PTI Government since assuming power in August 2018. Out of this, $19.2 billion was just to repay the maturing external debt and the remaining was added to the “external public and publicly guaranteed debt”. The resultant increase in debt-servicing as repayments contracted as new foreign loans, increased substantially. For the current fiscal year 2020-21, the cost of external debt servicing is estimated at Rs. 315 billion despite the fact that over $300 million temporary moratorium on debt servicing is extended by the G20 countries.

In fiscal year 2018-19, Pakistan borrowed $16 billion, including balance of payments support from Gulf countries, and returned $9.1 billion worth of loans. In fiscal year 2019-20, the gross foreign loans stood at $13.2 billion and repayments amounted to slightly above $10 billion. For the Finance Ministry, the report says, “there was no option but to borrow to repay maturing loans and stabilise foreign currency reserves that dipped below $10 billion in May 2020 after the outflow of hot foreign money of over $3 billion”.

According to the report, “the withdrawal of hot foreign money, on the one hand, exposed the ill-planning of the State Bank of Pakistan (SBP) and on the other highlighted the fragility of foreign exchange reserves that were built on the back of foreign borrowing”. The dip in foreign exchange reserves, it says, “triggered panic borrowing by the economic managers of the PTI Government”. Resultantly, the Government “started borrowing from the commercial, bilateral and multilateral creditors exceeded the budgetary target due to the dip in SBP’s foreign currency reserves, low inflows under the Saudi oil facility and the decision not to float Eurobonds valuing at $3 billion. The PTI government, like its predecessor, has also been unable to fully capitalise on non-debt creating inflows like exports, remittances and foreign direct investment”, the report adds.

Bilateral creditors disbursed $629 million in the last fiscal year against the budgetary target of $480 million. The utilisation of Saudi oil facility remained low at around $770 million against the target of $3.2 billion. China gave $488 million in bilateral loan against earlier estimate of $402 million. Multilateral creditors disbursed $5.54 billion in loans in the previous fiscal year.

The Asian Development Bank (ADB) provided $2.8 billion, exceeding the annual target of $1.7 billion. However, out of the $2.8 billion, the ADB’s budgetary support loans amounted to $2.3 billion including a billion dollars for the crisis response facility. The IMF disbursed loans of $2.84 billion, including $1.4 billion in emergency financing in response to Covid-19. The Islamic Development Bank (IDB) disbursed $869 million under the oil credit facility against the estimate of $1.1 billion. The World Bank released $1.32 billion against the annual estimate of close to $1.2 billion. The Asian Infrastructure Investment Bank (AIIB) gave $508 million in loan.

Like the previous Pakistan Muslim League (Nawaz) government, the PTI also relied on short-term foreign commercial loans. Against the budgetary estimate of $2 billion, it took $3.4 billion in foreign commercial loans. Commercial loans are always expensive due to their short maturity period and relatively higher interest rates compared with the official bilateral and multilateral credit. Two Chinese financial institutions, China Development Bank ($1.7 billion) and Bank of China ($500 million), provided about two-thirds or $2.2 billion of total foreign commercial loans. Dubai Bank extended $564 million, Ajman Bank $300 million, Citibank $148 million, Standard Chartered $27 million and Suisse Bank AG $205 million. The PTI Government has also planned to seek $15 billion in gross foreign loans in the current fiscal year 2020-21 for debt servicing and building foreign currency reserves in the absence of non-debt creating inflows. Out of the estimated external borrowing of $15 billion, nearly $10 billion, or two-thirds, will be used to return the maturing loans, excluding interest payments.

Managing high fiscal deficit coupled with massive debt burden is the toughest challenge faced by our economic managers. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is easier said than done. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of Federal Board of Revenue, continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies, losses of Public Sector Enterprises (PES) etc. Other alarming elements remained high fiscal deficit, sluggish exports and heavy imports.

The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, increase tax collection, abolish perks and benefits of the ruling elites, eliminate wasteful expenses, dismantle rent-seeking structures, ensure rule of law, and stop reckless borrowing and ruthless spending.

Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. There is a need to run big PSEs with equity stakes for the poor through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to for the elites and by the elites only.

The real challenge is how to break away from this debt-prison. The key to debt retirement is export-driven growth, drastic reduction of unproductive and wasteful expenditure, utilisation of State land, like GORs etc, for commercial purpose by giving them on lease through public auction, and collection of taxes fairly and justly, but firmly, without any favour or fear. The real tax potential is Rs. 8 trillion. For achieving these goals a concrete plan based on pragmatic and sound research is provided to the PTI Government but no concrete action is taken in the last two years for its realisation. How to revive the economy amid the Covid-19 endemic is a challenge for the PTI Government in coming days. The outrageous debt burden and huge fiscal deficits are chronic symptoms of an ailing economy that will keep on recurring unless causes (elitist economic structure and crony capitalism) for illness are realistically diagnosed and cured. This is a specialised job for which no preparation has yet been made by the PTI Government even after two years in power.


The writer, Advocate Supreme Court, is Adjunct Faculty at the Lahore University of management Sciences (LUMS).

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