Pakistan sinking in debt

The Government is continuously borrowing money from internal and external sources. Therefore, external debt and liabilities (EDL) rose 7.5 per cent to $60.116 billion in 2010-11 as against $55.901 billion in 2009-10, depicting an increase of $4.2 billion, the State Bank of Pakistan (SBP) indicated in its report.
Public debt also increased to $56.315 billion rose from $52.107 billion. The external debt has risen $711 million in the last quarter of 2010-11. The scheduled bank borrowings increase by 23.8 per cent to $239 million, which were $193 billion in June 2010. In the total EDL, the loan from the IMF grew to $8.94 billion from the same period of last years $8.07 billion.
However, there was a nominal decline in foreign exchange liabilities of $1 billion from $1.2 billion. Fiscal deficit and inadequate external funding has resulted in a 30 per cent increase in government borrowing for budgetary support, during July 1st 2010 to May 28th 2011, which accounts for 89.7 per cent of the expansion in broad money, the SBP said in its 3rd Quarterly Report. The borrowing in the first phase, July to mid-December 2010, the government relied mainly on borrowings from SBP. It borrowed total Rs413.5 billion from the banking system; of which Rs328.6 billion was taken from SBP. The second phase started from mid December 2010 to March 2011. During this period, the government retired Rs286.1 billion to SBP. The curtailment of government borrowings from SBP was facilitated by two developments: The National Saving Scheme (NSS) showing a net inflow of Rs87.2 billion in Q3 FY11, which was quite higher compared to the first two quarters. The government was facing difficulties in managing the fiscal deficit. up to March 2011 the budget deficit was 4.5 per cent of GDP. Therefore, the government has had no option but to rely on domestic borrowing to finance the growing fiscal deficit, especially when the borrowing should remain at the levels of end September 2010. In the third phase the abrupt change from April 2011 onwards took place and the government again borrowed over Rs350 billion from the SBP during 31st March to 3rd May 2011.
The Report said, the first reason was that a large part of this borrowing was used for the growing quasi-fiscal expense, e.g. the circular debt in energy sector. In other words, this borrowing was actually financing the carried forward fiscal deficits from the previous years. This one off adjustment was likely to add an additional burden of about 0.6 per cent of GDP in FY11. Hence, against the government target of 5.5 per cent of GDP the fiscal gap was likely to end to 6.0 per cent of GDP in FY11, after paying off Rs120 billion for old dues reflected under the head of the circular debt of the power sector. Secondly, SBP was already shifting a portion of this borrowing to the market through outright OMOs, and was expected that government borrowing from SBP will be at the level by the end of September 2010, as committed by the government to IMF.
In 2010, Pakistan was declared the third largest external debt recipient country in the region, after Sri Lanka and Nepal. According to the figures released by the Finance Ministry report on Debt Policy Statement 2010-11, total public debt was 60.6 per cent of GDP, it was 49.9 per cent at the end of December 2010, which was higher than 39.3 per cent from Bangladesh but lower than Sri Lanka’s 86.7 per cent and India’s 55.9 per cent. However, IMF said Pakistan’s public debt stood at 56.8 per cent and India 71.8 per cent of the GDP. Sri Lanka’s external debt reached 36 per cent of GDP, followed by 35 per cent of Nepal and 33 per cent of Pakistan. Total external debt of India was 15 per cent and China 7 per cent of GDP. External in-debtness of Sri Lanka and Nepal has been $17.97 billion and $4.5 billion. The external debt (ED) of Pakistan reached $57.2 billion, which was 33 per cent of GDP by December 2010. That further rose to $60.6 billion in June 2011, which shows a net increase of $2.8 billion in only 6 months. The domestic debt was Rs6014 billion by June 2011. The external debt of Bangladesh as on December 2010 stands at $24.4 billion or 23 per cent of the GDP. The external debt indicates the liabilities in foreign currency, both the public and private sector. While public debt is the cumulative total of all government borrowings less repayments to be made in a country’s home currency.
The direct impact of the increasing fiscal deficit was a sharp rise in domestic debt. The total domestic debt reached Rs5.594 trillion. Loss making PSEs like Railways, PIA and Pakistan Steel has continued to be a huge burden on the economy. Support to such PSEs was about 1.6 per cent of government’s total current spending during July-March FY11. Debt burden of about 31.8 per cent of estimated GDP was more than double the stock at end June 2007. This sharp growth in debt amount impacted macro economic stability and monetary system. In addition, the maturity of domestic debt indicated that the government has to rollover the entire amount of Rs2.854 trillion of short term debt at least for a year.
Besides borrowing of domestic loans, Pakistan received $2.5 billion foreign aid during 2010-11, including loans of $1.8 billion and grants of $668 million that was Rs0.9 billion less than the revised figure of the 2011-12 budgets. The present budget was based on the total external resource inflow of Rs290 billion that was Rs3.4 billion less than the budget target of Rs387 billion while actual receipts were about Rs213 billion as against $565 million project loans, of which $450 million were loans and $114 million were grants. Under Tokyo pledges, $295 million was received, of which $63 million was loans and $231 million were grants. About $897 million have been received as project aid, including $816 million as loans and $81 million as grants, while $97 million was received for earthquake aid, including $78 million as loans and $19 million as grants. $6.1 million were received as grants for the Afghan refugees while for floods $636 million was received as aid, including $420.3 million as loans and $215.6 million as grants. To reduce the cost of borrowing the SBP has taken decision to trim down the discount rate to 13.5 per cent. It would lessen the burden of domestic debt and pressure on budget deficit. Rate of inflation may also come down. The reduction of 50bps is based mainly on two assumptions: the average inflation would not exceed 12 per cent and it would restrict its domestic borrowings for financing fiscal deficit. The decrease in the rate also aimed to encourage private investment and revitalise the slowing growth. The rate had remained unchanged since December 2010.
Economic Survey 2010-11 indicated that presently, Pakistan is experiencing serious debt problems and deterioration in macro economic conditions, leading to deceleration in investment. The investment was $62 million but $110 million were repatriated profit, July 2011, and economic growth was 4.2 per cent while LSM growth was -2.95pc that resulted in a rise in the poverty. External Debt and Liabilities (EDL) increased from $37.9 billion at end-June 2000, to $55.9 billion by the end of June 2010, and stood at $59.5 at end-March, 2011 and at the end of June 2011 it further rose to 60.12 billion. During the same period, EDL as a percentage of GDP decreased 23.5 per cent 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 was due to current account deficit and exchange rate stability on the country’s debt burden. Pakistan benefited from the stable value of rupee and reduction in financing of current account, which facilitated a reduction in the debt burden. Entering into the IMF Stand-by Arrangement (IMF SBA) programme has enabled Pakistan to enhance foreign exchange reserves, which has prevented the economy from further deterioration. But it has also resulted into a significant increase in outstanding external debt. Focusing on the absolute increase in the outstanding amount of EDL can be misleading for two main reasons: Firstly, the outstanding amount of debt must be analyzed in relation to the size of the economy and its repayment capacity in terms of GDP and other macroeconomic indicators. Secondly, the absolute change in EDL neglects classification between an actual increase in amount and increase caused by fluctuations in international exchange rates. The annual debt servicing payments were $6327 million in 2001-02, with a rollover of $2243 million. Paris Club bilateral debt, on a long term, the amount reduced to about $3 billion by 2007-08. The debt obligations started building up since 2008-09 and reached to $5.8 billion in 2009-10.
Moreover, $7.8 billion has been paid during July-March 2010-11, which shows an increase of over one billion dollar in one year. Out of this amount, $6.2 billion was paid on account of repayment of principal amounts. A significant proportion of this increase was due to repayment of short term liabilities of scheduled commercial banks amounting to $4.3 billion. The amount rolled over decreased from $1.7 billion in 2009-10 to $756 million in July-March 2010-11 as IDB’s short term obligations were rolled over continuously in the past but not rolled over this year, says official document. It is forecasted that private investment would remain shy; inflation may rise due to increasing energy prices. The increase in fiscal deficit would compel the government to continue borrowing to support budget, if it could not raise tax revenues and not received foreign aid, especially in the wake of deteriorating relations with the IMF and the US. America is rethinking its military aid budget to Pakistan. The international donors are also not happy with the present situation of politics in which leadership of Pakistan is highly corrupt. The present scenario is that life and property is highly insecure, particularly for the poor. The existence of millions of bonded labourers also sheds light on the increasing socio-economic disparities in Pakistan. In this scenario the borrowed money must be used carefully and effectively so that it would accelerate economic activities. It is proved that external borrowing slows growth if it crosses the level of 50 per cent of GDP or in net present value terms to 20 to 25 per cent of GDP.