In an interesting development, the government, confessing before the National Assembly (NA) that Pakistan’s external debt bearing capacity has deteriorated further last year, admitted that except one, all external debt sustainability indicators have weakened.
The government, in its Debt Policy Statement 2017-18, has admitted that during the last fiscal year the country’s external debt has increased at a rapid pace as compared to its foreign exchange earnings.
It was the highest ratio after the one recorded during the last year of the PPP government.
Moreover, Pakistan’s external debt in percentage of foreign exchange reserves also increased to the three years highest level. In the same vein, the cost of external debt servicing in percentage of foreign exchange earnings significantly increased.
It is crucial to note that the Debt Policy Statement 2017-18 has been submitted to the NA as per the requirements of the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005.
However, some parts of the FRDL Act of 2005 have been rendered ineffective after the government’s decision to introduce sweeping changes to the law aimed at hiding its failures by changing the goalposts.
Despite amending the law, there were certain areas where the government could not show improvement.
Headed by its Director General Ehtesham Rashid, the Debt Policy Coordination Office prepared the statement in the light of the FRDL Act.
By the end of FY 2016-17, the external debt increased to 120 per cent of the foreign exchange earnings, showing that Pakistan’s debt-bearing capacity has weakened. It is the second consecutive year when the ratio has slipped as the ratio was 110% in FY 2015-16.
In a similar manner, external debt as percentage of foreign exchange reserves increased to 290 per cent, reflecting the adverse impact in decline in the reserves due to growing current account deficit. This ratio was 250 per cent in FY 2015-16, which within one year jumped to three years high level.
The external debt servicing-to-foreign exchange earnings ratio also worsened to 12.4 per cent due to the growing debt servicing cost.
This ratio was only 8.5 per cent just a year ago. The 12.4 per cent external debt servicing in the percentage of foreign exchange earnings was even worse than last year of the PPP government when it was 11.1 per cent.
On the other hand, the Ministry of Finance has tried to shift the blame for the failures on others, mainly the Ministry of Commerce and the situation in the Middle East.
“The lower foreign exchange earnings during 2016-17 led to increase in these ratios,” according to the statement, adding that stagnation in the exports largely due to global economic conditions, low commodity prices, and bottlenecks in the energy and infrastructure sectors of the economy were some of the other factors for the situation.