Pakistan: External Debt Leaving Little Room for Development

The Finance Minister of Pakistan, Muhammad Ishaq Dar has been painting a rosy picture of Pakistan’s economy. However, the perspective changes when he talks about external debt and liabilities.

The stark contrast of the situation came to light earlier this month, at a meeting chaired by the minister over matters related to the Debt Policy Coordination Office. The meeting discussed the debt policy of the country where he stressed on effective debt management for long term economic growth. The senator strongly believes that Pakistan has managed its debt very carefully and is capable to repay this mounting debt in the years to come.

While chairing a meeting at the Ministry of Finance, he gave special emphasis on the highest ever reserves which have reached an all-time high of $24 billion that includes $19 billion reserves held by SBP along with $5 billion residing in reserves with private banks. In addition, he added:

“As of today, external debt servicing obligations for Pakistan are not more than an average of $5bn per annum until 2021. Keeping in view the track record of the country, this amount of repayments should not raise any concern”

The minister only referred to public debt at $48.1 billion, the value as of 30th June 2013. While the remaining $12 billion, other liabilities that take the total foreign debt figure to $60 billion during the same period, were conveniently ignored.

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According to the figures given by SBP as of 30th September 2016:

  • Pakistan’s total external debt and liabilities stand at $74.6 billion
  • Out of the above, public sector debt stood at $62.4 billion, public sector enterprises’ debt at $2.76 billion. Moreover, bank borrowing stood at $2.95 billion while non-resident deposits at $0.7 billion, private sector guaranteed debt $3.57 billion and debt liabilities to direct investors at $2.95 billion

Should Pakistan be Deluded by Highest Foreign Exchange Reserves?

The ministry of finance is praising its efforts in creating highest ever foreign exchange reserves of $24 billion. These numbers indicate sound economic standing as per the proponents of the current government. However, the question arises whether this growth is due to increasing exports, higher remittances and declining imports or is it triggered by increased borrowing. The answer is the latter; the government resorted to IMF loans and local bank borrowing.

IMF borrowing obviously came with a few terms and conditions. It included reduction of fiscal deficit, privatization of state organizations and expanding the revenue base through higher taxes.

IMF’s Optimistic Approach; The Real Economic Indicators Do Not Look Promising

IMF has always been a backup plan for most of the governments and this time it has provided a highly optimistic evaluation of Pakistan’s economy. In its recent reports, it has ignored many important indicators which show a struggling economy in the long run. These include minimal growth in exports, rising deficits, currency devaluation, slower credit extension to private sector and rising corruption.

The real pointers show a slightly different picture as the tax to GDP ratio is not improving. In addition, the circular debt is not only haunting public entities but also funding rising fiscal space.

An optimistic picture will undoubtedly enable Pakistan to get access to more foreign lending to meet current expenditures. However, the move will further push Pakistan into the debt cycle. The history suggests that IMF funding instead of solving the economic issues of debtor economies grips them into a never ending debt cycle. Consequently, inability to service the current debt forces economies to reschedule it further. Therefore, it will be passing in on to the future governments.

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Despite the above mentioned drawbacks, the senator’s aggressive approach may prove to be good for the economic growth but it has to be sustainable in the long run. Rising debt may hamper growth as there would be little room left for human and infrastructure development. Additionally, it can also increase Pakistan’s dependency on these lending organizations. As a result, it could enable external forces to use Pakistan for their vested interests.

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