The Governor of the State Bank of Pakistan delivered a key-note address on 2nd March at the 51st annual general meeting of the Institute of Bankers in Pakistan. During his speech, he dwelt at length upon the subject of the external debt burden of the country.

During the address, two new economic theories appear to have emerged; firstly the “non-interest current account surplus” and “working out of the country’s net outstanding external debt stock” by deducting from the total stock of the debt the amount of the country’s reserves.

As for the first item, the economists well-conversant with the theories prevailing at the international level can only comment on the theoretical aspect but for the common man, it does not make any difference even if there is “non-interest current account surplus” at any given point of time in case the overall payments in the external sector at the same point of time exceed the receipts and there is net deficit. Therefore, in the layman’s point of view, the theory is of no practical significance.

Coming to yet another aspect of the above theory, the question is how the “non-interest current account surplus” has arisen. Is it the consequence of any tangible efforts of the economic managers?

This writer, in the full expectation of being contradicted if wrong, feels that this surplus is the direct result of the two reschedulings obtained by the government from the Paris Club in the past which had stopped outflow of foreign exchange in repayment of the debts.

And for future, such surpluses will generate on account of the long term reprofiling of the debts recently agreed to with the Paris Club.

How the reprofiling became available is not a million dollar question. Obviously, it is the impact of the September 11, 2001 events.

It is also not understood what practical benefit accrues to the country or the public if the stock of the external debt is shown in the reduced amount by deducting from the outstanding stock the amount of the foreign exchange reserves. After all, that methodology does not practically reduce the actual debt burden.

It has been said by the government, time and again, that the recent reprofiling of the bilateral debt has reduced the stock of the outstanding external debt by 30 per cent. The Governor in his address went to the extent that the debt stock will further be reduced by 20 per cent when the negotiations with the bilateral lenders on the interest rates issue take place and the agreements are signed. This will cut the stock of the bilateral debts to just half.

The governor did mention that external debt problem was a complex issue and that he had endeavoured to put it in a language comprehensible to an ordinary citizen of the country.

But by a very careful study of his address, what one can understand is that 2/3rd of the bilateral debt has been rescheduled for 38 years including a grace period of 15 years while 1/3rd of it has been rescheduled for 23 years including a grace period of 5 years.

It is well-nigh impossible for a common man to understand how the quantum of the debt stock stands reduced by 30 per cent and how after bilateral negotiations on the interest rates issue, it will be reduced by another 20 per cent.

Will the SBP authorities arrange to issue in the press for the information of the general public the detailed mechanism under which the outstanding debt stock will be cut by the above proportion?

In the above address, the question of revaluation (in terms of dollar) of the debt stock expressed in other foreign currencies has also been discussed. It has been pointed out that in case such a revaluation was not done, the debt stock would have further been reduced by $1.4 billion (i.e. from $ 34.4 billion to $ 33 billion). One would like to understand whether revaluation (in terms of dollar) of non-US $ debts has taken place for the fist time?

If previous governments were not doing it, how they were arriving at the cumulative amount of the non-US $ debt in terms of US $. This point also needs to be clarified by the Ministry of Finance or the SBP for the education of common man. In case the previous governments did not revalue the non-US $ debts in terms of U.S.$, it was surely a mistake on their part. But a very pertinent question is that when the government/SBP has rectified that mistake this time, what is the rationale in making the assertion that had this revaluation not been done, the stock of external debt would have been lesser by one and a half billion dollars. This also needs to be dilated upon in some detail by the SBP authorities.

The SBP governor has mentioned in the address that low cost multilateral debt shall continue to be obtained. The finance minister had expressed the view that there is no harm in contracting the new debts provided they are spent on the profit yielding projects as the income generating from such projects will provide resources for the required repayment and debt servicing.

Recently, news items have appeared that the Asian Development will dish out loans worth $1 billion during the current year. A loan of over $ 350 million is reported to have been made available by the World Bank. Which profit yielding projects, these loans are proposed to be put in, have not been officially identified.

What one gathers from the media is that the Asian Development Bank/ the World Bank loans are to be used to finance the public sector banks, capital markets development project, banking sector reforms, judicial reforms project, financing the NWFP budget deficit ($ 200 million), etc. Will the pouring of the externally borrowed money in such avenues generate funds for repayment / servicing of the relative debt.? Is it not the same policy which was pursued by the previous governments?

True that the present government intends to borrow at the low cost and the Asian Development Bank/ the World Bank have increased the volume of the concessional loans but the bifurcation of the mix has not been made public. Satisfaction has, however, been expressed that even the interest rates of the non-concessional loans these days are not too onerous.

There is yet another aspect of these non-concessional loans. These multilateral institutions had been extending loans in the past both at “fixed” and “floating” interest rates. If the loan agreements covering the non-concessional loans are signed on the basis of floating interest rates, the rates would obviously change at half-yearly/yearly interval. No expert in the world can predict the interest/exchange rate behaviour in the long run. So, the current low interest rates may prove to be punitive in future in case floating interest rate provision is incorporated in the relative agreements.

There is in fact no ground for expressing complacency in this respect. Apart from these factors, the fact remains that the fresh borrowings, concessional or non-concessional, will obviously add to the stock of the country’s debt to be owed by our future generation.

It is also true that the proposed debt will carry 10-15 year grace period but this grace period will end almost simultaneously with the commencement of repayments under the presently reprofiled debt and at that point of time the Pakistani public will face the double debt repayment burden—of the reprofiled one and the newly contracted one too.

The ideal situation would, therefore, be that the financial managers manage the economy by utilizing the breathing space provided by the debt reprofiling / write-offs (which has provided a yearly relief of $1 billion) and the foreign currency inflows on account of grants / increased home remittances etc. and let the future generation feel easier with lesser debt burden at the time they hand over to their successors.

It has been asserted in the address that the past governments resorted to the short term commercial borrowings for building up the foreign exchange reserves. This does not appear to depict the whole truth. The commercial loans were generally contracted in the past era for the import of crude petroleum oil / edible oil and the finished petroleum products in view of the difficult foreign exchange position obtaining at that time.

The reserve management strategy has been changed by the present governor in as-much-as the amounts of foreign currency deposits which were in the past required to be surrendered to the SBP have been returned to the concerned banks.

There are two categories of foreign currency deposits; firstly those from which withdrawals in foreign exchange were banned in May, 1998 and secondly those which are termed as “incremental deposits”. As public is aware, the expatriate Pakistanis working in the Gulf had shown a lot of resentment against the ban placed on withdrawals in foreign exchange from the foreign currency accounts when the former prime minister Muhammad Nawaz Sharif visited Kuwait soon after the nuclear detonation.

At that time, Nawaz Sharif had promised to allow free operations in respect of the “incremental foreign currency deposits” brought after his said commitment. In order to alleviate the fears from the minds of the public, he had given commitment that foreign currencies received in the accounts would not be required to be surrendered to the SBP but the depository banks would themselves keep the funds, invest them and return the same to the depositors on demand in foreign currencies or Pak Rupees as the case may be.

The arrangement continued to function well for some time. But in May, 1999 or so, the SBP was constrained to call upon the banks to surrender the relative funds to it (SBP). What were the compelling circumstances which led the SBP to initiate that drastic action still remain a state secret.

Now that the decision has been taken to return 80 per cent of the incremental foreign currency deposits to the banks concerned, public may be interested in knowing the 1999 compulsions if “access to information” permits the State Bank of Pakistan to divulge that information.