THE Economic Survey 2004-05 says that “Pakistan’s external debt and liabilities have declined by $1.24 billion-down from $ 37.86 billion in 1999-00 to $ 36.62 billion by end-March 2005”. While this in itself may be a statement of fact, it creates an impression about debt reduction that may need to be qualified if explored further.
It is evident from Table-1 that while the total external liabilities that include external debt and foreign exchange liabilities did decline from $ 37.86 billion end June 2000 to $ 36.62 billion end March 2005, total external debt increased by $ 2.581 billion during the same period. So, the decrease in total external liabilities was more due to a decrease in foreign exchange liabilities than that in total external debt which actually went up. As shown in Table-1, total external debt after decreasing marginally by end June 2001 went up end June 2002 and after decreasing marginally again in the following two years increased to $34.777 by end March 2005.
The decrease in total external liabilities was due to a decrease in foreign exchange liabilities which decreased by $3.818 billion during end June 2000 and end March 2005. This decrease offset the increase of $2.581 billion in total external debt. The result was a decrease in total external liabilities of $1.237 billion during the same period that we are all happy about. And, this decrease in total external liabilities makes us sanguine about the increase in total external debt as shown above.
The decrease in foreign exchange liabilities has been due to a decrease in foreign currency accounts and maturing Special dollar bonds. During FY 2000 and end March 2005, Pakistan retired its expensive debt with the help of rising foreign exchange reserves that increased primarily due to enhanced export earnings and foreign exchange remittances in the aftermath of 9/11. Consequently, $26.979 billion of debt was serviced according to the latest Survey.
However, the SBP Annual Report 2003-04 notes, “…the negligible fall in external debt (in FY 2004) appears surprising in light of the large pre-payments of public and private loans in FY04—-In fact, the impact of the pre-payment of official and private commercial debt, and scheduled retirement of expensive loans was offset by the disbursement of fresh inflows (approx. $2.2 billion), interest capitalization ($306 million) and, most importantly, the revaluation impact ($1 billion) on the stock of non-dollar denominated debt (mainly Paris Club debt)”.
While private non-guaranteed debt decreased from $2.842 billion end June 2000 to $1.433 billion end March 2005, medium and long term Paris Club, multilateral and other bilateral debt increased from $25.301 billion end June 2000 to $29.711 end March 2005. Total public and publicly guaranteed debt increased by $3.783 billion during the same period.
Let us explore next how external debt-to-GDP indicators might be read alternatively to the indicators calculated on the basis of total external debt and liabilities which declined thereby showing a favourable trend of this indicator as a function of GDP.
It is evident from Table-2 that the external debt and liabilities as a percentage of GDP look favourable from 2001-02 onwards. However, the total external debt as a percentage of GDP increased by 2.72 percentage points by 2001-02 as compared to its 1999-00 level. It, however, decreased to 40.46 per cent in 2002-03 to 35.1 in 2003-04. Can we then conclude by simply looking at the figures that the debt to GDP indicator has improved for the better?
Should we not take into consideration higher GDP growth rates since 2002-03 and currency appreciation during 2002-03 and 2003-04 both of which increased the denominator in dollars thus casting a favourable numerical impact on the ratio of total external debt-to-GDP? The claims vis-ŕ-vis improved external debt ratios, therefore, need to be qualified on two counts.
First, total external debt has increased (obvious from Table-1) and this increase should be reflected in a separate calculation of total external debt-to-GDP (Table-2). If combined with foreign exchange liabilities, it will obviously present a rosy picture because foreign exchange liabilities have gone down.
Second, even if total external debt-to-GDP is gauged, its trend should be studied in the light of increase in GDP and the exchange rate impact when measured in dollars. Only then can it be determined whether the performance claimed on the basis of this ratio is an unqualified success.
For, while the total external debt decreased marginally during 2002-03 and 2003-04, the ratio decreased by considerably higher percentage points as GDP grew by 5 per cent and more which if converted to dollars would increase the numerical value further due to exchange rate appreciation also in these two years.
The denominator of this ratio, therefore, increased by a percentage considerably higher than the marginal decrease in the numerator. Total external debt to GDP ratios during FY03 and FY04, therefore, look favourable. The external debt position requires a lot more candid explanation than has been given thus far.
