October 23, 2006	Monday	Ramazan 29, 1427

Pakistan’s external borrowing requirements are increasing because of surging imports, falling exports and ballooning trade deficit. The rising domestic demand, fuelled by high economic growth, is being met by unsustainable level of import despite its funding by capital inflows like workers remittances.

While there is need for more external assistance, the debt burden is increasing in absolute terms when the export earnings for servicing loans and credits is falling and bulk of the imports cater to the domestic demand and not the export-oriented industries. Similarly, quite a sizeable part of the foreign investment goes into acquisition of existing enterprises and definitely not in creating any notable capacity for exports of goods or services.

Though the current ratios of debt to GDP or export earnings may appear to be robust to the policy makers, the emerging trends in external sector are not so promising. The situation would become more clear when a report on the debt situation, now being finalised, will be presented before the Parliament in January 2007.

Officials claim that the economy is growing at a much faster pace and its size has almost doubled after update of national accounts and a seven per cent economic growth over the last four years. This has improved the debt-GDP ratio. The country’s borrowing requirements are also rising. “But we need to keep an eye on the rising trend” an official said.

The Fiscal Responsibility Law approved by the Parliament places a debt ceiling that should not be more than 60 per cent of the GDP by 2012-2013 and that it should decline by 2.5 percentage of the GDP every year. The law provides that revenue deficit should be zero by 2007-08 and the government should not guarantee loans of the state enterprises which are more than two per cent of GDP.

But the Debt Policy and Co-ordinated Office seems to be facing problems in managing the debt burden, though its officials continue to claim that so far targets fixed under the Fiscal Responsibility Law have over-performed, especially in ensuring that public debt should remain less than 60 per cent of the GDP.

The debt office is handicapped by lack of trained manpower and experts for managing debt and debt liabilities. In past three years, only six experts could be hired because of the non-availability of such professionals in the market. It could prove costly to the national exchequer.

Director General of the debt office, Dr Ashfaque Hasan Khan, says that debt itself in not bad but it is the burden of debt which matters. Debt burden, he says, must continue to decline and this is what the government is doing over the last few years.

“And that is why, the burden of debt is almost half during the last seven years”, he said, adding that borrowing domestically or from international sources is normal part of economic activity.

As long as the borrowers can earn a higher economic and social rate of return than the cost of borrowed funds, creation of debt is not a burden. Debt servicing problems arise when the debt carrying capacity of the economy does not increase, commensurate with the increase in its debt service liabilities.

The debt carrying capacity is defined as the ability of a country to service its external liabilities within an orderly and stable macro economic framework.

Dr Khan said that people say that Pakistan’s debt is rising and those who say this they see absolute numbers. But international capital market, banks, rating agencies and international analysts look at the burden of debt and not the debt itself.

However, the situation has improved since the government repaid expensive loans which were offered by the Asian Development Bank (ADB). Most expensive loans carried a maximum 5.5 per cent LIBOR interest rate but he conceded that interest on bonds floated by Pakistan is seven per cent.

Out of total $37 billion debt, about $14 billion belonged to bilateral creditors of the Paris Club, while $15 billion worth of loans were secured by World Bank, ADB and the Islamic Development Bank (IDB). Nearly a loan of $1.5 billion given by the IMF on account of Poverty Reduction Growth Facility (PRGF) was continuing and was still to be fully repaid.

When reminded that independent economists still cast doubt about the government ‘s ability to handle its huge debt, he referred to three major reports recently given by Deutche Bank, Union bank of Switzerland(UBS) and J.P. Morgan. “They all say Pakistan has arrived in the international capital market and is managing its debt carefully and that there is no worrying thing for the country”.

According to the latest update of the debt office, the external debt and liabilities stood at $37.265 billion at the end of financial year 2005-06 as against $35.834 billion at the end of 2004-05, showing an increase of $1.431 billion or four per cent.

The debt and liabilities stood at $38.9 billion at the end of 1998-99. Although external debt has risen by $1.43 billion in 2005-06 compared to the previous year, the debt burden has, however, declined significantly over the year.

As a percentage of GDP, the external debt was 32.3 per cent in 2004-05 but declined to 28.9 percent in 2005-06. Similarly, Pakistan’s external debt and foreign exchange liabilities as percentage of foreign exchange earnings stood at 134.3 per cent in 2004-05 but declined to 120.6 per cent in 2005- 06.