FROM this quarter of this fiscal year, external debts will start swelling as foreign lenders begin to disburse approved funds, and so will debt servicing over time.

The external debt servicing (part repayment of foreign loans with interest) totaled $5.388 billion in nine months of this fiscal year.

Sources in the ministry of finance say by the end of the year in June, total external debt servicing may reach $7 billion, of which nearly $6 billion would fall in the government’s account.

“Our exports and home remittances combined fall short of our total imports bill. So, where on earth can the government arrange foreign exchange for massive external debt servicing, particularly if foreign investment remains sluggish — as it is right now,” questioned a senior ministry official.

The government is borrowing to repay external debts. An increase of 4.2pc and 11.4pc respectively in exports and remittances in 10 months of FY14 (coinciding with a very slow growth of 1.2pc in the imports bill) has somewhat improved the situation.


Had foreign private investment not declined by 15pc from an already low base, ‘not every fresh penny borrowed from outside would have to be spent on external debt servicing’


Had foreign private investment not declined by 15pc from an already low base, “not every fresh penny borrowed from outside would have to be spent on external debt servicing,” says another senior official.

At the beginning of this month, the World Bank approved $1 billion for the energy sector and taxation reforms. Earlier, the Asian Development Bank had approved $400 million — also for the energy sector. These loans would be in addition to the $6.7 billion IMF loan, of which four tranches of about half a billion dollars each have been disbursed.

After mobilising $2 billion through Eurobonds earlier this year, the government is now going to raise more debt from foreign markets through Sukuk (Islamic bonds). It has already invited proposals from banks interested in becoming lead managers/financial advisers for this deal.

Besides, multi-billion bilateral loans have already been pledged by China to support Pakistan’s development programmes in various fields. All of this is going to increase our external debt servicing, and unless the government curtails domestic debt servicing, overall debt servicing will start squeezing fiscal space from the next fiscal year.

Recent budgetary leaks in the media suggest that the government may set aside Rs1,347 billion for external and domestic debt servicing in the FY15 budget, due early next month. This is 36pc higher than the actual amount spent under the same head during FY13, and 12.8pc more than the revised estimate for FY14.

Finance ministry officials say that from the standpoint of prudent fiscal and debt management, the cost of total debt servicing will be kept within limits, and faster accumulation of foreign debt will be timed with slower domestic borrowings.

“Our foreign debt inflows will soon outweigh external debt servicing, thus warding off pressure on the fiscal side at least in this fiscal year. This is more so because the over 10pc rupee depreciation so far has already cut into external debt servicing [in terms of rupees],” says one of these officials.

At the end of the last fiscal year, 74pc of our external debt and liabilities were in the form of public and publicly guaranteed debt, official statistics reveal. Despite all the repayments of public debt, including that to the IMF, this percentage may not decrease by the end of FY14 next month.

It would instead increase, primarily due to the launching of $2 billion of Eurobonds. In the last fiscal year, external debt and liabilities had declined because Pakistan repaid about $3 billion of an old IMF loan, and also because the appreciation of the dollar against the Japanese yen (24.5pc between July 2012 and June 2013) lowered the value of our yen-denominated foreign loans in terms of dollars by no less than $2.7 billion.

During this fiscal year, this factor is not in play, as the dollar has made a very nominal gain of about 2pc against the yen between July 1, 2013 and May 20, 2014, and there are no indications of a huge yen decline against the dollar till the end of June.

One important way of looking at external debt and liabilities (EDL) is its size relative to the GDP. By end of FY13, total EDL stock was equal to 25.3pc of GDP, showing some improvement of 381 basis points against FY12. This year, EDL as percentage of GDP too is likely to increase, as debt accumulation has been huge and economic expansion quite nominal.

The stock of public and publicly guaranteed external debt looks set to settle around $53 billion by the end of this fiscal year in June, up from $51 billion at the end of the last fiscal year. At end-March 2014, the stock of public and publicly guaranteed external debt was slightly over $51.5 billion, according to latest figures released by the State Bank of Pakistan.

Published in Dawn, Economic & Business, May 26th, 2014

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