IN a recent article on public debt management, the finance minister has made some dangerously wrong assertions. Foremost of these is that the power projects under CPEC are being set up by private investors; hence the approximately $25 billion foreign debt that these projects will entail will not be sovereign in nature, and by implication, repayment of these loans will somehow not burden the country’s balance of payments.
This is patently false. If the finance minister has been led to believe this, it raises even more concern about how prepared Pakistan will be to meet its repayment obligations in the medium term. But first, in order to anchor the discussion, it is important to provide the context of the finance minister’s article and earlier statement on the floor of the Senate.
The outstanding stock of debt of any country is composed of those loans that have to be repaid in foreign currency (external debt) and those that are to be repaid in local currency (domestic debt). (Technically, the distinction between external and domestic debt is not made on the basis of currency of repayment but on the jurisdiction of the lender. However, for purposes of simplicity, I will use currency of repayment as the basis for categorisation).
Another categorisation is between loans and liabilities contracted by the government or wider public sector, and borrowing by the private sector. Only those loans and liabilities are counted under ‘public debt’ whose repayment is either directly from the budget, or is guaranteed by the government. The wider definition of public debt is usually referred to as ‘public and publicly guaranteed debt’.
The distinction between public and private external debt is largely irrelevant.
Pakistan’s total debt — public as well as private, external and domestic, inclusive of liabilities — stood at Rs21 trillion as of end-December 2015. By comparison, on June 30, 2013, this figure stood at Rs16.4tr. During this period, public debt (using the official definition, which excludes certain categories such as foreign exchange liabilities and PSEs’ debt) has increased from Rs14.7tr to Rs18.9tr.
Hence, in two and half years of the PML-N government, total public debt has officially increased by Rs4,200bn, recording an increase of nearly 29pc. In absolute terms, the addition to the net outstanding public debt in this period is by far the highest in Pakistan’s history.
The bulk of the increase has occurred under domestic debt. But the net addition to external public debt has been significant too. Since July 2013, net external debt (after repayment) has increased by $5.7bn to $57bn. Using an expanded definition that includes external debt of the public-sector enterprises, public and publicly guaranteed external debt stands at nearly $60bn.
This is the amount already disbursed by foreign lenders, including IMF, to Pakistan. The amount of external debt contracted by Pakistan during the tenure of the PML-N government, inclusive of debt that has been committed but not disbursed, amounts to a whopping $26bn.
While Pakistan’s external debt dynamic remains benign at this point in time, with foreign exchange reserves of over $20bn comfortably covering import requirements and maturing debt repayment, power projects worth $35bn under CPEC will add significantly to the country’s total external debt.
And here’s the rub. From a balance of payments perspective, the distinction between public and private external debt is meaningless. Irrespective of whether the government is contracted to repay the debt or the private sector, the pool of available foreign exchange is exactly the same. The private sector will also make repayments on its external borrowing from the country’s export earnings and remittances. Unless the new projects for which foreign loans have been taken — whether by the government or the private sector — increase Pakistan’s exports, the ability to repay future debt obligations in foreign currency will be affected.
The biggest vulnerability under CPEC is that whereas approximately $25bn of new foreign loans will be contracted, the earnings of the projects will mostly be in rupees. It is important to remember that the East Asian crisis in 1997-98 was not caused by sovereign defaults on external debt by Indonesia and Thailand, but by the unavailability of foreign exchange to private borrowers and investors to repatriate capital. The bottom line: future repayment of foreign loans depends critically on increasing Pakistan’s export earnings. And it is here that the government’s absence of a clear-cut and viable strategy is most apparent.
The unprecedented amount of external debt accumulation by this government, and its nonchalant and unprepared approach to the debt dynamic under CPEC, has raised concern amongst independent observers — and focused minds within the security establishment. Is Pakistan being subjected by economic hit men within the PML-N government to the template laid out in John Perkin’s book Confessions of an Economic Hit Man (whose new, revised version has just been released). In revelations by Mr Perkins, it is alleged that the US government through myriad agencies and multilateral institutions such as the IMF and World Bank, and a network of global consultants, contrives to make countries heavily indebted as part of a strategy to exert control and influence.
It was in the backdrop of these rising concerns that the finance minister was compelled to make a statement on the floor of the Senate that “Pakistan will not compromise its nuclear programme even if external debt reaches $100tr”. Whatever the truth behind the concern and speculation in this regard, it is clear the ministry of finance needs to put greater thought into the dynamic of Pakistan’s external debt in the medium term, especially with regard to the CPEC projects.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
Published in Dawn, April 1st, 2016