THE latest data on external debt that the State Bank released on Thursday paints a worrisome picture of the direction in which the economy is headed. External debt of the country increased by $10bn in the first quarter of this fiscal year compared to the first quarter last year. And this does not include the $2.5bn in the bonds floated recently.

The bulk of this increase has come since March this year, and given the recent flotation of bonds in the global markets, the figure is set to accelerate in the coming months. As part of this story of increasing external debts, there is an accompanying growth of external debt-service payments. For example, two years ago, the country paid $5.3bn in debt-service costs, including principal and interest. The next year, this figure rose to almost $8.2bn, with both components, principal and interest, registering an increase.

Thus far in the first quarter of the fiscal year, the debt-service figure has come in at $2.1bn, which if extrapolated forward, indicates no change from last year in the best of scenarios. Even that is worrisome, given that we are shoring up our reserves with borrowed money.

The rising external debt is the other side of the growth story that the government constantly reminds us of. Pakistan’s GDP growth rates have indeed begun to tick upward since 2013, but the pace of accumulation of external debt implies that in substantial measure, these upticks have been earned through borrowed money.

The fresh borrowing undertaken recently by floating bonds in international capital markets should not impact the total debt of the state since the government claims that it will be retiring an equal amount of domestic debt this week. If it does this without raising additional revenues so that the fiscal deficit target is not impacted then the net effect will be to transfer domestic debt to the external account. But even without a net increase in total public debt, the rising external liabilities are a problem because of the depreciation of the rupee, which increases debt-service obligations accordingly.

Those who use this fact to argue against the depreciation of the exchange rate demonstrate a lack of familiarity with how debt markets work. There is no way that a strategy built on borrowing and paying for growth can be sustained without the bill eventually becoming due.

Published in Dawn, December 18th, 2017