KARACHI: Pakistan could face a serious problem as its foreign exchange reserves fast depleting amid rising external debt servicing.

The country’s external debt servicing rose to $10.886 billion in the first three quarters of 2021-22 compared to $13.38bn in the entire FY21.

It was just $1.653bn in 1QFY22 against $3.51bn in the first quarter of 2020-21. However, the debt servicing jumped to $4.357bn in 2QFY22 and further to $4.875bn in 3QFY22.

The country has been facing a serious threat from its external front as the State Bank of Pakistan’s foreign exchange reserves fell to single digits despite a $2.3bn inflow from China late last month.

The increasing size of the external debt servicing in each quarter indicates the government has been borrowing dollars at higher commercial rates to meet its foreign debt repayment obligations.

The PML-N-led coalition didn’t disclose the rate at which it had borrowed $2.3bn from China. Initially, Beijing had agreed to roll over the syndicated loans before the ouster of the PTI government. However, the Shehbaz administration had to wait for two months to secure the Chinese loan.

The financial sector and other stakeholders of the economy are still not satisfied with the hidden cost of the Chinese loan. The market is full of speculations that Chinese loans were taken at a very high rate.

Finance Minister Miftah Ismail has been assuring Pakistanis that the release of the $1bn tranche is expected in a few days but three months have gone without a satisfactory reply from the IMF. Bankers believe that the fund is dictating the government like Washington to do more.

Since the IMF has stopped funding the country is not getting project funding from the World Bank and Asian Development Bank.

A senior analyst said that the Chinese knew that Pakistan was unable to return to the international debt market and the IMF was not in a hurry to help Islamabad. This was the reason for Chinese lent the money at a very high rate.

Pakistan has been paying debt servicing through commercial borrowing which means more external debt servicing in the next financial year. The two governments in FY22 could not control the influx of huge imports totalling $80bn creating a large current account deficit (CAD).

So far the CAD in 11MFY22 reached $15.199bn compared to just $1.183bn in the same period of last fiscal year. The huge CAD is alone enough to understand the external weakness of the economy.

Despite record remittances and exports, the country is unable to get dollars from the international debt market.

Published in Dawn, July 13th, 2022