KARACHI, Oct 30: Pakistan's total external debt saw only a marginal fall of $45 million in FY04 (July-June 2003-04), according to the State Bank's annual report for the last fiscal year released here on Saturday.

Total external debt declined to $33.307 billion at end-June 2004, from $33.352 billion at end-June 2003. This negligible fall in external debt appears surprising in the light of the large pre-payments of public and private loans in FY04 and requires an explanation.

"In fact, the impact of pre-payments of official and private commercial debt and scheduled retirement of expensive loans was offset by the disbursement of fresh inflows, interest capitalization and most importantly, the revaluation impact on the stock of non US$ denominated debt," says the report.

In FY04, Pak-Arab Refinery Co. or Parco pre-paid a US$350 million Japanese loan, the government pre-paid $1.17 billion expensive Asian Development Bank loans. Besides, $65.8 million worth of private non-guaranteed debt was also retired ahead of schedule.

In addition to all this, Pakistan also made scheduled retirement of the loans taken from IMF, commercial loans and credits, short-term Islamic Development Bank loans and other bilateral and multilateral debt.

But, despite huge pre-payments as well as regular retirements of foreign loans, the stock of external debt fell by only $45 million to $33.307 billion. The SBP report explains that fresh disbursement of about $2.2 billion, interest capitalization of $306 million and the revaluation impact of $1 billion were the factors responsible for a marginal fall in foreign debt despite pre-payments and regular retirements.

Fresh Disbursement: The SBP report says that during FY04, the disbursement of loans from Japan, Germany, France and the US contributed marginally towards the increase in stock of Paris Club loans, while during the same period $519 million were repaid as principal amount of loan. As for the stock of other bilateral debt is concerned, the disbursement from China of $47.46 million for railway and $36.8 million for the Gawadar deep-water project increased the outstanding stock in FY04, despite the retirement of $42 million loans during this period.

Impact of Capitalization of Interest Rates: It was decided under the December 2001 rescheduling agreement that the deferred amount of interest payments would be capitalized in the Paris Club debt stock and the repayments of these amounts would start from May 31, 2005 with four equal and successive semi-annual instalments.

Accordingly, the deferred payments on newly structured and post-cut off date (i.e. September 1997) were capitalized in Paris Club debt stock of FY04, inflating the stock of Paris Club debt by $306 million this year. Interestingly, out of total interest payments bunched up in FY04, the larger amount of payments (US$187 million) pertains to FY02, which should more appropriately be included in the corresponding debt stock for that year.

Currency Valuation: One of the prime reasons that increased the Paris Club debt stock in FY04 is the revaluation of non-US$ debt.

Typically, the loans are denominated in different currencies, but for reporting purposes all amounts are converted into the US dollar equivalents at the applicable exchange rates at particular point in time.

Thus, exchange rate movements can cause changes in the reported US$ equivalents over time. "It is this effect that has led to inflation of the total external debt in FY04," says the SBP report. "Since the currency profile of Paris Club debt includes large debt denominated in euro and yen, the depreciation of US dollar against these currencies inflated the US dollar value of Pakistan's Paris Club debt. The US dollar lost 4.8 per cent against euro and 8 per cent against yen during FY04."

The SBP report says that while the stock of total external debt did not change significantly, the pre-payments did contribute to a significant reduction in the outstanding stock of expensive external debt and liabilities, the share of which in total debt and liabilities fell sharply.

The report says that total external debt and liabilities declined by $216 million in the last fiscal year, coming down to $35.258 billion at end-June 2004 from $35.474 billion at end-June 2003. Foreign exchange liabilities alone, fell by $171 million, chiefly due to maturing special US$ bonds.

The stock of US dollar bonds reduced to $552 million at end-June 2004, from $696 million at end-June 2003.