KARACHI, Feb 7: Pakistan spent $1.519 billion on servicing its external debt during the first half (July-Dec) of this fiscal year. This included repayment of $1.079 billion as principal amount of foreign loans and $440 million as interest, according to the data released by the State Bank.

During July-Dec 2005, Pakistan also spent $137 million on servicing its foreign exchange liabilities, including the principal amount of $81 million and $56 million paid as interest. The foreign exchange liabilities include special dollar bonds, foreign currency bonds, deposits of foreign central banks in Pakistan, Bank of China’s deposits with the National Bank of Pakistan and foreign currency swaps.

Thus, the country had to dish out $1.656 billion on servicing external debt and the liabilities combined. At the end of December 2005, Pakistan was carrying $35.245 billion worth of external debt and liabilities, of which external loans amounted to $33.523 billion and liabilities $1.722 billion. At $35.245 billion, the stock of external debt and liabilities showed a decline of $589 million within six months i.e. between July-December 2005: at end-June 2005, the country was carrying $35.834 billion external debt and liabilities.

Servicing of external debt and liabilities is perhaps the single largest source of outflow of foreign exchange from Pakistan after imports. During the current fiscal year, Pakistan’s import bill is likely to reach $27 billion and the country would spend around $3 billion on servicing of debt and liabilities. The two combined means an outflow of $30 billion.

During the current fiscal year, Pakistan’s exports are expected to fetch $17 billion besides, the country is expecting $4 billion from its expatriate citizens and $4 billion more through foreign direct and portfolio investment. So, all the three major sources of inflow of foreign exchange would generate $25bn or so, less $5bn than what would be needed to finance imports and servicing of external debt and liabilities. This does not mean that the country would necessarily see sizable balance of payments deficit, but this certainly indicates that the BOP would remain under pressure during the current fiscal year.

According to the SBP data, out of the $1.519bn spent on external debt servicing in the first half of this fiscal year, $928 million were paid through the central bank’s foreign exchange reserves. That explains why the reserves held by the State Bank witnessed a decline of $548 million during this period, falling from $9.791bn at end-June 2005 to $9.243bn at end-December 2005. Pakistan’s overall liquid foreign exchange reserves, including those held by the commercial banks, declined by $955 million, from $12.623 billion at end-June 2005 to $11.668 billion at end-December 2005.

The rupee, however, remained somewhat stable during this period and lost only 0.3 per cent of its value against the dollar as the State Bank continued to provide foreign exchange to the banks for financing oil imports. Since the reserves have started falling, the central bank may have to review this policy, which it had adopted in November 2004, to keep the rupee from falling in the wake of soaring oil prices.

But, even if the central bank agrees to have a second look at the policy, it would not stop selling dollars for this purpose altogether because that would weaken the rupee immediately.