KARACHI: Pakistan had to pay a heavy price of loss of $3.3 billion in fiscal year 2011 due to fluctuations in the price of US dollar against major currencies, said a recent State Bank report.
The importance of currency composition of external debt has significantly increased in recent years; as foreign currency markets remained volatile following the financial crisis of 2008.
The currency composition reveals that 94.9 per cent of Pakistan’s EDLs (external debt and liabilities) are denominated in four major currencies ie US dollar, Japanese yen, euros, and SDRs.
Exchange rate movements (appreciation or depreciation) of the US dollar against other major currencies (yen, euros and SDRs) have a significant effect on the stock of EDL; as it is used as a base currency.
“An impact analysis of exchange rate movements indicates that 97 per cent of increase in public debt during FY 11 was due to ‘transactional losses,” said the State Bank report.
“In absolute terms, transactional losses for FY 11 stood at $3.3 billion. The depreciation of US dollar against Japanese yen alone inflated public debt by $1.3 billion,” said the report.
A change in the external debt stock on account of converting EDL denominated in different currencies to a base currency (UD dollar in case of Pakistan) is known as transactional changes (gains or losses).
According to the composition, US dollar constitutes 25.2 per cent, SDR 26.6 per cent, yen 30.3 per cent, euro 12.8 per cent and others 5.1 per cent in the EDL of Pakistan.
Pakistan’s total external debt and liabilities (EDL) witnessed a rise of $4.5 billion during the year to reach $61.8 billion by end FY 11.
“Factors contributing to this increase in FY 11 were the cross-currency movement of exchange rate and government loans to deal with the devastating floods at the beginning of the year,” said the report.
The external debt adjusted for revaluation losses shows an increase of just $1.1 billion in FY 11. This implies that foreign currency loans in FY 11 were issued largely for repayments of maturing external loans.
Specifically, the ratio of principal repayments of the government loans for budgetary support to disbursement stood at 72.3 per cent for FY11.
The higher principal repayments to disbursement ratio was primarily due to low disbursements; as principal repayments for FY11 were also lower compared to the previous two years.
Among other factors, a suspension of the IMF’s SBA played a key role in lower disbursement for FY11.
Despite a sharp improvement in current account balance in FY11, the rise in Pakistan’s total debt and liabilities (TDL) of Rs1.8 trillion during the year to Rs12.1 trillion, is a reflection of deteriorating fiscal imbalances, it said.
Changes in the rupee value of external debt due to revaluation changes and increased borrowing of loss-making Public Sector Enterprises (PSEs) also contributed to the rise in the debt burden.
These accumulating TDL (total debt liability) impose large costs on the productive resources of the economy; debt servicing of TDL reached Rs1 trillion in FY11, which was 5.8 percent of GDP.
Within TDL, public debt accounted for 90.5 per cent as of end FY11, and its servicing eats up 43.7 per cent of government revenues for the year.
This limits government’s ability to use fiscal policy as a countercyclical tool.