Pakistan on way to becoming heavily indebted country

08 August, 2009 10:44:00 editor

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State Bank of Pakistan is the Central bank of Pakistan

Pakistan is once again on its way to becoming a heavily indebted country. The external debt to GDP has now crossed 30 per cent. In absolute volume terms it works out to more than $ 50 billion. The outlook for Pakistan’s sovereign debt rating refuses to look up. It is well below the rating enjoyed by India, Indonesia and Turkey.

Between FY2004 and FY2009, total external debt and liabilities have grown at a cumulative rate of 42 percent; in FY2009, their growth rate was faster than nominal GDP. The three year IMF Stand by Arrangement (SBA) concluded in November 2008, has led to a significant increase in the external debt. Roughly 83 per cent is accounted for by the Paris Club multilateral and the IMF debt. IMF's share of Pak debt increased from 3.1 percent in FY08 to 8.4 percent in FY09.

According to Federation of Pakistan Chamber of Commerce & Industry (FPCCI), bulk of the loans has come from bilateral and multilateral sources. Non-government lending to Pakistan remains trivial, amounting to less than 1 percent of the GDP; private foreign exchange liabilities are about the same level. Put differently, the external debt burden demonstrates the political character of economic support extended by the West and its multilateral agencies.

It also means Pakistan is shunned by foreign private capital, which doesn’t see Pakistan as an attractive investment -despite the exorbitantly high interest rate Islamabad offers. This is clear from a paltry $275 million realised from the sale of non-guaranteed private sector bonds in the international market.

A close study of the loans and other liabilities shows Pakistan is not getting much project aid. . Project aid's share in total commitment fell over 70 percent in the 1990s to about 40 percent in 2000-2009. There is no existing commitment for any manufacturing sector project in Pakistan.

Post -9/11 mood in the western capitals led to liberal aid to Pakistan, which is seen as the front line state in the global fight against terrorism, it is made to pay through its nose for the aid. FPCCI study shows that most loans carried high interest rates. The share of soft loans and grants in the FY 2008 commitments was only about 10 percent. It means debt service burden is going to crowd out commitments for welfare sector.

Before 9/11 debt, Pakistan used to pay about $5 billion annually in debt servicing. It dropped to $3 billion by 2007-8. But next fiscal debt servicing rose by over 20 percent to $3.65 billion. In percentage terms, debt service to foreign exchange earning ratio increased from 19 percent in 2006-07 to over 35 percent in 2008-09.

The foreign liabilities are increasing much faster than forex earnings. By June 2009, Pakistan's external debt to foreign reserves ratio exceeded 500 percent. A clear signal of systemic risk to international investors. Capital inflows are paltry therefore.

Pakistan’s continued reliance on foreign debt has its own flip-side. It will inhibit productivity and expansion of job market. Distortions will result in the macro-economic scene; a high cost economy will pose tough challenge to the Zardari government while the man in the street will find prices of daily roti go through the roof, like they did towards the end of Musharraf regime

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