The world has experienced a progressive increase in foreign debt liabilities in the recent decade, with unforeseen consequences for certain borrowing countries. Among them include sluggish economic growth, grave debt issues, and stock market volatility, especially in low-income countries. Unsustainable debt is causing countries to default like Pakistan and Sri Lanka. The debt is easily understood to be the ‘deficit accumulated over time’. Countries who lack liquidity either to pay for imports or have trade deficits need to finance their needs thereby, turn towards acquiring loans.
Pakistan is among the top 10 countries possessing the largest foreign debt stocks with an external debt of $138.568 billion in 2022-23 up from $129.574 billion in 2021-22, according to the International Monetary Fund (IMF). There has been a growing concern about its ability to repay its debt obligations, the impact of the debt on the country’s economic growth, and debt restructuring to ease the country’s financial strain. To grasp the idea of debt restructuring as a panacea to the ailing economy, one has to stitch a few things together the history of the country’s debt, its accumulation over time, debt obligations, and last but not least, whether debt restructuring is a panacea.
Since the inception of the country, governments have been borrowing from external sources like donor agencies and friendly countries like China, resulting in a rising debt burden over time. The external debt started increasing significantly in the 1980s due to the country’s support for the Afghan war, and its subsequent economic sanctions. This trend continued in the 1990s and early 2000s as Pakistan borrowed heavily to finance its economic growth and development projects. The debt situation worsened in the last decade as the country took on more loans to address its balance of payment crisis and for infrastructure development projects. According to the State Bank of Pakistan, the country’s external debt was around $126.6 billion as of June 2022.
It is crucial to strengthen institutions that oversee debt management and ensure transparency and accountability in the borrowing process.
The accumulation of Pakistan’s debt over time can be attributed to a combination of factors. Among them is the increased trade deficit, which is a situation where imports outweigh exports this has certainly put pressure on the country’s foreign reserves. The declining foreign reserves become then, another dilemma. Resultantly, to ensure the foreign payments for imports, it has to borrow. Another factor contributing to Pakistan’s debt is the decline in Foreign Direct Investment (FDI). The political instability results in a decline in the business-friendly environment which results in lower confidence in foreign investors and thus, a decline in FDI and capital flight is seen. Other factors include financial assistance from IMF and World Bank to Pakistan. This assistance often comes with strict conditionalities that require Pakistan to undertake unpopular economic reforms such as austerity measures like those reducing public spending and increasing taxes. Equally true, Pakistan’s tax collection system, due to its regressive type, results, in a limited revenue base to finance government expenses. This has led to a mismanagement of public funds and corruption, exacerbating the country’s debt crisis.
According to recent reports, Pakistan’s external debt repayment obligations stand at $73 billion over the next three years. From April 2023 to June 2026, Pakistan needs to repay $77.5 billion in external debt, which is a “hefty amount” for a $350 billion economy. Moreover, the country’s total foreign debt servicing is projected to climb up to $23 billion for the budget 2022-23, with commercial loan repayment forming a significant portion. These repayment obligations are part of a $6.5 billion bailout package the International Monetary Fund (IMF) approved in 2019, which is critical for Pakistan to avoid default on external debt obligations. The debt burden has become a significant challenge for Pakistan, with its stability increasingly dependent on addressing the economic crisis arising from the massive external debt obligations.
The question that whether Pakistan needs its debt restructured or not is a point of contention here. It is needless to say, debt restructuring may help the country manage its debt burden but it is not a nostrum. Debt restructuring involves renegotiating the terms of existing debt to ease the burden of repayment. Nevertheless, it all comes at a cost, as creditors may demand higher interest rates or impose stricter conditions on future lending. Pakistan has already received debt relief from various international organizations, including the G20, the Paris Club, and the IMF. It may need further restructuring to deal with its growing debt burden. The IMF has recommended that Pakistan should pursue a comprehensive debt restructuring plan, including measures such as fiscal consolidation, improved tax collection, and an increase in exports.
Viewing all, debt restructuring can provide short-term relief, it is not a panacea for long-term debt sustainability. Debt restructuring can result in lower debt payments, but it can also lead to lower credit ratings, higher borrowing costs, and a loss of investor confidence. Additionally, debt restructuring does not address the root causes of debt accumulation, such as poor governance, corruption, and lack of economic diversification.
Improving debt management in Pakistan is essential to address the country’s debt problem. This could involve a range of measures, including improving tax collection from the elite, reducing defence spending, and promoting economic growth. The government could also explore alternative sources of financing, such as issuing bonds or attracting foreign direct investment. Moreover, it is crucial to strengthen institutions that oversee debt management and ensure transparency and accountability in the borrowing process. Pakistan needs improved debt management. The government must take action to put the country’s finances on a sustainable path and ensure that debt does not become an impediment to economic growth and development.
The writer is a researcher.