In a bid to contain mounting challenges on the external sector front, the government of Pakistan has started increasing its international debt liabilities at an aggressive rate. According to the provisional statistics reported by the Economic Affairs Division, $796.8 million worth of new debt is added to the overall debt portfolio for budgetary support during July-September this year. In addition to this, the government has also finalised arrangements for borrowing another $2 billion for budgetary support. Money borrowed for project financing, which actually adds to the economic development of the country, amounts to $582.97 million for July-September 2017.
This comparison clearly shows the adverse nature of our current borrowing regime. We are borrowing more money for short-term economic fire-fighting than for economic development. There are even more damaging consequences of this borrowing strategy which is dominated by financing for budgetary support. Let’s first see who is giving Pakistan money for this purpose.
Out of the $796.8 million budgetary support debt, $458 million is given by a consortium of foreign and domestic commercial banks. The remaining amount is provided by the International Islamic Trade Finance Corporation (ITFC) under the facility of Murabha financing. For the $2 billion new debt which the government is about to incur, it is floating Euro bonds and Sukuk bonds in the international capital markets.
The only alternative to financing through these means is to enter into another IMF program just like the government did in 2008 and 2013. IMF is a conventional institution that is chartered to provide money for budgetary support purposes only. The Asian Development Bank (ADB) and the World Bank (WB) also provide minimum financing for such purposes subject to approval by the IMF. However, the government has time and again reiterated its stance for not getting into any such program.
There are three main problems with borrowing from unconventional institutions like any consortium of commercial banks. First, the interest rate charged by commercial banks is higher so there is an interest rate risk. In contrast to this, loans provided by conventional lending institutions like IMF, WB, or ADB are on concessionary terms. Second, the maturities of these loans are short so there is a refinance risk inherent in borrowing through commercial banks as well. Third, since they are contracted on commercial terms, any possibility of debt roll-over is minimal.
Borrowing through capital markets is also expensive. When the government issued Euro bonds in September 2015 valuing $500 million of 10-year maturity, the interest rate was 8.25 per cent. This interest rate was 6.12 per cent higher than the US treasury rate. Similarly, the interest rate was 5.5 per cent when the government raised $1 billion last year through floating Sukuk bond. The high-risk profile of Pakistan’s economy is evident from these high interest rates. The government has to promise high returns to lure foreign investors of capital markets.
Despite the renewed focus on public debt sustainability, loans incurred for budgetary support lack transparency. We don’t know the terms of engagement of the government of Pakistan with the foreign commercial banks
Although there is low refinance risk in debt incurred through capital markets, the interest rate risk is enormous. Compare Pakistan’s average GDP growth rate of 4-5 per cent with the interest rates mentioned above.
The recent increase in borrowing for budgetary support puts a big question mark on the sustainability of our public debt stocks. The sustainability of public debt has already become a heated topic in Pakistan. Along of its adverse economic ramifications, debt sustainability is also viewed through security lens now.
Despite this renewed focus on public debt sustainability, loans incurred for budgetary support lack transparency. We don’t know the terms of engagement of the government of Pakistan with these foreign commercial banks. For example, the government of Pakistan secured $450 million short term foreign commercial loans by Credit Suisse-led consortium of banks. Although only $206 million were disbursed, the Ministry of Finance didn’t reveal the interest rate that the government will pay on the short term facility.
How can we expect parliamentary accountability on matters of public debt when such crucial information is withheld from public? This lack of transparency is already compounded because the government has brought at least two revisions to the official definition of public debt through Finance Act. Even sound fiscal management is hampered due to this practice. It will not be wrong to conclude that public debt has become almost a grey area in Pakistan.
We can’t go on borrowing for budgetary support to avert one crisis after another if we want our economy to be sustainable. The government of Pakistan should realise that the $6.6 billion IMF gave in 2013 were not meant to pay debt or increase foreign reserves. That facility accorded breathing space to the economy so that we could initiate much-needed economic reforms. If Pakistan had brought those reforms then it wouldn’t be borrowing for budgetary support now.
The writer is a researcher and works in the development sector of Gilgit
Published in Daily Times, October 28th 2017.