Daily Times

Soon after the creation of Pakistan, we started borrowing to support growth and industrialization. However, slowly our leaders fell prey to the temptation of spending lavishly on non-developmental projects. Such spending did not add anything to the economy but kept ballooning our external debts. They never thought that such royal ways of spending would eventually come back to bite us. That is exactly what happened, and debt reached the level where the bulk of our budget is dedicated to debt servicing.

The foreign debt was $96 billion in 2018 and the incumbent government took $17 billion foreign loan, jacking up the debt liability of Pakistan to $113 billion on June 30, 2020. Pakistan has to repay $4.4 billion on account of foreign commercial loans during the current fiscal year of 2020-21, indicating a pressure building up on forex reserves amid uncertainty over IMF’s stalled program. The country has to make total external debt repayments to the tune of $10.3 billion during this year. It just paid out $798 million out of it. The remaining amount of over $9.5 billion is to be paid in 10 months period. The total external debt repayment of $10.3 billion constitutes $8.5 billion as principle payment of loans and $1.8 billion as interest repayment. The incumbent government borrowed $1.7 billion from the International Monetary Fund (IMF), $1.20 billion from commercial banks and $1.20 billion from different countries. The increase in debt stock and debt servicing continue to pose a major threat to the government’s exchequer. Pakistan received over $2.7 billion in gross foreign loans in the first quarter of current fiscal year, up about one-fourth amid growing concern about the impact of high indebtedness on national security. The $2.7 billion borrowing was 22% of the annual budget estimate of $12.2 billion for fiscal year 2020-21.

Pakistan’s budget deficit – the gap between expenditures and revenues – will be 6.7% of GDP in the current fiscal year and 4% for fiscal year 2022-23, which will be the last year of the PTI government

At the end of the PML-N tenure, the share of external public debt in the total public debt was 32.2%, which has now deteriorated to 36% within two years. In 2018-19 – the first year of the PTI government – the ratio was 34.8%. The government issued Rs342 billion worth of new guarantees or rolled over existing ones in favour of loss-making public sector enterprises (PSEs). This took the volume of total outstanding guarantees to Rs2.34 trillion, an addition of 18.8% within one year. The government was required to restrict the stock of outstanding guarantees to Rs1.6 trillion under the International Monetary Fund (IMF) agreement. The volume of new government guarantees issued during a financial year is limited under the Fiscal Responsibility and Debt Limitation Act, to 2% of GDP. Total public debt-to-GDP ratio increased from 86.1% in June 2019 to 87.2% in June 2020. The pandemic caused the government to borrow an additional $3.7 billion worth of grants and loans from various countries to support the country’s corona relief efforts. Despite paying $24.5 billion in interest and principal loans over the past two years, the foreign debt and liabilities continue to surge, suggesting the possibility of slipping into a debt trap.

It is pertinent to mention that ever since the PTI government came to power, Pakistani rupee depreciated by 39 percent as a result of a move towards market exchange rate as part of the IMF programme. The weakening of rupee however, has increased the burden of foreign debt and liabilities. Between April 2019 and June 2020, the rupee lost over 25 rupees which raised the debt repayments by Rs. 2.5 trillion.

Pakistan’s fortunes are linked to China’s growth, Prime Minister Imran Khan said this earlier this year. Main Line Project in Pakistan is a railway line that runs all the way from Karachi in South to Peshawar in North. It is the largest Chines initiative in Pakistan. More than 2600 kilometres of railway track is being built at a cost of 6.8 billion US Dollars. Pakistan will bear only 10 per cent of the project cost while the rest of the money will come from China not as an investment, but as loans. China wants a higher interest rate on its loans. It is stalling infrastructure projects until an agreement is reached.

Pakistan is expected to get additional temporary debt relief of nearly $1.2 billion after the world’s richest nations agreed to extend debt-relief initiative for the ‘poorest’ nations by another six months to June 2021. Pakistan also signed loan financing agreements for another $1.15 billion loans. With fresh relief, the total relief will be close to $3.2 billion. The G-20 nations have not written off these loans, rather they have only extended the repayment period with additional interest cost.

Pakistan is scheduled to make $10.6 billion repayments in this fiscal year and $1.2 billion relief would not be sufficient to address the country’s debt woes. Meanwhile, Pakistan also signed financing agreements for $1.15 billion with the World Bank. PM Imran had vowed to bring the public debt down to Rs20 trillion. Even at 78% of GDP, the public debt will be higher than the limit set under the Fiscal Responsibility and Debt Limitation Act, that Pakistan’s debt should not be more than 60% of GDP. For fiscal year 2021-22, the IMF has projected debt-to-GDP ratio of 82.1%.

It will not be an easy task for the government to revive the stalled $6 billion IMF loan programme. Pakistan’s budget deficit – the gap between expenditures and revenues – will be 6.7% of GDP in the current fiscal year and 4% for fiscal year 2022-23, which will be the last year of the PTI government. Revenues have been calculated at 16.1% of GDP for the current fiscal year, slightly higher than the government’s budgetary target. Pakistan needs annual economic growth of around 7% to create jobs sufficient to absorb the youth bulge. Any economic growth below this adds to unemployment and poverty. However, a report of the Asian Development Bank (ADB) says Pakistan cannot grow more than 3.8% on a sustainable basis without first fixing the structural issues.

Debts have soared to a level where it is impossible for any new government to govern efficiently. They borrow to retire past loans and some more to run their affairs. There is no attention to industrial growth and projects that add to the economy by creating jobs and boosting exports. Hence, this vicious cycle of debt has crippled our economy and resulting in excruciating inflation. The people of Pakistan struggle day in and day out facing the worst of the inflation and unemployment. If our leaders don’t stop the blame game and sit together to agree on long term plans that ensure debt retirement and steps to strengthen the economy by boasting industrial, agricultural, and service sectors, we are afraid that will lose our sovereignty to the menace of monumental foreign debts.

The writer is an economist and the President of All Pakistan Private Schools Federation. President@pakistanprivateschools.com