Pakistan’s external debt woes

Pakistan requires USD 37 billion in external financing for fiscal year 2022-23 as recently informed by the finance minister. The breakdown reveals that approximately USD 21 billion will be required to repay or for the servicing of existing debt. Another USD 15 billion is required to cover for the current account which could easily go up depending on oil, metals, and food import prices and the supply disruptions which could remain in the wake of the ongoing Russia-Ukraine war. What is more concerning is that USD 5 billion is required before the ongoing fiscal year ends in June.  

This addition to existing debt stock has resulted in limiting Pakistan’s options available for procuring more debt. For example, it is no longer prudent to go to global capital markets as Pakistan’s foreign currency denominated bonds already in the international markets have shed a significant value this year and bond yields have increased. 
 
Friendly countries including Saudi Arabia and China are willing to extend short-term debt including a rollover facility and oil on deferred payment basis. However, they too require Pakistan to first bring the International Monetary Fund’s External Fund Facility back on track. While these negotiations with the IMF continue, the federal government is undertaking immediate measures to demonstrate fiscal discipline. The month of May has already seen the government allowing oil prices to increase and presenting a plan to rationalize several forms of subsidies. The IMF and other donors are also concerned about current and future political instability as it is not clear if the current government will be able to pacify Pakistan Tehreek-e-Insaaf and the calls for early elections.  

Greater availability of external financing raises the likelihood of economic growth, but in times of low repayment capacity this also increases the risk of bank and currency crises. These fears have also resulted in a negative sentiment which has led to a sharp decline in the value of the Pakistani rupee during this fiscal year. This depreciation also ends up leaving the exchequer with increased value of past debt.   

Inefficient firms including public sector enterprises, often growing on the back of subsidies, end up capturing major stock of capital available in the economy.

Dr. Vaqar Ahmed

The debt assessment by the finance ministry and central bank is also at variance. The foreign currency reserves held by the State Bank of Pakistan declined to USD 10.2 billion by mid-May. And SBP had assessed a much higher foreign financing requirement at USD 45 billion. The strategy which SBP’s leadership revealed to arrange this required amount included the revival of the fund programme, narrowing down of current account deficit, debt rollover by friendly countries, loans from other multilateral bodies, promoting foreign direct and portfolio investments (alongside other non-debt creating inflows) and possibly new bond issuance once macroeconomic fundamentals exhibit medium term stability.  

Whatever the PML-N led government tries to do in the limited time they have will be at best a patchwork. If there is anything that requires a strong political consensus for the future sovereignty of the country, that will have to be the management of borrowed money. In the longer term, repayment capacities can only be developed by diversifying borrowing sources, ideally towards capital markets and away from the banking sector. Capital markets offer greater opportunities for countries which are able to sustain increased levels of productivity and competitiveness.  

Pakistan’s growth prospects and ability to raise government revenues which partially contribute to debt repayment capacity are constrained. Low domestic resource mobilization threatens spending on human and social development. Pandemic times have seen all three – government, corporate, and household debt climb. This calls for a conscious focus on developing economic resilience in times of high future debt. Such an approach recognizes that too much, or the wrong kind, of external finance is negatively associated with equality. High levels of debt also hamper the efficient allocation of capital in the economy. Inefficient firms including public sector enterprises – often growing on the back of subsidies, end up capturing major stock of capital available in the economy.   

Non-debt inflows such as foreign direct investments (FDI) are a preferred source of inflow as these not only bring foreign capital but also raise prospects of growth, productivity, and job creation. However, as learnt from the experience of China-Pakistan Economic Corridor experience, a key determinant of FDI is quality of economic management institutions and transparent regulatory regime. 

Strengthening of the rule of law also helps attract international capital flows including FDI. This in turn reduces vulnerabilities and enhances economic resilience – paving the way for new technologies and longer-term investments. Economic literature shows that countries with higher quality institutions are found to experience lower risk of unanticipated economic downturns.

– Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.

Twitter: @vaqarahmed​