ISLAMABAD-Pakistan’s servicing of external public debt was recorded at $798 million during the first couple of months (July to August) of the current fiscal year, putting pressure on the country’s foreign exchange reserves.

The latest data of Ministry of Economic Affairs showed that during July-August 2020, total servicing of external public debt was $798 million against the annual repayment estimates of $10.363 billion for the entire fiscal year. The breakup of $798 million showed that $661 million (83 percent of total external public debt servicing) was repaid as principal and $137 million (17 percent) as interest on the outstanding stock of external public debt. 

“Around 26percent of total external public debt repaid during July-August of fiscal year 2020-21 constitutes the repayments of some of the foreign commercial loans which were obtained by the previous government,” according the Ministry of Economic Affairs. During July-August 2020-21, the government settled $204 million worth of foreign commercial loans. Similarly the government has also repaid $493 million to multilateral and $102 million to bilateral development partners. Considering foreign exchange constraints, financing of development projects and repayments of the huge external public debts compel the incumbent government to further borrow from multiple sources.

The government is taking massive borrowing to maintain its foreign exchange reserves, which are depleting due to the repayment of previous loans. Pakistan has borrowed $2.734 billion from external sources in first quarter of the current fiscal year to maintain the country’s foreign exchange reserves.

However, the ministry of finance has recently defended the policy of borrowing from external sources. The ministry stated that increase in external debt and liabilities by $ 17 billion in last two years reported by State Bank of Pakistan (SBP) needs to be properly interpreted for a better understanding.

Out of the total increase of $17.6 billion in external debt and liabilities during Jun 2018 -Jun 2020, $7.8 billion (44 percent of the increase) has been borrowed by the government for financing of its fiscal deficit. This amount of $7.8 billion was the actual borrowing of the present government during its first two years. It is important to highlight that these additional borrowings were from multilateral and bilateral development partners whereas portion of loans from commercial sources were repaid. Borrowings from multilateral and bilateral development partners were contracted on low cost and longer tenor, which contributed towards enhanced external public debt sustainability during the tenure of present government. 

Meanwhile, $4.8 billion (27 percent of the increase) is on account of SBP’s foreign exchange liabilities. It should not be interpreted as government’s debt because it is offset by cash balances and liquid assets of SBP. Furthermore, $2.9 billion (16 percent of the increase) has been borrowed by private sector from external sources which is a healthy sign indicating private sector’s capacity to borrow from abroad for domestic investments and $2.2 billion (13 percent of the increase) has been borrowed primarily by PSEs (Public Sector Entities) for spending on their financing needs mostly related to development expenditure.