PPP govt sets new records of foreign loans

KARACHI - Although all governments have been taking foreign loans to meet their requirements, the government of Prime Minister Syed Yousuf Raza Gilani set new records of getting loans during its first three years, official statistics show. At present, Pakistan owes $59.5 billion to various institutions and there is little possibility of the government being able to discharge its debt servicing obligations without getting more loans. When Gen Musharraf had taken over in October 1999, toppling Nawaz Sharif, the countrys foreign debts stood at $37.9 billion. At the end of June 2007, when Gen Musharraf was still in power, the loans rose to $40.5 billion. This means the increase in foreign debt/liabilities did not register much increase. The external debt/liabilities stood at $22billion only till the end of the 80s. This shows that Pakistans dependence on foreign loans has been going up with the passage of time, despite consistent claims by all governments that they had done miracles to improve the economy. The performance of the present government in this sector seems more painful as not only has it been adding to the burden of foreign loans, it has raised the prices of all utilities manifold during its first three years. External Debt and Liabilities (EDL) increased from US $ 37.9 billion at end-June 2000, to $55.9 billion by the end of June 2010, and stood at $ 59.5 at end-March, 2011. During the same period, EDL as a percentage of GDP decreased by 23.5 percentage points of GDP, falling from 51.7 per cent on end-June 2000 to 28.2 per cent by end-March 2011, an official document says. The multilateral lending institutions, Paris Club and International Monetary Fund are the biggest holders of Pakistans external debt, while the State Bank of Pakistan owns the major share of domestic debts. The substantial rise in the size of countrys external debt is widely attributed to growing servicing or repayment requirements, heavy public sector borrowing to finance fiscal deficit, currency depreciation and decline in tax revenue receipts. The big chunk of Pakistans outstanding external debt is classified as public and publicly guaranteed debt and accounts for 76.6 per cent of the total outstanding external debt liabilities (EDL) stock. Out of the remaining amount 15 per cent debt is owed to the IMF. Private non-guaranteed debt contributes 6.4 per cent to the stock of EDL and another 2 per cent contribution came from foreign exchange liabilities. The data given by the Economic Survey of Pakistan 2010-11 and the State Bank of Pakistan report on Pakistans Debt Profile reveals that Pakistan has had a better debt profile during the democratic tenures of Benazir Bhutto and Nawaz Sharif. Even the debt levels were under control in nine-year military regime of Pervez Musharraf when countrys outstanding EDL had not surpassed $41 billion mark. Since the present government took office in 2008, the share of external debt and liabilities had started rising substantially due to fragile macroeconomic situation of the country. During the first year of PPPs government, Pakistan was facing the possibility of defaulting on current account payments; the country had no option but to seek credit from the International Monetary Fund (IMF). During the last two years, EDL has increased in absolute terms, but decreased in relation to GDP. This shift in momentum has highlighted the crucial role played by current account deficit and exchange rate stability on a countrys debt burden, according to recent Pakistan Economic Survey. External Debt & Liabilities (EDL) increased from US $ 37.9 billion at end-June 2000, to $55.9 billion by the end of June 2010, and stood at $59.5 at end-March, 2011. During the same period, EDL as a percentage of GDP decreased by 23.5 percentage points of GDP, falling from 51.7 per cent on end-June 2000 to 28.2 per cent by end-March 2011, the survey says. Pakistan benefited from a relatively stable rupee and significant reduction in financing of current account which facilitated a reduction in the debt burden. Entering into the IMF Stand-by Arrangement (IMF SBA) programme has enabled Pakistan to shore up foreign exchange reserves and prevent the economy from any further depreciation, but it has also translated into a significant increase in outstanding external debt, the survey adds. Economists say accumulating foreign debt has put negative impacts on countrys fiscal stability. Poor debt management poses risks for both the public and private sectors in the form of economic instability, insolvency, debt distress, and fiscal crisis. Similarly, a government document also endorses this impression, saying that in order to prevent such eventuality, the government needs to identify the various risks to its debt stock, and formulate strategies to counter or minimize these risks. Prudent and efficient debt management is required not only to ensure that present debt levels are kept under control, but also manage future repayment obligations. At the end-March 2011, debt owed to IMF aggregated to $8.9 billion (a growth of 10.7 per cent) out of which $1,979 million accrued to the federal government. The remaining IMF funds were recorded on SBP books to strengthen the foreign exchange reserves of the country. During the current year, IMF gave $452 million as Emergency and Natural Disaster Assistance (ENDA) for budgetary assistance. Public and publicly guaranteed debt accounts for the largest share of 76.6 per cent in EDL. This component is further classified into medium to long-term debt and short-term debt. The survey says Pakistans debt dynamics has undergone substantial changes in the last three years. Higher fiscal deficit led to accumulation of huge debt in absolute and relative terms. The debt profile moved towards shorter end of maturity as desperation to finance deficit through domestic sources owing to inadequacy of external financing. Therefore, developments in both external and domestic debt are of key concern to debt management. Excessive increase in debt has caused problems for Pakistan in the past, while imprudent domestic borrowing plagued the economy during 2010-11. The domestic debt stock piled up by Rs.803.9 billion in July-March 2010-11. During the first nine months of 2010-11, public and publicly guaranteed debt has increased by 5.8 per cent or $2.5 billion, rising from $ 43.1 billion at end-June 2010 to $ 45.6 billion by end-March 2011. Medium and long-term debt increased by $2.3 billion during the same period. Short-term debt increased from $793 million at end-June 2010 to $916 by end-March 2011. This increase of $123 million is on account of rollover of existing stock of by the Islamic Development Bank (IDB) debt. The annual debt servicing payments stood at $6327 million in 2001-02 with a rollover of $2243 million. However, combination of re-profiling of Paris Club bilateral debt on a long-term horizon, the substantial write-off of the US bilateral debt stock, the prepayment of expensive debt and the relative shift in contracting new loans on concessional terms, this amount was reduced to around $3billion by 2007-08. The current fiscal year carried the legacy of high fiscal account deficits mainly driven by overrun in security related spending and revenue shortfalls owing to weaker economic activities. Stable exchange rate has helped in lower incidence of external debt in relation to GDP. On the internal front, borrowing from the State Bank of Pakistan continues to create problem as in the first half of 2010-11 increased substantially but in the Jan- March quarter witnessed retirement of SBP debt stock. The external sector remained comfortably placed as current account has recorded surplus in July-April 2010-11 and thus haemorrhage to foreign exchange reserves not only arrested but reserves crossed $17 billion mark.