Imtiaz Gul
Pakistan’s foreign debt has become precariously high for the struggling economy; it paid $11.895 billion in external public debt servicing during 2019-20, says the data released by the State Bank of Pakistan (SBP) late August. This was 23 per cent higher than the $9.645 bn debt repayments in in 2018-19.
Of this $9.543 bn was the principal while a staggering $2.352 bn accounted for interest payments.
Look at the mark up costs which average to almost 20 percent at a time when interest rates across the globe at the bare minimum and even personal loans are available for as low as 2 percent.
The total external debt and liabilities as of June 2020 stood around $112.8 bn in FY20 , compared to $106.3 bn in the fiscal year 2019. This also includes about $ 6 billion loans and another $2 billion balance of payment support from China.
Total external debt at the end of the PML-N government was about 95.2 billion, meaning thereby the PTI government has borrowed a little over $ 17 billion in the last two years – an increase of about 15.7 percent.
The entire borrowing is meant to service the external loans Pakistan owes to the Paris Club members as well as to the international finance institutions such as the IMF and International Finance Corporation.
And within this period the entire debt servicing, including the return of the principal amount of $ One Billion upon the maturity of the Euro Sukuk bonds in November 2019, was more than $ 24 billion.
This indicates that the debt servicing outnumbered the new loans by almost $7 billion, most probably because of the sharp decrease in the current account deficit in FY20 and drop in imports.
But if we go by the popular narrative then the PTI has amassed Rs14.7 trillion in public debt and liabilities in the last two years, almost close to what what its predecessor PML-N government accumulated in five years i.e. Rs15 trillion.
This brings the total public debt to nearly 45 trillion, equivalent to 106.8 percent of GDP (as of June, 2020).
Theoretically true. But in reality this figure also includes the external debt as well as the calculation of the current dollar-rupee parity.
It is a misleading calculation indeed because the governments never convert rupees into dollars for debt repayments and almost always use either fresh loans, remittances from abroad or the export earnings to service the debt. Secondly, this figure does not take into account the 38.4 percent rupee depreciation either.
Why then inflate the public debt figures by adding to the public debt the external loan, calculated on the current dollar-rupee parity?
No doubt, nevertheless, the dangerously high Debt to GDP ration remains a concern; current projections put Pakistan’s GDP to less than $300 b for 2020-21. The $ 112 external debt amounts to over 37 % of the GDP , which raises concern about the government’s repayment ability.
In India, the foreign debt ( $ 543 b) to GDP ratio in December 2019 stood at around 20 percent for an economy that has seen continuous growth in domestic productivity and higher exports.
Similarly, India’s total public debt ( over $ 2 trillion) amounts to close to 70 percent of its GDP – which is acceptable for a rapidly growing economy.
A Department of Economic Affairs of the Ministry of Finance report in April 2020 put India’s total public debt at 68.6% of the gross domestic product by March 2019.
As far India’s external debt, it was about 85 billion dollars in 1991, which increased to US$446 billion in 2014 and US$ 564 billion by the end of December 2019, meaning thereby that under PM Narendra Modi India, the external debt has increased by 118 billion dollars, according to Hemant Singh (http://www.jagranjosh.com/general-knowledge/debt-on-indian-government-1591004800-1).
This underlines a plain reality of today; there is hardly any country in the world – including the United States of America or Germany – that does not take loans (internal or external loan) to run its country. Actually, the main objective of the government borrowing is to generate resources for socio-economic development and ensure the welfare of the citizens and ensure growth.
No surprise that as of May 1, 2020 the federal debt in the USA was $nearly $25 trillion.
But in Pakistan, most of the borrowing is done to repay older loans, and hence the high debt to GDP ratio has become source of worry. Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country’s borrowing costs and yields of government bonds.
But regardless of who rules the country, these conditions including the value of the currency are likely to represent big fiscal management challenges.
Until planning for real growth and swift execution of projects takes the centre stage in Pakistan and until it can produce exportable commodities to significantly increase exports, the foreign exchange earnings will remain volatile and the currency exposed to risks of depreciation. This country for sure needs a charter of economy and needs to emulate Bangladesh, if not India, if its civilian and military ruling desire to take it out of woods for a stable future. The undue reliance on Chinese loans and investments must also give way to a more balanced development approach that benefits from the partnership with China but at the same time also innovates and corrects internal policy planning to optimally utilise all available human and material resources. CPEC of course is a big shot in the arm but it cannot be life-saving until Pakistani elites themselves step up efforts to put the country on the path of real economic growth through revised governance structures, modern procurement procedures and a simple taxation regime.
