More heavy borrowing on the cards

Secretary Finance Tariq Bajwa stated during the Senate Standing Committee on Finance chaired by Saleem Mandviwalla that the government may issue bonds in the international market as well as borrow from the external commercial sector to repay 6.5 billion dollar loans that are payable from February this year till June 2018. The Secretary revealed the debt repayment profile for the next 17 months was as follows: (i) 2.9 billion dollar multilateral assistance, (ii) 858 million dollars commercial borrowing, (iii) 750 million dollars from the issuance of bonds in the international market, (iv) 1.8 billion dollars from bilateral sources and (v) 82 million dollars from the International Monetary Fund.
Bajwa argued that there was no reason for concern as there are sufficient foreign exchange reserves supported by projected inflows in the coming months; and it is this statement which, no doubt, should raise the hackles of independent economists for three reasons. First, our exports have been steadily declining and the trade gap widening regardless of the export incentive package (consisting mainly of tax incentives) recently announced by the Prime Minister. Unfortunately, though one of the policy decisions considered to be a major factor behind the export decline is continuing notably an overvalued rupee which is rendering our exports uncompetitive internationally - exports that are suffering a decline due to a world-wide recession in any case. Delays in refunds are another factor, though the government has committed to clearing the backlog soon, however, here too sceptics argue that failure to meet the budgeted revenue targets may be a mitigating factor in the release of refunds.
Second, remittances, another source of desirable foreign exchange earnings as no repayment is required, are declining as well. With the continuing recession in oil producing countries, remittances of South Asian countries, including Pakistan, have naturally begun to decline. Or, in other words, this enviable source of foreign exchange earnings is not likely to be as big a contributor to plugging the trade gap and shoring up our foreign exchange reserves to enable us to repay loans as in the past.
That essentially leaves borrowing as the major source for repayment of foreign loans. For the past three and quarter years, foreign exchange reserves have been shored up through heavy borrowing by the Dar-led Finance Ministry - a fact that was acknowledged by the IMF mission chief during the 6.64 billion dollar Extended Fund Facility. And in this context, it is relevant to note that in the second quarter of the current fiscal year there were net outflows rather than net inflows due to heavier than ever reliance on commercial borrowing - estimated at around 3 billion dollars - which has a very short amortisation period and high rates of interest. In addition, the rate offered on Eurobonds and sukuk was more than double the current international rates - at 8.5 percent for 10-year maturity, 7.5 percent for five-year maturity and 6.5 percent for sukuk issued recently, a lower rate though the rate internationally is less than half that.
Multilateral assistance for budget support has dried up as per budget documents, which projects this source of funds at 133.7 billion rupees (a decline from 324.6 billion rupees in the year past). This is attributable to the completion of the IMF programme and its associated monitoring which had provided a comfort level to other donors - bilateral and multilateral. The budget projects other aid, which is essentially only borrowing, at 443 billion rupees for the current year - up from only 190 billion rupees the year before - a rise of a whopping 133 percent in one year alone.
The Finance Secretary further contended that irrespective of a decline in exports and remittances the finance account is positive due to the China Pakistan Economic Corridor (CPEC). The Standing Committee members asked the State Bank of Pakistan (SBP) representative for information on the equity to which he replied that the Bank does not have information yet and it is carrying out a survey to ascertain the equity and loan given that some transactions are being settled offshore. The SBP response raises doubts about its independence on the one hand and highlights the fact that the SBP has, like the rest of the country, not been taken on board with respect to providing transparency on financing aspects of CPEC projects.
This newspaper has been in the forefront to point out to the Ministry of Finance that relying on borrowing to shore up reserves would raise indebtedness and compromise the country's economic future, overvaluing the rupee may reduce the external indebtedness in the budget documents but it would compromise exports and require raising the rate of return on bonds and sukuk to well above the international rate, and last but not least, financing of CPEC projects should be made transparent. Unfortunately, however, the Dar-led Finance Ministry dismisses these suggestions as uninformed at best and anti-state at worst and not coming from a genuine desire to contribute towards a Pakistan that is truly at a development take-off stage.