A host of discrepancies is becoming visible in a variety of economic numbers released at various forums. The recent case of underreporting of GDP numbers in the IMF LOI, which the finance ministry blamed on a typo, is one such example. Or, the $1.5 billion gift from KSA, which was initially shown as “statistical discrepancies”. The story of showing 5.1 percent GDP growth in first quarter by PBS was not different. The latest addition to the list of discrepancies comes on the external account front.
The so-called star performance of Finance Minister Ishaq Dar is the improvement in balance-of-payment with reserves almost doubled from its low in six months time and currency (artificially) stabilized at promised levels. Intriguingly, a detailed scrutiny of IMF’s country report along with the letter of intent duly signed by Finance Minister and Governor State Bank reveals a contrasting picture.
The table of Pakistan gross financing requirements and sources shows that the maturing of short-term external debt in FY15 is $2.3 billion as against $0.5 billion last year. This is a big number as it has to be repaid soon and implies that a good chunk of reserves building is based on weak foundations. Plus, the SBP has not shown this in any of its recent reports or publication.
Many questions arise from it. What has compelled government to borrow so heavily? Who are the lenders? What type of credit is this? Is it deferred payment of oil imports or is it dipping into the foreign currency accounts-– adjustment against FE25? Or the government borrowed cash? The SBP and Ministry of Finance must reveal these details as balance-of-payment numbers published by SBP are not showing it.
However, our economic managers have given a detailed plan to the IMF which states that gross external financing requirement for FY15 is at $10.8 billion as compared to $9.4 billion last year. This includes current account deficit of $3 billion out of which Coalition Support Fund money is projected at $1.4 billion. Now with the US exiting from Afghanistan and making India as its strategic ally in the region, this money is likely to remain elusive. It is pertinent to note that USA has not released the third installment, which was due in the last quarter.
The amortization of medium- and long-term debt at $5.4 billion is not much different from what it was in FY14 ($5.8bn) as IMF repayments are lowered to half in FY15; but it is largely replaced by higher payment to other official creditors.
The available financing projected at $6.4 billion and its lion’s share is expected to come from FDI and privatization proceeds ($4.3bn). The rest is medium- and long-term borrowing ($1.6bn) and the rollover of short-term debt ($1bn). While the other net capital flows are anticipated at $3.5 billion.
The financing gap is to be partially filled by the IMF ($2.2bn) and whatever is left, after filling other official creditors, is promised to be provided by the World Bank. For FY15, this amount stands at $1.3 billion. In the process, foreign reserves are calculated to increase by $4 billion in FY15 which is higher than overall increase in FY14.
All this seems too honky-dory as the reserves are expected to pick up further by $3.9 billion and $1.7 billion in the subsequent two years. But don’t get carried away without seeing the bottom line.
The natural consequence to higher support from creditors is the piling up of external debt. When the PPP’s government left, the external debt was $59.8 billion (19.6% of GDP). The PML-N government in its first year has increased it to $66.1 (21.5% of GDP) and is expected to swell to $79.3 billion by FY18.
The repercussions of higher debt on the balance of payment after FY18 could be huge (See BR Research column: “The dark underbelly of external loans” May 21, 2014). Mind you, the $79.3 billion external debt amount does not include the money coming from China that has pledged $32 billion for power and infrastructure projects in Pakistan. And last but not the least, the deduced number from IMF’s document is that the fund and the government agreed upon a parity of Rs112 per USD in FY15, whereas Dar is promising it to keep below hundred. Isn’t it ironic?
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