The most authentic document on Pakistan’s (organized) economy is the Pakistan Economic Survey. The Survey for 2020-2021 states about the External Debt Sustainability as under:
External Debt Sustainability: A country can achieve debt sustainability if it can meet its current and future debt service obligations in a timely manner without exceptional financial assistance.
Misaligned economic policies of the past, including large fiscal deficits, loose monetary policy and defence of an overvalued exchange rate, fuelled consumption and short-term growth but steadily eroded macroeconomic buffers, increased external debt, inflated current account deficit and depleted international reserves.
Current account deficit was recorded at historic high of US$ 19.2 billion during 2017-18. The external account improved significantly during the tenure of the present government.
In 2019-20, Current Account Deficit (CAD) stood at US$ 4.4 billion. The lower CAD significantly reduced the country’s need to arrange external financing. The external sector continues to strengthen and after remaining positive for all 10 months of ongoing Pakistan Economic Survey 2020-21 196 fiscal year, the cumulative current account balance was recorded at a surplus of US$ 0.8 billion during July 2020-April 2021.
This turnaround was supported by an improvement in the trade balance and surge in remittances. External public debt to foreign exchange reserves ratio improved and recorded at 4.1 times during 2019-20 compared with 5.1 times during last fiscal year, on the back of slowdown in fresh accumulation of debt and the rise in the country’s foreign exchange reserves.
Growth in external public debt servicing mainly driven by repayments of Eurobonds and commercial loans which outpaced the growth in FEE and accordingly external public debt servicing to foreign exchange earnings ratio increased to 20.4 percent in 2019-20 compared with 17.2 percent in 2018-19.
Pakistan’s external debt remains on a sustainable path, which has also been endorsed by the IMF. With an improved balance of payment situation, external debt sustainability is expected to improve further going forward.
Sustainability was envisaged on the ground that there had been considerable improvement in the current account situation. The worst economic management on external account for the country emerged in 2017-2018 (the last year of PML-N government) that has been substantially improved in the following years. The only factor that gave rise to optimism in the aforesaid survey was an improved balance of payment situation in the following years. It is unfortunate that the basis of that optimism has gradually eroded as for the current year (July 21 to June 30, 2022) the current account deficit is expected to be over USD 10 billion. The sustainability issue is therefore required to be examined within the revised paradigm.
Total external debt of Pakistan is around USD 127 billion out of which a substantial sum is due for principal payment in the following five (5) years. On the asset side of the balance sheet there is a comparatively improved figure of reserves with the State Bank of Pakistan at around USD 25 billion. Thus the net liability is around USD 100 billion. According to a conservative estimate, the amount due for retirement in the next five years is over USD 40 billion. The fundamental question is whether or not the country will be able to retire this debt liability in the light of the expected current account balance in the next five years. The situation is not satisfactory, to say the least.
Read the first part here: The entity is bankrupt: surgery is required — I
With the present economic setup of the country, it is not expected that there will be any substantial change in the indicators of imports, exports and foreign remittances. Even if there are some changes on the positive side, the current account balance is expected to remain within the tune of around USD10 billion in negative in the following five years.
In simple cash terms, there is a liability of USD 100 billion out of which around USD 40 billion is payable in next five years. During those next five years there will be a further outflow of USD 50 billion. Thus in cash terms the entity is in difficulty for which a serious restructuring is required. This is not a political subject. This relates to the very essence of Pakistan’s economic future. If we take the conservative estimate and if we are able to either reschedule the existing debt or obtain new debts then the position at the end of the following five years will be a net debt of USD 177 billion.
With this kind of cash projection for the external account of the country it would be very difficult to maintain the USD-Rupee parity at a reasonable level for the country and there will be pressure on import -led increase in prices of essential imported commodities such as petroleum, RLNG and edible oil. In my lecture to the future graduates of Hamdard University on December 15, 2021 I referred to this position and that people at large appreciated the timely identification of grave situation in Pakistan’s current account. In a recent speech in Lahore, Prime Minister Imram Khan indicated that the only substantial increase in exports can lead to substantial economic growth in the country. As rightly indicated by the Prime Minister, Pakistan is caught in a vicious circle in this area. It has been the history of Pakistan’s economy that increase in GDP growth to over 4 to 5 percent leads to a disproportionate increase in the import bill, resulting in an unsustainable situation. This has happened last year. This therefore shows that there are certain structural defects in the economic model of the country that leads to near bankruptcy whenever growth surpasses a certain benchmark. This effectively means that on an overall basis there is no effective ‘value addition’ and the country is gradually moving towards un-sustainability. This is exactly what had been revealed in the much quoted lecture on December 15, 2021.
With a constant increase in population over and above the international average and an apparent handicap in the growth rate to a certain level due to external account infirmity there appears to be no solution for the financial issues of the country under the present paradigm. This requires reexamination of the import and export bills of the country. The observations made in the official document for the month of September 21, 2021 are as under:
IMPORTS
In terms of US dollars the imports in September, 2021 were of $ 6,595 million (provisional) as compared to $ 6,577 million (provisional) in August, 2021 showing an increase of 0.27% and by 53.48% as compared to $ 4,297 million in September 2020.
Imports during July-September, 2021 totalled Rs 3,077,368 million (provisional) as against Rs 1,881,327 million during the corresponding period of last year, showing an increase of 63.57%.
In terms of US dollars, the imports during July-September, 2021 totalled $ 18,747 million (provisional) as against $ 11,286 million during the corresponding period of last year, showing an increase of 66.11%.
Main commodities of imports during September, 2021 were petroleum products (Rs 106,932 million), medicinal products (Rs 77,003 million), petroleum crude (Rs 73,276 million), natural gas, liquefied (Rs 62,717 million), palm oil (Rs 52,792 million), plastic materials (Rs 42,531 million), iron & steel (Rs 40,154 million), mobile phones (Rs 35,126 million), Iron & steel scrap (Rs 32,266 million) and Power generating machinery (Rs 31,920 million).
If we take out all the major items of imports being petroleum products, medical products, natural gas and RLNG, iron & steel and mobile phones then it emerges that in respect almost all these items we have made and continue to make fundamental errors in our import policy. We are consuming palm oil, which was an unknown commodity around 50 years ago. We have forgotten to use locally produced cotton seed oil and other oils. In order to please the import-based trading lobbies, the interest of national economy has been shelved. In the case of mobile phones we are allowing import of branded mobiles costing over Rs 150,000 whereas the same Chinese made mobiles are available for less than Rs 25,000. In the earlier part of this series of articles I have already identified issues relating to energy imports.
The conclusion up to this stage of analysis is that the entity will not be able to service its debt in the foreseeable future. It would require fresh loans to repay the existing loans. When the future projections are not better than the past ones, the terms and conditions for new loans will be tougher with higher net liability for the country. Unless and until fundamental structuring is done in the business model the entity (Pakistan) will remain in dire financial straits.
(To be continued)
Copyright Business Recorder, 2021
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