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Pakistan’s external debt repayment problem is attracting more attention than the base problem of rapidly increasing external debt itself.

During the last decade FY13-FY22, Pakistan’s external debt and liabilities (loan stock) have doubled from $65 billion (Jun-2012) to $130 billion (Jun-2022), growing at a Compound Annual Growth Rate (CAGR) of 7.1%. Comparatively, the economy has expanded at a CAGR of 4.5% only.

‘Pakistan facing difficult situation due to external debt’

As the economy grows, the loan stock also grows in tandem, in absolute terms, in order to support a larger size economy. If both the economy and the loan stock grow at the same pace, their ratio will remain constant.

However, this has not been the case.

Public debt increases to Rs52.721trn by Dec 2022

In just the past 10 years, the debt to GDP ratio has aggravated from 30.9% (June 2012) to 39.7% (June 2022), increasing disproportionally by 88 basis points every year. This mismatch has already caused external debt servicing to grow beyond repayment capacity.

External trade has always been in an imbalance resulting in a current account deficit (CAD) almost every year despite increasing workers’ remittances. Foreign Direct Investment (FDI) remains low, and the balance is met by incurring external debt and liabilities. During the last decade, the country has incurred a CAD of $83 billion, and almost all of it is funded by debt.

For Pakistan’s economy, a limited current account deficit acknowledges the fact that the trade balance cannot improve in a short time and that investment is required to be made for bolstering the capacity for export and import substitution.

Dar explains country’s debt burden

Recognising the importance of building capacity, successive governments introduced schemes in order to incentivize investors. Among them, Long-Term Financing for Export-Oriented Projects (LTF-EOP/LTFF) in 2006/07, China Pakistan Economic Corridor (CPEC) in 2015 and Temporary Economic Refinance Facility (TERF) in 2021.

But all these schemes preceded a ballooning current account deficit in the following years when the consequent demand for the import of plant and machinery was competing with the demand of other imports. This situation was not considered in the planning, as no simultaneous action was taken to slow down demand for non-essential imports to recognize that the space in the current account is limited. As a result, growth was borrowed from the future.

Ignoring these imbalances for many years has eventually led to a point where the problem of external debt servicing is to be dealt with in a firefighting mode. Imports are halted, businesses are suffering, and industries are facing shortage of input materials.

To stop worsening of debt to GDP ratio, a further annual ceiling need to be introduced, and all policies should be integrated backwards. Despite the ceiling, the space for growth will still be available. At the end of FY22, the size of GDP was $328 billion and loan stock stood at $130 billion. Since the economy has grown at a CAGR of 4.5% in the past decade, loan stock can also grow at same pace while remaining within the ceiling.

Arrangements made for $3.7bn worth of debt repayments: finance ministry

For example, a $5.8-billion addition in loans (4.5% of $130 billion) would have kept the debt to GDP ratio constant for FY23. Considering average FDI of $1.7 billion, we arrive at a sustainable current account deficit of $7.5 billion or 2.3% of GDP.

Public debt-to-GDP ratios have continued to rise in Pakistan: IMF

While the present political and economic crisis is taking time to settle, the financing sources have dried up. During the first nine months of FY23, the disbursement of fresh external loan is lagging the loan repayments being made. The overall debt and liabilities have therefore reduced from $130 billion (Jun 2022) to $126 billion (Mar 2023).

The sudden drop in loan stock is unsustainable due to the pain it is causing to the economy. The loan stock will start rising again as soon as the lenders are satisfied, but internally a policy and plan must be made and followed recognizing the capacity to run a current account deficit, in order to avoid a similar situation in the future.

The article does not necessarily reflect the opinion of Business Recorder or its owners

Faisal Hafeez

The writer is CEO at Kifayah Investment Management Limited

Comments

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EQ May 30, 2023 11:16pm
Pakistan doesn't borrow the corrupt leaders do. I pray that we dont get further loans so that we only need to repay and close of what we have. Go into supermarkets and we see even water imported from UAE. Why import it when we have local supplies. I further pray that we dont get loans and foreign government starts auctioning of assets that Pakistani politicians have in their country. Imagine Avenfield being sold off to pay part of the loans.
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MaiKolachi May 31, 2023 03:26pm
And the future of Pakistan...its youth...disowned by its corrupt ruling elite... can be found at the borders of EU countries...Mexico...and North America...waiting for opportunities to get into those countries for a better future!
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Tulukan Mairandi May 31, 2023 03:35pm
We look forward to receiving more loans. According to Dar, it's a smart thing to get future generations who are not even born yet, to pay for our lavish lifestyle.
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Rebirth Jun 01, 2023 03:39am
Legally, our debt cannot go beyond 65% of our GDP. During the previous government, when criticized for failing to take note of this, Mr. Hammad Azhar made sure all of our data was up to date and the base year was correct. This meant our debt remained near the 65% mark. The article suggests that we should always rely on debt and specifically, foreign creditors to balance our trade deficit. Our fiscal deficits, which is a national security concern, are managed by debt from commercial banks. Some of these banks are foreign and possibly rely on foreign capital. We fund our defence budget using loans from such commercial banks. Our fiscal deficit can be managed by collecting taxes from N-league’s freeloading constituents in Central Punjab doing business at our expense. The trade deficit can also be managed by ensuring that SBP’s exchange rate exceeds the open market rate. This’ll incentivize the buying of USDs at a lower rate from the market and then transferring it to the banks for profit.
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Muhammad Adnan Ghafoor Jun 01, 2023 12:39pm
The lending money to run system has strongly backfired. Country economy can't run on loan. The exuberant practice getting loans to run state affairs in last 10 year has severely damaged country sovereignty. The Governments has to stop this practice at once and curtail its unwanted expenditure. Except this doing there is no way out to bring country out of this debit trap.
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Hilarious Jun 03, 2023 07:33pm
@Muhammad Adnan Ghafoor, getting loans to run state affairs has been the norm since the inception of the country, look at the statistics, every decade since the 1950’s the debt doubles.
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Hilarious Jun 03, 2023 07:36pm
@EQ, it’s called a free market and consumers make the choice, with an overall very poor manufacturing environment plagued by even poorer manufacturing practices, people perceive imported goods to be of superior nature to those of local origins, and locally, people would rather not do the hard work required to make their products credible enough to compete with them.
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Hilarious Jun 03, 2023 07:43pm
@Tulukan Mairandi, that’s been the case according to everybody, civil or military. A country that produces very little, and that too poorly and mostly just consumed with no long term plan (from the average citizen up to those highest in the government) we are a nation who’s vision sparsely goes beyond the very short term. We would rather be happy today than swallow the pain for a happier tomorrow, it’s in essence a part of culture, the extremes of religion where the world and life is temporary with an infinite afterlife does not help either, essentially making people treat their surroundings like a dump, that applies to most countries, but takes on extremes in Pakistan.
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