Debt servicing needs exports

Earlier on the debt debate, the context was developed to evaluate the stock of debt in terms of GDP and in terms of capacity to pay back. The picture is portrayed in historic perspective to weigh the options of domestic debt and external debt. The argument is built on the concerns of abnormal domestic debt growth in the last decade (2009-18). This was crowding out the private credit in domestic banking system. Shifting the debt mix to external avenues may help create domestic credit for private sector. The emphasis is to extend the potential increase in private credit pie to exporting sectors.

Here the country’s ability of paying growing external debt servicing is put in perspective. The external debt and liabilities mix (mainly public debt) is skewing towards the short term (and commercial loans) high cost debt. The commercial loan increased from $100 million in Jun-2015 to $$8.0 billion in Sep-19.

The issue is not Paris Club or international financial institutions (IFIs) debt (generally very long term and on concessional terms) that has also grown rapidly in past few years. The pacing up of non-concessional debt is a concern. This is implying that debt servicing cost will increase more rapidly. The economic capacity to pay that debt back has fallen and needs deliberation. This needs to be replaced with longer term concessional loans.

The debt servicing has to be seen in terms of exports receipts. Since remittances potential is saturating, significant pick up in exports is utmost important to service external debt.

In 2006, the country’ exports (goods and services) at $20.2 billion was 55 percent of total external debt and liabilities. In 2019, the ratio fell to 28 percent. The debt grew to $106.9 billion, while the exports stood at $29.5 billion. The ability to pay debt based on exports has halved. The home remittances grew from $4.6 billion to $21.8 billion. The juice from Middle East seems to have been extracted. Do not expect remittances to continue to grow at historic pace.

The burden of servicing debt – principal and interest, is growing. The debt servicing annual average stood at $3.5 billion during 2006-15. The servicing increased to $5.1 billion in FY17 and reached $8.1 billion in FY19. In the 1QFY20, the toll reached $2.3 billion (annualized $9.2 bn).

In terms of exports, the debt servicing was 10 percent in 2006. The ratio increased to 27 percent in FY19 and 32 percent in 1QFY20. That is a dangerous trend. The debt servicing in terms of overall foreign exchange earnings (exports, remittances and other flows) increased from 7 percent in 2006 to 17 percent in 2019. Exports have to grow significantly to serve the debt. Some say nothing less than doubling exports will work.