Foreign Debt: A Deadly Trap

siddiqui88 · #1 Sunday, August 05, 2012

Foreign Debt: A Deadly Trap

By Shujauddin Qureshi

The parliament has taken seriously the accumulation of foreign debt as it has formed a committee to probe the foreign debt situation since 1985 when the first assembly was elected after General Ziaul Haq’s martial law. There are various factors as to why the country kept sinking into the deep waters of foreign debt. How can it come out of it seems to be a difficult question at the moment.

Apparently, at the moment, with the transfer of the blocked US $ 1.1 billion from the US under Coalition Support Fund, the government of Pakistan has heaved a sigh of relief for now as the growing budget deficit and dwindling foreign exchange reserves have already posed a great threat to economy and to its political survival in the days to come. This is the government’s last fiscal year ahead of fresh elections due in 2013.
According to the State Bank of Pakistan statistics the country’s foreign external debt and liabilities were US$ 45.8 billion by March 31, 2008, which have soared to US$ 60.3 billion by March 31, 2012.

Pakistan’s foreign exchange reserves had hit a record high at $18.31 billion in July last year when in June 2011 the World Bank released $191.9 million and Asian Development Bank sanctioned a loan of $196.8 million for Pakistan but due to abrupt suspension of IMF loan the foreign exchange reserves could not sustain the new high levels for longer durations.

The worrisome economic indicators with growing trade deficit, relentless energy crisis and declining currency exchange rate have dimmed the chances of the government to claim some successes on economic front during its five year term or give a promise to the nation for the next term.

Pakistan’s economy has witnessed difficult times during the tenure of PPP-led coalition government, especially due to burgeoning energy crisis, heavy losses due to 2010 floods, followed by stoppage of foreign aid because of the growing tension between Pakistan and the US after attack on Salala Checkpost by the US led NATO forces in which about two dozen Pakistani soldiers were killed.

As a result of the friction, the US stopped all financial support, including holding back of all the due installments under the Coalition Support Fund, Kerry Lugar Bill and official military assistance. The fiscal year 2011 also witnessed difficulties after the monsoon rains and floods due to breaches in Left Bank Outfall drain many areas of Sindh.

The cancellation of US financial assistance for which the government had allocated provision in the budget in anticipation of release of funds under Coalition Support Fund and assistance under Kerry Lugar bill added to the problems. Since the amount was held back, it disturbed all the economic targets of 2011-12 budget.

These fresh remittances from the Bretton Woods institutions could not help much improve the foreign exchange reserves situation as the reserves started dwindling mainly because of the abrupt conclusion of the IMF’s Standby Arrangement (SBA) programme in September 2011.

Pakistan failed to draw the last two tranches of $US 3.4 billion from IMF because of non-fulfillment of the main conditions tagged with the loans including imposition of Reformed General Sales Tax (RGST). Most of ruling as well as opposition political parties in the parliament had opposed the RGST, which ultimately caused the disconnection of IMF.

Although the government is seriously considering to again request IMF for a fresh assistance but the fear of tougher conditionalities of IMF has barred the government from taking a risk due to ensuing general elections.

“The present government may be waiting for a caretaker government to take a tougher decision,” remarked Dr. Shahid Hasan Siddiqui, a senior economist and Chairman of Research Institute of Islamic Banking and Finance. “Pakistan will have to intensify military action against terrorist groups otherwise getting US assistance is almost impossible,” he added.

He said during the initial phase of war on terror, Pakistan was in a better position to negotiate its terms and it got more money, but as the time passed Pakistan is no more in the bargaining position.

The relationship between Pakistan and US had already started aggravating after May 2, 2011 Abbottabad operation in which the US mariners killed Osama Bin Laden by intruding into Pakistani borders. The Salala incident seemed to be the last nail in the coffin of Pak-US relations when Pakistan suspended the facility of NATO supplies through land routes via Karachi port and cancelled the lease of using Shamsi airbase in Balochistan.

Although the government has reopened the NATO route, the country suffered a substantial economic loss during the seven month impasse. Due to its weaker economic base Pakistan has always relied on foreign assistance for its budget financing.

The government’s foreign borrowings are mainly spent on debt repayment, which has resulted in further increase in its foreign debt liabilities. “Had the IMF Stand by arrangement continued, the foreign debt could have been much more than the present levels,” remarks Dr. Siddiqui.

The depreciation of Pakistani currency has further increased the amount of foreign debt in rupee terms. Increased level of debt has already plagued Pakistan’s economic growth because of declining expenditure on development and increasing spending on defence and debt services.

“Pakistan has been trapped in a vicious cycle and it has to get loans only to repay the loans,” says Khurram Shahzad an analyst at Investment Capital Securities.
“Over the period the foreign debt has increased substantially as there is no productivity in the country and rupee is depreciating. Pakistani economy has no repayment capability,” he adds.

Pakistan is facing difficulties to kick off its privatisation programme after its suspension during Musharraf government. On many occasions present government had tried to kick start it, but failed. It had tried to auction G-3 licenses to telecom industries to generate about Rs.75 billion or $833 million, but those auctions could not held in 2011-12.

Pakistan has to pay IMF a total US$8 billion under the Stand-by Arrangement (SBA) facility. About US$1.8 billion are due to be paid during 2012. Moreover, the real challenge would be for the next year when Pakistan would have to pay US$3.9 billion in 2013 and $2.1 billion in 2014. All these conditions have forced the government to resort of internal and external borrowing.

Not only external debt, Pakistan’s domestic debt has also increased manifold over the period, especially during the last four year tenure of the PPP-led coalition government. The domestic debt as well as external debt liabilities have almost doubled during this year. Domestic debt has increased from Rs 3226 billion in 2008 to Rs 6223 billion in 2011-12 and external debt from Rs 2778 billion to Rs 4773 billion.

Pakistani economy mostly depends on foreign assistance to bridge the budget deficit. The narrow tax base coupled with increased expenditure on maintenance of internal security have posed challenges to the economy.

Pakistan’s main challenge is to contain growing trade deficit which is currently as high as US$ 21 billion,” says Dr. Shahid Hasan Siddiqui, a senior economist. He said last year the trade deficit was US$ 15 billion and it is continuously growing.

Similarly, the foreign direct investment (FDI) are also minimal at only US$ 1 billion. Dr. Siddiqui said that the repatriation of the profit from the FDI is much more than the FDI coming in Pakistan, which is a challenging situation.

Dr. Siddiqui expected that Pakistan may seek deferment of repayment from IMF because of its economic situation. “It would also depend on the relationship between Pakistan and USA that how much Pakistan receives in foreign exchange,” he says, adding, “although Pakistani economy suffered a lot because of General Pervez Musharraf’s privatization programme, the country received US$ 7 billion because of privatization especially because of two major utilities PTCL and Karachi Electric Supply Corporation (KESC). We are now paying the prices of those privatization,” he said.

The coming years are very tough for Pakistani economy as the foreign debt is expected to increase further.

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