Pakistan: Fall in external debt and liabilities

Decline in overall stock of external debt and liability is normally considered a healthy development for a country. Seen against this background, the news in the Business Recorder on 17th May, 2013 that stock of external debt and liabilities of the country had declined by seven percent or over $4 billion during the first nine months of the current fiscal year would appear to a good sign for the economy. The fall in the stock of total external debt and liabilities was reportedly due mainly to repayment of loans to international financial institutions, particularly the IMF. The country had availed Stand-By Arrangement (SBA) programme from this institution in November, 2008 to avoid default and a massive amount of foreign exchange is being paid now on account of this programme, resulting in a decline in the external debt stock. As per schedule, Pakistan has to pay three more instalments in the next two months and these repayments are expected to further reduce the stock of external debt and liabilities. Ministry of Finance is reported to have made it clear that Pakistan was able to meet its commitments with international financial institutions and manage overall debt servicing. In specific terms, the data compiled by the SBP showed that with the current decline, overall stock of external debt and liabilities stood at $60.869 billion on 31st March, 2013 as against $65.478 billion last year. A large part of decline originated from public debt which posted a decline of 8 percent during this period. The public sector debt comprises government debt, IMF debt and foreign exchange liabilities. It may be mentioned that repayment of SBA began from last fiscal and during the nine months' period of this year. IMF debt was reduced by $2 billion to $5.3 billion from $7.34 billion. PSE's debt, on the other hand, went up to $1.826 billion in March this year, up from $1.524 billion in June, 2012. The decline in external debt and liabilities could be interpreted and analysed in several ways. It could be argued that as per the advice of Ministry of Finance and also probably the State Bank, Pakistan was in a position to manage its external debt servicing on its own and it was a good news for the country. A further decline in the external debt due to SBA repayments in the coming months could lighten the debt servicing burden of Pakistan further and enable it to look confidently in future. Sadly, however, the reality is vastly different. No country or IFI is prepared to write-off or reschedule our loans and neither there is a possibility of a huge turnaround in our current account balances in the near future - the two factors which could help us tide over the deteriorating situation easily. What in fact has happened is that the fall in external debt and liabilities has occurred due to drawdown on our foreign exchange reserves held with the SBP, which are now at a very low level of $6.5 billion. Further fall in reserves could impair the capacity of the country to pay its debt obligations in time. In our view, consistent impression by the relevant authorities that external sector is manageable without some extraordinary measures is not only self-deceptive but gives a false sense of security, especially to the government at the helms, whereas the reality is quite different. While the level of home remittances have lately tapered-off, there is hardly any chance of increasing exports substantially until and unless the productivity of the country is sharply enhanced by improving its macroeconomic indicators. The institutional and structural constraints and the infrastructural requirements of the country are so huge that the existing resources are not adequate to alter the situation for the better, at least in the near future. As is evident, the incoming government would have to tackle very difficult challenges before it could be satisfied with the progress in the external sector account of the country. In the meantime, there seems to be no credible alternative but to initiate a programme with the Fund to support the balance of payments of the country and avoid the risk of insolvency which seems to be looming large on the horizon. It is time to think seriously about the shrinking foreign exchange reserves rather to be satisfied with the fall in external debt and liabilities.