Spree of foreign borrowing and debt trap
By M. Sharif

Meltdown of the economy within the short period of one year and the depletion of the forex reserves from around $16.0 billion by end of the last fiscal year to around $6.6 billion at present, sent the government on a foreign borrowing spree from the International Monetary Fund (IMF), friendly countries and multilateral organisations. The spree for foreign borrowing was necessitated because of the looming sovereign default, having meager forex reserves and to keep the rupee strong and the investor’s confidence intact.

It is estimated by the IMF that the forex exchange requirement for the current fiscal year is around $13.0 billion, of which IMF will provide $4.6 billion and $3.1 billion for immediate relief has already been received which has boosted the forex reserves to $9.63 billion and another $1.5 billion will be received three months later subject to successfully meeting IMF conditionalities, the remaining amount is to be borrowed from other sources, most probably friendly countries. The most pertinent question is that in the wake of this borrowing spree, howsoever justified it might be, is the country not being pushed in to a debt trap inadvertently? The fear is that of pulling a country out of a debt trap that is likely to firm its grip with the current borrowing will be an extremely difficult task.

Debt volume and servicing cost

Public debt and its servicing has a grim history. The national economy has remained debt-dependent for years, despite the efforts put in by successive governments. By the end of 1999, the country had faced a grim situation. Fear of sovereign default and depletion of forex reserves had then dominated the economic scenario. Public debt was more than 100.0 per cent of GDP and the government had to rush to IMF that helped with a package of $ 596million under a 10-month SBA facility. The country, four years after “breaking the begging bowl” in December 2004 when it completed the IMF three-year $1.3 billion credit facility under PRGF, is once again desperately seeking foreign loans of no less than $9 billion for current fiscal year alone with a much higher foreign and domestic debt burden in absolute terms.

It is ironic that each time Pakistan approaches the IMF after a lapse of 3-4 years; its requirement for credit facility is always higher. What is really wrong with the management of our economy? This time perhaps, the IMF being wary of us has partially given us the doorway to visit other friendly countries with a begging bowl.

The government is pursuing economic diplomacy with Gulf States to secure soft loan and investment. It has already got a soft loan of $500 million from China. Further borrowing during current fiscal year is listed as: $1.0 billion from WB; $1.5 billion from the Asian Development Bank (ADB), of which $500 million has already been procured; and $500 million from the Islamic Development Bank and $500 million from DFID. In order to meet the target of $9.0 billion by end of current fiscal year, government will have to still look for $1.0 billion from some of the friendly countries and if privatisation process picked up it might be relieved of further borrowing at least for current fiscal year.

Pakistan’s foreign debt liabilities stood at $47 billion by the end of last fiscal year. In case one is to add current borrowing of around $9.0 billion, total foreign debt liabilities would sour to $56 billion. This is in addition to domestic debt whose volume should be around Rs3.5 trillion by now keeping in view current rate of borrowing from the SBP, that the government has pledged to bring down to zero level by the end of current fiscal year. It borrowed Rs369 billion between July- 8 Nov, 08.

The volume of foreign loans since 2000 has increased from $32 billion to $47 billion, registering an increase of around $2 billion per year. A part of this borrowing must have been utilised to pay back outstanding loans. External Debt Liabilities (EDLs) have been on increase during last three years. They were recorded 1.6 per cent in 2005, further increased to 3.9 per cent in 2006 and 4.4 per cent in 2007 and are estimated to be around $3.0 billion for current fiscal year. The situation will become more demanding than it is at present when after completion of current IMF credit facility under SBA after 23 months by end of 2010, the country will be called upon to pay it back from 2011 with an interest rate of 3.51 per cent for first three installments and with an interest of 4.5 per cent for next four installments. The debt liability would be around $1.25 billion per year.

The point not to be missed is: will economy develop capacity to pay back the new as well already outstanding loans. Total effect of paying foreign loans should come to around $4.0 billion per year. It will be really a big challenge for present team of managers of national economy to develop that much capacity in the economy apart from servicing domestic debt also whose servicing is yet another serious fiscal problem.

Domestic debt stood at Rs2300.0 billion by end of the FY2006-07. The government went on a borrowing spree and raised it to around Rs3200 billion by end of the last fiscal year. It has further borrowed around Rs369 billion between July-Nov, 2008. Debt servicing has further increased because of increase in interest rates by 2.0 per cent. Cost of foreign debt in domestic currency has gone up by around Rs800.0 billion because of depreciation of rupee from Rs60 per dollar to Rs79.0 per dollar at present. It is unlikely if rupee will appreciate to its previous value of Rs60 per dollar and irrespective of its appreciation, which could be at best 2-3 after stabilisation of economy, debt burden and its servicing will stay as a huge fiscal burden on economy. Debt servicing during FY2008 was Rs437.4 billion, 50.0 per cent more than the budget estimate and 12.0 per cent higher than revised estimate of FY2006-7. During current fiscal year it would be much higher because of increase in discount rate and increase in volume of the debt.

Ways out to avoid debt trap

The government has always maintained and this is what it has been always advised by IMF also to utilise proceeds of privatisations exclusively for debt retirement. The government could not adhere to this suggestion otherwise there could have been lesser accumulation of foreign debt. One of the ways available to the government to dilute mounting effect of debt trap is to use privatisation proceeds that could be around $4.0 billion in a year or two, provided it picks up. It is somewhat difficult because of two reasons. One, there is greater opposition to privatisation by the public particularly by the employees of that very organisation. That is why the government had to track back on privatisation of Ghazi gas filed and PSM. It might take sometime before privatisation really picks up. Two, there is liquidity crunch in international market. Investors will be choosy and shy and would step in only if they are sure that it would be a profitable venture for them. It seems certain that a lot of spadework is required to be done by the government before this option could be used to avoid debt trap.

The second way out is to create capacity in economy to bear the burden of public debt on one hand and to reduce dependence on loans on other hand. It would be possible in case the government adopts a strategy to boost industrial and agriculture production, GDP growth, exports, tax revenue collection and reduces non-development expenditure. IMF conditionality of reducing development expenditure by prioritising development projects in order to reduce fiscal deficit and to increase tax revenue collection by around Rs110.0 billion by imposing taxes and reducing subsidies, would scuttle economic growth. The IMF recipe might help in achieving macro-economic stability but there are doubts about increasing capacity in economy to pay for increase in debt burden.

The third way out is to do massive investment in agriculture and industrial sectors by involving domestic and multinational entrepreneurs to add value addition in both the sectors and to meet aggregate demand for domestic consumption of food and other products. The measure should bridge import-export gap that might hover around $14 billion despite decrease in prices of oil, commodities and metal products in international market.

Conclusion

The economy time and again has failed to sustain high growth and reduce debt primarily because strategies to manage it have been lopsided resulting into serious fiscal and monetary distortions and increasing dependence on foreign loans. The reasons for such consequences are well known and many analysts have been pointing out practical measures. But again, the question is if the government is ready to demonstrate acumen and political will in taking the right course to save the country from once again falling into a debt trap?