Debt Spiral Haunts

Soaring liabilities trigger fears of default for Pakistan

The clouds of sovereign default are casting dark shadows over Pakistan, as the current account deficit reached $17.4 billion and trade deficit ballooned to an all-time high of $44.7 billion in FY22.

It seems that the external debt of the country is likely to go further up in the days to come, as the imports are expected to remain on the higher side, whereas the lack of diversification will keep the exports stagnant.

According to the data available on the State Bank of Pakistan (SBP) website, the total external debt of the country till March 2022 stood at $129 billion. However, what is surprising is that the central bank didn’t mention its share in GDP last year.

At present, the only favourable thing for the government is that the major share of the total external debt worth $81 billion is long-term loan.

The multilateral agencies have the major share of liabilities worth $34.5 billion; other bilateral lenders, $17 billion; Paris Club, $9.7 billion; Euro/Sukuk Bonds, $8.8 billion; commercial loans, $8.2 billion; the International Monetary Fund (IMF) has lend $7.5 billion.

Pakistan took record foreign loans of around $20 billion in the last fiscal year, up 27 per cent, largely to repay the maturing foreign debt and finance imports, as the country faces a serious challenge to keep these financing pipelines open.

To be precise, the two governments of the Pakistan Tehreek-e-Insaf (PTI) and the Pakistan Muslim League (PML-N)-led coalition  government received over $19.7 billion in foreign loans during the fiscal year 2021/22 from multilateral, bilateral and overseas Pakistanis, according to the details separately released by the Ministry of Economic Affairs and the SBP.

The borrowing was $4.2 billion, or 27 per cent, higher than the preceding year. The data collected by the Economic Affairs Ministry showed that it received $16.7 billion in foreign loans during the last fiscal year that ended on June 30. However, the ministry failed to achieve the loan disbursement targets, which are largely meant for project financing but require extra efforts.

The SBP’s data showed that it received around $2 billion in highly expensive foreign loans for the Naya Pakistan Certificates and another $1 billion from the IMF in the last fiscal year.

Around 82 per cent of the new gross foreign loans were aimed at bridging the budget deficit and artificially sustaining the foreign currency reserves. The rest of the 18 per cent loans were taken for the development projects ($2.5 billion) and funding a new fighter jet project.

The $2 billion loan under the Naya Pakistan Certificates was acquired at 7 per cent interest rate in the dollar terms, while the return in the local currency was up to 11 per cent.

Of the nearly $20 billion, loans of $15 billion had been taken during the time when Imran Khan was the prime minister. In total, Khan’s government took gross loans of $57 billion during its 43-month rule.

Until the economy is put on a sustainable path where the economic wheel is not greased by foreign lending, the policymakers do not have a choice but to keep borrowing.

Owing to a pause in the inflows of major budgetary support loans, the country is struggling to keep its economy running. The central bank is monitoring almost every single transaction to maintain the foreign exchange reserves at the existing levels until the IMF revives its loan programme. But due to the increasing reliance on loans to enhance the foreign currency reserves and finance the budget gap, the cost of debt servicing has significantly gone up.

During the last fiscal year, Pakistan received $4.9 billion in foreign commercial loans from the banks, including $2.24 billion in June from a consortium of Chinese commercial banks.

The chances of getting major commercial loans and floating sovereign bonds have gone down after three credit rating agencies, Fitch, Moody’s and now S&P changed the country’s outlook to negative, while its bonds are trading at a discount on the fears of a default.

Official statistics showed that bilateral lending to Pakistan for project financing remained at only $597 million, excluding the publicly guaranteed debt.

Pakistan also booked $1.53 billion worth of publicly guaranteed debt. It included $486 million for Karachi’s nuclear power plants, known as K2 and K3 and $1.03 billion for the fighter jet project, the Ministry of Economic Affairs reported.

The country obtained loans worth $4.7 billion from the multilateral creditors, which were $665 million less than the budgeted amount.

Among the multilateral development partners, the Asian Development Bank (ADB) disbursed $1.6 billion during the last fiscal year. The World Bank released $1.5 billion against the budgeted amount of $2.3 billion. The Islamic Development Bank (IDB) disbursed $1.3 billion for crude oil imports.

The government raised $2 billion by floating long-term bonds against the budgeted figure of $3.5 billion. It included $1 billion through the most expensive Sukuk in Pakistan’s history at nearly 8 per cent interest rate.

Similarly, Pakistan received $3 billion in Saudi cash deposits in the previous fiscal year, while the kingdom has not yet disbursed any sum to the new government, despite its request for a bailout.

The federal budget documents reveal that the expected level of external debt repayment in 2022/23 is $21.2 billion. Achieving three months minimum ‘safe’ cover of imports will require an increase of up to $8 billion in the level of forex reserves. Therefore, meeting these two requirements will require external inflows of $29 billion.

However, SBP Acting Governor Dr Murtaza Syed has categorically rejected all the conflicting reports, speculating the country is heading towards default on global payments, as a staff-level agreement with the IMF has paved the way for the large-scale foreign funding and oil financing from friendly countries.

“Pakistan is not among the most vulnerable countries in the world, so its citizens do not need to panic,” he said in a podcast.

The central bank governor and deputy governor admitted that the country was facing economic hardships but the situation remained under control.

Over the next 12 months, the countries that have taken an IMF programme will be much safer, compared with the states like Ghana, Zambia, Tunisia and Angola, which do not have the IMF’s support and may face bigger pressures, he said.

“We have completed the current review with the IMF and we have successfully achieved the difficult task of receiving a staff-level agreement by fulfilling all their requirements,” Syed added.

“Now, it should be much easier for us to get approval from the IMF Board to get large-scale funding. We will also get some additional funding and oil financing from friendly countries. So, the Pakistanis should dismiss all the economic fears.”

Analysing the current vulnerability of the economy, Dr Syed said: “As the world is still in the process of overcoming the impact of the Covid-19 pandemic, the next 12 months will be very challenging for the global economy.”

Syed said his optimism was based on three fundamentals, including a reasonable debt-to-GDP (gross domestic product) ratio of 70 per cent for Pakistan.

“It is not justifiable to categorise Pakistan’s debt-to-GDP ratio with Ghana (80 per cent), Egypt (90 per cent) and Zambia (100 per cent), while Sri Lanka has a 120 per cent ratio.”

Moreover, Pakistan’s external debt is 40 per cent of GDP, while Tunisia’s debt stands at 90 per cent, Angola 120 per cent and Zambia over 150 per cent.

Fortunately, Pakistan is relying more on its domestic debt, which is payable in rupee terms and is easier to manage, compared with the external loans, which are payable in foreign currencies.

Only 7 per cent of Pakistan’s external debt is short-term in nature, while other countries have taken much higher short-term external loans, like Turkey (30 per cent).

Pakistan has acquired only 20 per cent of its borrowing on commercial terms and the rest are concessionary loans, taken from the IMF, World Bank or friendly countries.

“So, it is easier for us to return these loans and all debt indicators of Pakistan are much better than the countries, which have done more commercial borrowing,” the SBP acting governor said.

SBP Deputy Governor Dr Inayat Hussain said that Pakistan’s foreign exchange reserves stood at around $9.3 billion, which “is not too good”.

“We are working to increase the forex reserves equal to three months of import cover. However, the current level is not too low or worrisome for the nation,” he added.

In addition, the country also has gold reserves worth around $3.8 billion.

“Currently, we are not in a debilitating crisis, so we do not need to pledge these gold reserves. We must not panic. I advise the Pakistanis to reject the fake news reports drawing a doomsday scenario.”

The rupee has depreciated sharply, around 20 per cent, since December 2021. However, 12 per cent of the depreciation was caused by the aggressive increase in the interest rates by the US Fed to support the dollar against other global currencies.

Pressures on the local currency were also caused due to the rising imports and the demand for the dollars, while the supply of the dollars remained low due to geopolitical and domestic uncertainties.

“We expect the imports to slow down gradually, so this gap in the dollar demand and supply will reduce. The foreign exchange market is functioning consistently, while the SBP is vigilantly controlling this market to prevent disruptions or malpractices,” Dr Hussain said.

However, contrary to the SBP claims, Finance Minister Miftah Ismail said that the government was amending the laws to enable the sale of shares of the listed state-owned entities (SOEs) with a buyback option to friendly countries on a government-to-government (G2G) basis and help bridge a part of $4 billion financing gap estimated by the IMF for the current fiscal year.

Without naming the Inter-Government Commercial Transaction Act 2022 that the Federal Cabinet approved, the finance minister said the law was necessary because the existing privatisation law did not allow such commercial transactions on a G2G basis.

The reason was that these laws were a straightjacket and provided some people an excuse not to work. Therefore, the change in the SOEs-related laws would be made appropriately to sell the shares to a friendly country through a stock exchange and two liquefied natural gas (LNG)-based power projects owned by the federal government — Balloki and Haveli Bahadur Shah — to another friendly country.

Dr Ashfaque Hasan Khan, former adviser to the Ministry of Finance and NUST Principal said that the prevailing political uncertainty and polarisation are taking its toll on the economy.

“I am surprised that despite a free fall of the rupee, the State Bank is a mere spectator and not put brakes on this slide,” he said.

According to him, the market speculators along with the banks are taking full advantage of the negligence of the central bank and raised the value of the dollars to over Rs239.

“In 2004, when I was running the affairs of the Finance Ministry, the treasury heads of the four leading banks formed a cartel and artificially created shortage of the dollars due to which its value increased from Rs60 to Rs63 within a few days. However, the Finance Ministry along with the State Bank took prompt action against those banks and asked their presidents to take serious action against their treasury heads. Our approach of zero tolerance brings the rupee back to the level of 60 against the dollar,” he added.

Dr Ashfaque said that $35 billion financing requirements projected by the IMF in FY23 are highly exaggerated and if the government put its house in order then it required not more than $18 to$19 billion to meet its financing requirements.

Samiullah Tariq, head of research and development at Pak-Kuwait Investment Company (PKIC), said that because of the prevailing political uncertainty, no financial institution or friendly country is willing to provide financing to Pakistan.

The government didn’t evolve a policy to curtail imports and, now in panic, it banned imports, which shattered the market and investors’ confidence.

“Instead of opting for energy conservation at the start of the summer, the government ordered five cargoes of LNG at unbelievably high rate of $30/mmbtu, which means every cargo costs $125 million, which was too much for a country, which is facing severe balance of payments crisis,” he lamented.

For Tariq, though the government now announced to lift the ban on the imports but the announcements by Indus Motors and Pak Suzuki to stop production of cars because of a ban on completely-knocked down (CKD) import created panic in the country and even signalled that we might move towards default,” he observed.