The latest estimate, as of and June 2017, of the external government debt of Pakistan is over $57 billion. The largest part, up to March 2017, of 48 percent is owed to Multilateral Agencies like the World Bank, ADB and IDB. The share of Paris Club countries is 22 percent, with over $6 billion from Japan. Next in importance is bilateral lending by non-Paris Club countries, especially China, with a share of 13 percent. The remainder, 17 percent, is in the form of Sukuk/Eurobonds, borrowing from foreign commercial banks and other sources. The relatively large share of concessional debt from multilateral and bilateral sources has historically limited the debt servicing liabilities. In the first eleven months of 2016-17 repayment plus interest costs of debt servicing were equivalent to 7 percent of the outstanding external debt. This has ensured a degree of external debt sustainability. The basic question is whether the profile of external government debt will remain largely unchanged. If not, then there is need to study the implications of changes both the level and the composition on the future external debt sustainability.
The other question is whether foreign exchange reserves will rise or fall given the inflow of foreign assistance. Between 2012-13 and 2015-16, the increase in reserves was over 12 billion, while external debt, both public and private, rose by almost the same amount. Therefore, for 2017-18 it is essential to see the prospects for the level of reserves. The first major finding is that the composition of gross government external borrowing from July 2016 to June 2017 is very different from the profile of outstanding government external debt. The share of multilateral agencies has fallen sharply to 28 percent. Similarly, the share of funding from Paris Club countries has plummeted to only 6 percent. As such, the overall share of relatively concessional financing has visibly declined.
The increases that have taken place are in borrowing from non-Paris club countries, especially from China, and commercial borrowing (plus flotation of Sukuk bond). The share of the former has increased to 15 percent and of the latter source to 51 percent. Commercial borrowing has come from Chinese banks, like ICBC and China Development Bank, and other banks like SCB, London and Credit Suisse. Out of the record total gross inflow of assistance in 2016-17 of $10.6 billion, almost $4.4 billion has been financed by commercial banks. The contribution of the Sukuk Bond is $1 billion.
During the last quarter of 2016-17 the gross government external borrowing reached a record breaking level of $5.3 billion. Clearly, as the current account position in the balance of payments worsened sharply as the year progressed, there has been need to resort to large-scale commercial borrowing to prevent a precipitous decline in foreign exchange reserves. The implications on debt servicing obligations of the changing profile are substantial. The amortization period is much shorter and the rate of interest is significantly higher on commercial loans. For example, the loans from the ICBC bank of China, according to the Pakistan Economic Survey, are to be repaid in only two years and the interest rate is LIBOR plus 2.4 percent. This implies that annually for a loan of $1 billion, the cost of debt servicing in the next two years is as much as $521million per annum. The LIBOR rate is very low currently at 1.4 percent for six months. It could rise steadily and approach 5 percent as in previous years.
Similarly, project loans from China, largely for CPEC infrastructure projects, are also expensive relative to loans from either the World Bank or ADB. The terms of a typical loan from the latter are at an interest rate close to 2 percent only, payable in 19 to 24 years. As compared to this the Chinese financing is available at an interest rate of over 4 percent, at the current LIBOR rate, and the amortization period is twelve years. As such, for the same size of loan, the cost of servicing of the Chinese financing is more than double that of ADB for the duration of the loan. The basic implication is that debt servicing costs will rise sharply in years to come, if there is continued dependence on Chinese project financing and loans from Chinese and other foreign commercial banks. Meanwhile, there is a visible tendency on the part of traditional lenders, especially the World Bank, to reduce annual assistance to Pakistan in the form of either project or program loans.
The budget estimates for 2017-18 of foreign assistance continue to adhere to the old pattern, with over 74 percent expected from multilateral agencies and a much reduced 26 percent from flotation of Sukuk bond and borrowing from commercial banks, Further, the Government expects to reduce its overall borrowing by over $2.2 billion this year in comparison to $10.6 billion in 2016-17. Adherence to the budget estimate for 2017-18 of foreign assistance could actually imply a big draw down of foreign exchange reserves. The external financing requirement (current account deficit plus debt repayment) could approach $19 billion. The current account deficit is projected at $14 billion, with relatively fast growth in imports, due especially to machinery for CPEC projects, and modest growth in exports and remittances. The repayment of public external debt will approach $5 billion. FDI and net private borrowing could rise to $4 billion, due to more FDI especially from China, Gross external government borrowing and grants are budgeted at just over $8 billion. The result will be financing gap of as large as $7 billion.
The fundamental question is will the government accept the fall in reserves to about $9 billion, providing import cover of just over two months? Alternatively, will it go for a borrowing binge, like in 2016-17, largely once again from Chinese or other international commercial banks? However, will Pakistan still be considered as credit worthy by these banks? Exports are the lifeline and have to be revived on an emergency basis. We anxiously await the developments on the balance of payments front during the on-going financial year.
(The writer is Professor Emeritus and a former Federal Minister)
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