Pakistan's growing indebtedness

External debt payment (inclusive of principal due) was estimated at 4.969 billion dollars according to the State Bank of Pakistan (SBP) website during the first nine months of the current fiscal year 2017-18. This is an extremely disturbing figure for two reasons. First, it does not obviously reflect the entire year's figure, but a merely 66 percent of the period, and with financing needs rising due to decisions taken by the PML-N government whose tenure expires one month before the end of the fiscal year, and revenue projections for the last two months grossly overstated, it is extremely likely that more loans, international and domestic, may have to be incurred. Pakistan is currently not on an International Monetary Fund (IMF) programme and therefore it is highly unlikely that multilaterals would extend programme loans/budget support at lower rates than available on the market. This would imply that the Caretakers may be compelled to borrow from foreign commercial banks - a source that was unwisely increasingly tapped by the incumbent government, at rates that are close to 12 percent with an extremely short amortization period that may further compromise the flexibility to undertake policy reforms by the next elected government.
Secondly, 2.5 billion dollars repayment on external debt is due next month as per Miftah Ismail, Federal Finance Minister. Foreign exchange reserves on 11 May 2018 were estimated at 10.79 billion dollars as per the SBP website which would decline to 8.9 billion dollars once the 2.5 billion dollar payment is cleared and barring higher exports relative to imports (again highly likely) Pakistan would have reserves to meet less than two months of imports. Would these reserves be sufficient to provide a buffer against shocks to the economy? The IMF undertook a survey titled "Assessing the Need for Foreign Currency Reserves" in which it argued that "traditional 'rules of thumb' that have been used to guide reserve adequacy suggest that countries should hold reserves covering 100 percent of short-term debt or the equivalent of 3 months worth of imports;" and argues that there is a need to use "risk-weighted metric capital stock used to assess bank needs covering potential vulnerabilities from falling export income, sudden stop in short-term debt inflows, outflows from other debt and equity liabilities and resident capital flight. Pakistan's performance is extremely poorly with respect to all these elements."
It is relevant to note that the foreign exchange reserve situation has deteriorated during the current fiscal year. On 17 September 2017, total reserves were estimated at 13.8 billion dollars which declined to 13.4 billion dollars by 17 October 2017. By 6 April 2018, reserves had declined to 11.4 billion dollars and by 11 May 2018 there was a further decline to 10.79 billion dollars. The incumbent government is reportedly considering a 28 billion rupee export package as a means to strengthen exports and therefore reserves however it must be borne in mind that the 180 billion rupee export package announced in January 2017 failed to raise exports (true, it was partially implemented but refunds were not cleared estimated at over 200 billion rupees and tariffs were higher than in competing countries) while imports continued to grow widening the trade gap. Thus with a 28 billion rupee package it appears to be unlikely that total refunds will be cleared by 31 May this year.
The SBP's website further reveals that the government borrowed 2 trillion rupees during the first 10 months of the current fiscal year raising the total domestic debt to 16 trillion rupees - already higher than 15.4 trillion rupees estimated in the Economic Survey 2017-18. This would further constrain the next government if it opts to go back on an IMF programme as its standard conditionality is to bring borrowing from the SBP to zero.
To conclude, it is imperative that the Caretakers consult all the major mainstream parties and form a consensus on how to deal with the debt left behind by the PML-N government and how much, if any, to incur to balance the books by end June 2018 and from what source.