I now turn to the next question, ie the External Debt and liabilities of Pakistan. Here again, I will like to begin by clarifying some basic concepts. External Debt was not fully reported until 1999 as External Liabilities such as Foreign Currency Deposits, US Dollar deposits, Central Bank deposits of other countries were not publicly disclosed.
We started to show a complete picture of all External Debt and liabilities since 1999 for the first time by including foreign currency deposits of residents and non-residents, US dollar deposits, the deposits of friendly central banks and the Military debt in this total picture.
Thus, the past series on External Debt before 1999 is not strictly comparable to the current series that is more comprehensive and all inclusive.
It is true that Pakistan's External Debt and Liabilities (EDL) had declined from $38.9 billion in FY99 to $35.2 billion by FY04 but has risen to $36.6 billion by March 2005 - an increase of $1.4 billion during nine month period.
It must be emphasised that the absolute amounts of debt stock or debt servicing are not pertinent but it is the burden of debt or debt servicing relative to the country's payment capacity that is the relevant indicator.
Debt in absolute amount cannot remain static or constant but keeps on growing in a developing country.
What are the relevant debt indicators that can help us diagnose whether the debt burden is rising or declining or is unchanged? There are two types of indicators to watch. The first relates to the stock of debt with GDP, exports and foreign exchange earnings.
The second describes the debt servicing (due) to exports, foreign exchange earnings and foreign exchange reserves. We also compute the net present value of the debt which depends upon the proportion of concessional debt in the whole debt stock.
THE KEY INDICATORS ARE:
(a) Ratio of External Debt to GDP
(b) Ratio of External Debt to Exports
(c) Ratio of External Debt to Foreign Exchange Earnings
(d) Ratio of External Debt Service to Exports
(e) Ratio of External Debt Service to Foreign Exchange Earnings
(f) Ratio of External Debt to Foreign Reserves
(g) Ratio of Concessional Debt to External Debt
The moot point to consider is whether these key debt indicators have improved or not despite this increase in the absolute amount of debt. Table IV below shows the decline in almost all the Key Debt Indicators between June 1999 and March 2005.
Pakistan's capacity has vastly improved to bear the existing External Debt burden, to contract new loans and to service the Debt Service payments on existing and new loans without much difficulty. Not only that, the terms on which Pakistan has contracted the new loans are highly favourable.
According to the World Bank data, the average interest rate on new loan commitments to Pakistan in 2003 has declined, the maturity has been extended, grace period was longer and grant element was much higher compared to the year 2000.
As we argued earlier most developing countries contract loans from external creditors for financing development and Pakistan has also continued to borrow from both the World Bank and Asian Development Bank (ADB) in the last five years.
We have stopped borrowing from the IMF because the economy is in good shape and the IMF assistance is invoked only when a country's economy is in trouble and it cannot meet its obligations.
As we have shown, Pakistan does not face any difficulty and its capacity to meet its balance of payments needs, as well as, External Debt servicing has become quite strong.
It, therefore, no longer requires the IMF assistance. But Pakistan has not stopped its development process as it is still a poor country with per capita income of $700 with one-third of its population living below the poverty line. There should be no doubt in anyone's mind that we have to continue borrowing from the World Bank and the ADB for the next ten years to sustain high growth and reduce poverty.
These loans will be used for education and literacy, health, roads and highways, irrigation and water resources, power and energy, etc. As long as these loans are utilised properly not for consumption needs of the government but for public sector development program and private investment and the terms and conditions of the loans are concessional or reasonable it is in our collective interest to contract these loans.
The debt dynamics indicate that as long as the growth of real GDP is higher than the real cost of borrowing on External Debt and Non-Interest Current Account (NICA) surplus is generated the External Debt ratios will continue to decline. During 2000-04, the NICA was surplus by 3.6 percent of GDP and real cost of borrowing was 0.7 per cent and real GDP growth was 4.5 per cent.
If such parameters hold in the future, the External Debt ratios will further decline. The apprehension that as soon as Pakistan resumes servicing its Paris Club Debt in 2015 it will face problems in meeting its debt servicing obligations is totally unjustified. The Foreign Exchange Earnings at that time will be manifold higher than the present level and the debt ratios much lower.
However, it is imperative that there should be no attempt to disturb the above debt dynamics or accelerate borrowing. The room for maneuver is very limited and the risk that debt ratios could reverse under the pressure of unanticipated exogenous shocks -external or domestic - cannot be ruled out.
Prudent debt management requires that primary budgetary surpluses should be generated in order to reduce public debt ratios. Soft and concessional loans at favorable terms should remain the main staple of our external borrowing strategy in the next five years.
Non-debt creating external flows such as exports, workers' remittances, foreign direct and portfolio investment should be accelerated to finance the growing needs of investment goods in the economy while soft loans should be used for infrastructure expansion. This mix of external financing will keep the economy in good stead to meet unforeseen bad times and avoid resorting to the IMF support.
IMPACT OF SEPTEMBER 11, 2001 ON THE EXTERNAL SECTOR:
Another popular perception in the minds of most Pakistanis is that it is the massive aid flows and debt relief resulting from Pakistan's participation in the war against terror after September 11, 2001 that has been responsible for the large reserve accumulation and economic turnaround. As soon as these flows disappear we would once again be in serious financial trouble. This perception shows how little self confidence we have as a nation in our own capabilities and achievements.
It is true that September 11 did help in diverting worker's remittances from open market to interbank, in providing some debt relief and new loans and grants, in removing official sanctions, but there were huge costs incurred by Pakistan.
Export orders of more than $1 billion were cancelled. Visits by foreign buyers were suspended, higher war risk premium was charged on freight and insurance premiums were raised. Table VI presents the sources of Foreign Exchange Earnings of Pakistan since FY00 by each major component.
The data shows that even if we assume the extreme case that all official transfers, debt relief and all foreign loans/credits represent the "gift" of September 11 to Pakistan, this combined amount represents only 11 per cent of total Foreign Exchange Earnings of the Country in FY05 and even lower 9.3 per cent in FY04.
At its peak in FY02, this amount was 21.6 per cent. But this entire amount is not a direct fall out of September 11 because Pakistan has been receiving foreign loans and grants every year since the 1950s. For example, in FY00 and FY01, the two years prior to September 11, we received 16 per cent and 19.9 per cent of Foreign Exchange Earnings in form of foreign loans and grants. If we look at Table I again it is clear that the country had a positive overall balance and positive current and capital account balances in FY 2000-01 much before September 11, 2001 occurred.
Even in FY 1999-00 the deficit on overall balance was quite small less than 1% of GDP. Pakistan's reserves had started accumulating in FY2000-01 and SBP's own reserves had almost doubled after paying off foreign currency deposits of almost $1.7 billion to the non-resident and institutional holders and $.2.8 billion in debt servicing to external creditors. Thus, this perception that every thing good that has happened to the country is a direct consequence of September 11 is not only incorrect but highly exaggerated.
To sum up, Pakistan's external sector is responding to the development and investment needs of the country and growing trade deficit is not a cause for concern in the short term. In the long term, Pakistan has to significantly increase its exports and diversify its export base. Debt servicing capacity has improved considerably.
To the extent that the new loans are properly utilised for meeting the gap between domestic savings and investment, the people of Pakistan will be better off. September 11 did help in removing official sanctions, diverting remittances through banking channels, providing some debt relief and new grants and loans, but the contribution of these developments on foreign exchange earnings of the country has been highly exaggerated. Looking forward, prudent management of external sector to keep public debt and external debt ratios moving on a downward path will be absolutely necessary to meet the challenges of growth and unanticipated shocks either external or domestic.
TABLE IV:
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Key Debt Indicators
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June 1999 March 2005
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External Debt & Liabilities /GDP 66 33
External Debt & Liabilities /Exports 517 262
External Debt& Liabilities /Foreign
Exchange Earnings 346 142
External Debt Service due/Exports 36.1 18.8
External Debt Service/Foreign
Exchange Earnings 24.1 10.3
External Debt & Liabilities /Foreign
Exchange Reserves 22.3 3.4
Concessional Debt/External Debt 55 66
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TABLE V:
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Average Terms of New Loan Commitments
-------------------------------------
2000 2003
-------------------------------------
Interest rate (%) 6.3 1.7
Maturity (years) 12.5 19.9
Grace Period (years) 4.8 3.0
Grant Element (%) 19.9 52.7
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TABLE VI:
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Sources of Foreign Exchange Earnings
FY00 - FY05
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$ Million
FY 00 FY 01 FY 02 FY 03 FY 04 FY 05
Est.
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A. Exports of Goods
& Services 9,574 10,284 11,056 13,686 15,103 17,575
B. Workers'
Remittances 983 3,087 2,390 4,237 2,871 4,140
C. Other Private
Transfers 2111 2,853 1,899 1,559 2,293 4,250
D. Official
Transfers 940 842 1,500 1,051 634 393
E. Debt Relief - - - 1,000 - 495
F. Foreign Direct
Investment 472 323 485 798 951 1,025
G. Euro / Sukuk
Bonds - - - - 500 600
H. Foreign Loans/
Credits 1589 2812 2,910 2,293 1,726 2,587
I. Others 158 175 164 271 199 330
TOTAL: 15,827 18,377 20,404 24,895 25,253 31,395
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Annex
PAKISTAN'S BALANCE OF PAYMENTS
FY 2000 - 2005
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$ Million
FY OO FY 01 FY 02 FY 03 FY 04 FY 05 TOTAL
(Est.)FY00-FY05
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A Trade
Balance -1412 -1269 -294 -359 -1279 -4315 -8928
Exports FOB 8190 8933 9140 10974 12459 14322 64018
Imports FOB -9602 -10202 -9434 -11333 -13738 -18637 -72946
B Services
(net) -2794 -3142 -2617 -2213 -3523 -5594 19883
C Current
Transfers 3989 4737 5744 6642 6613 8500 36225
Current Account
Balance
(A+B+C) -217 326 2833 4070 1811 -1409 7414
Capital Account
Balance -163 400 -116 1841 -1389 925 1498
OVERALL
BALANCE -380 726 2717 5911 422 -282 8912
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