Rise in external indebtedness

While the government has been claiming credit for putting the economy on the path of sustainable development, some of the vital economic indicators have, of late, shown alarming trends.
According to the latest statistics released by the State Bank of Pakistan (SBP), the country's external debt and liabilities have witnessed a surge of $2.4 billion or about six percent to a new high of $42.88 billion at the end of December, 2007 from $40.48 billion at the close of 2006-07.
The entire increase was accounted for by a steep increase of $2.53 billion or 6.49 percent in external debt from $39.00 billion to $41.54 billion while foreign liabilities decreased by 8.89 percent from $1.47 billion to $1.34 billion during this period.
SBP statistics show that Pakistan's external debt has been continuously rising since FY04 and the country has borrowed about eight billion dollars during the last four and a half years. At the end of June, 2004, external debt and liabilities of the country were calculated at $34.88 billion by the State Bank. Additionally, the fiscal outcome has forced the government to borrow heavily from domestic sources, increasing debt servicing liabilities of the government in the years to come.
Economic managers of the country may say that such a level of external debt was still manageable due to the fact that as a percentage of GDP, foreign debt and liabilities of the country have not increased and overall debt (including internal and external) would be under 60 percent of GDP during 2007-08 but the trend, nonetheless, is certainly disturbing.
An increase of six percent in external indebtedness of the country in just six months is partly a reflection of growing current account deficit which amounted to $6.14 billion during July-December, 2007 as compared to $4.67 billion in the corresponding period of last year and shows very clearly that Pakistan is living very much beyond its means and debt servicing could become a major issue in the next few years if the trend is not reversed.
The problem could be compounded further by depreciation in the exchange rate of the rupee which is sure to follow if external sector situation continues to deteriorate. The financing of external sector deficit by reducing foreign exchange reserves could also have serious implications in terms of credit rating and long-term solvency of the country. Keeping all the factors in view, we would urge the authorities not to mask the problem by resorting to higher level of external borrowing but confront it by undertaking measures which could ensure a sustainable position in the external sector of the country in the long-run.
In order to achieve this goal, productivity of the economy has to be improved by several notches for which both foreign and domestic investment has to be encouraged on a much larger scale through a variety of incentives and imparting stability and strengthening institutions in the country.
The recent elections and the consequent exuberance at the stock exchange could be an indication that investors are now looking at Pakistan as a favourable destination for investment. Although it is too early to make a positive judgement, it could be interpreted as a good omen for growth and export prospects.
To give further confidence to the investors, it is imperative to reconsolidate the fiscal position, ensure price stability, upgrade infrastructure, provide uninterrupted supply of electricity and improve law and order situation in the country. Measures like privatisation, issuance of GDRs etc merely to contain external debt and depletion of reserves could help but only temporarily. It is time to overcome the basic disease rather than address the symptoms otherwise intensity of the problem could increase overtime.