The news in "Business Recorder" on 27th February, 2012 that Pakistan's external debt servicing had crossed dollar 10 billion mark during July-December 2011, might have been received with a great deal of anxiety and given an impression of this payment head reaching an unsustainable limit due to excessive foreign borrowings by the country over the years. It was stated that payments under debt servicing would continue to surge and economists had expressed a serious concern over the rising and massive spending on this head, terming it an alarming situation. The IMF had already stopped SBA tranches and country's foreign exchange reserves were depleting due to foreign payments. Also, there was likelihood of an increase in overall debt servicing during the second half of FY12 due to repayments of IMF loans amounting to dollar 1.2 billion. The latest available data from the State Bank showed that out of total debt servicing of dollar 10.356 billion during the first half of FY12 (July-December, 2011), dollar 9.828 billion were paid as principal amount while dollar 528 million represented interest payments. This compared very unfavourably with total debt payments of dollar 8.855 billion last year (dollar 7.786 billion of principal amount and dollar 1.069 billion of interest payments) and dollar 5.787 billion during 2009-10. In other words, there were clear indications that external debt servicing of the country was likely to be more than double during the current fiscal as compared to the previous year and, therefore, this was a case of utmost concern. While there was nothing wrong with the above figures and conclusions, it would be better to put the facts in proper perspective and analyse them in greater detail. By definition Public Debt is classified as debt obligations due by the government towards the IMF and by the central bank. By this definition, Public Debt Servicing, in the first half of the current financial year, has been dollar 1.34 billion. Out of the total external debt servicing of dollar 10.356 billion during July-December, 2011 as reported by the State Bank, dollar 8.539 billion were repayments of principal of short-term borrowings by banks on a gross basis that have been double counted. These borrowings include overnight or shorter nature repayment and recycling of transactions. The SBP also made it a point to recognise this in its footnote (4) to the table of external debt servicing. However, SBP's table does create unnecessary confusion as it is not reflective of true picture. SBP, therefore, needs to be more careful as Pakistan is going through a period of uncertainty with regard to its balance of payment (BoP) position. The country is also faced with rising speculation on future Pak rupee parity against the US dollar. If we exclude scheduled banks' short-term (ie less than 1 year) gross repayments from the data compiled by the State Bank, external debt servicing of the country was dollar 1.817 billion during the first half of FY12 as compared to dollar 3.939 billion in the previous year and dollar 4.606 billion in 2009-10. Seen from this angle, the situation does not seem to be as grim as was likely to be inferred from a cursory look at the way aggregate data of external debt servicing (principal + interest) is provided by SBP. Technically, the central bank may need to account for all banking transactions to ascertain the performance of economy and monitor that the transactions are being undertaken by banks only to meet the obligations of their clients. But, to ascertain country's debt servicing ability, a separate table showing Pakistan's External Debt Servicing numbers in the form of external debt over export ratio is needed. External debt servicing over export ratio has shown improvement in 2010-11 over 2009-10 ie from 23.4 percent to 15.5 percent and is provisionally at 15 percent in 2011-12. This, however, does not mean that the problem of external debt servicing of the country does not require immediate attention of policymakers. In case external inflows envisaged in the Federal Budget do not materialise - Coalition Support Fund; Etisalat proceeds and 3G licence auction on time - the pressure on balance of payments (BoP) will accentuate further. Domestic borrowing to compensate this would further crowd out private sector credit needs. As is well-known, stock of external debt and liabilities of the country is rising consistently due to obvious reasons and if the trend is not reversed, the issue of debt servicing would certainly assume serious dimensions. Repayments of dollar 2.719 billion during FY13 and dollar 3.072 billion a year after to the IMF would also be a huge burden on the balance of payments (BoP) position, forcing the country to borrow further from other sources and adding to its external debt servicing in future. There is no doubt that accumulating TDL and its servicing imposes large costs on productive resources of the economy and leaves little room for the government to use fiscal policy to support economic revival. In extreme cases, high external debt servicing could even threaten the solvency of the country. The situation as of now may not be so alarming but it certainly calls for a serious introspection and the preparation of a proper roadmap to reduce the external debt servicing of the country in terms of aggregates like exports and total foreign receipts overtime. Copyright Business Recorder, 2012
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