The sharp increase in external debt is no surprise and it isn’t catching headlines as either the debt story is known to all or other stories are more newsworthy. Whatever the case, the problem of growing debt is not getting any less alarming.
The overall external debt and liabilities increased by $2.6 billion in Jan-Mar18 to reach $91.8 billion, this is followed by $3.8 billion jump in Oct-Dec17. This implies an average monthly increase of $1.1 billion in the past six months. At this pace, the debt pile would cross century mark in billion dollars by Dec18.
In terms of GDP, the position is getting grimmer with every passing quarter. The total external debt to GDP increased from 26.2 percent in Sep17 to 28.6 percent in Dec17 to reach 30.8 percent in Mar18. This spike in the last two quarter is little surprising as nominal GDP in USD is computed based on PKR/USD rate on the last working day of quarter. That is not an accurate approach, a better way is to take the yearly average of PKR/USD which to date stands at 109.7. This takes the nominal GDP of Rs34.4 trillion to $314 billion instead $298 billion used for Jan-Mar debt calculation.
Thus, external debt to GDP is standing at 29.3 percent in Mar18 -highest debt level since Jun12. This sums up the external economic performance of the outgoing PMLN government. Virtually all the increase is in public sector whose debt increased by an average of $1 billion per month.
The math is simple. Average current account deficit is $1.4 billion per month and the FDI is covering mere $0.2 billion per month of CAD. The remaining $1.2 billion is either financed by additional debt or results in falling foreign reserves. The debt is up by $1billion per month and reserves fell by around $0.3 billion per month.
The speed of the reserve fall had increased in third quarter as new debt was hard to come by - total foreign reserves fell by $0.8 billion per month or $0.2 billion per week. The trend is arrested lately as reserves fell by $0.1 billion per week in the five weeks of fourth quarter despite $1 billion fresh debt injection by Chinese.
The SBP reserves are covering 2.8 months of good imports and merely 2.1 months of goods and services imports. Two months of imports is considered as a critical level as opening up of L/Cs become a problem below that number. If hypothetically, reserves fall to levels that no major imports take place, the day to day life will come to a halt in Pakistan. Thus, raising more debt is an absolute necessity in short to medium term.
The currency adjustment has lowered the CAD marginally to $1.2 billion in the last two months. Assuming CAD at same levels; adjusting for FDI, $1 billion fresh debt is required per month till we enter into an inevitable IMF programme. How many billion dollars of Chinese debt are yet to come? Mind you, China is already, by far, the biggest bilateral lender to Pakistan as loan from China is estimated at $20 billion after acquiring $1 billion in Apr18. For details read: The Chinese Debt” published on 7th March 2018.
The situation will be tough in remaining six weeks of this fiscal year. The principal debt repayment due in May-June is $ 3.2 billion adding $1 billion per month of CAD net of FDI, makes the gross funding requirement at $ 5.2 billion. For details read “External balance snapshot” published on 7th May, 2018.
Good luck to the caretakers. Whatever the interim setup will do; the initial hundred days of next government won’t be a honeymoon period.
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