SBP on debt

The readers would recall that I wrote an extensive paper on Pakistan's debt situation, published in the current issue of a quarterly, 'blue-chip'. The highly abridged version of the paper was published in Business Recorder. The motivation of writing such a detailed paper on debt rested on the fact that the speed at which the governments have borrowed in recent years in general and in the last two and a half years in particular, has caused serious alarm in various circles. It was thought that if the pace of borrowing remained unchecked the size of the external debt would become large enough to service its external debt obligations in an orderly manner.
My paper on debt has reviewed the current debt situation, how it evolved over the years, its impact on the economy and the future outlook (2015-16 to 2019-20) of the country's debt in the light of maturing bonds, expiry of Paris Club debt rescheduling, the start of the repayment of the current IMF loan and the projects to be undertaken under the China-Pakistan Economic Corridor (CPEC).
The major findings of my paper have been that Pakistan added almost $25 billion in external debt during the last eight years (2008-15). When the accumulation of external debt of the 1990s is added, it is found that out of total stock of external debt and liabilities ($65.2 billion as of June 2015), 65 percent or over $42 billion were accumulated in the 1990s and during the last eight years (2008-15).
The paper also found that if the current trends in borrowing continues, Pakistan's debt profile is likely to worsen in the next five years. Highly conservative estimates suggest that Pakistan's external debt and liabilities are expected to reach $105 billion or 387 percent of export earnings by 2019-20 from $65.2 billion or 271 percent of export earnings in 2014-15.
Is this forecast farfetched? The readers would know that the present regime has contracted over $30 billion loan in just two and a half years as against almost $25 billion loan contracted by the previous regime in five years. Thus the two regimes have contracted over $55 billion loan since 2008-09 which will continue to be disbursed over the years. The reckless borrowers have transformed Pakistan into a paradise for lenders.
The State Bank of Pakistan (SBP) has commented on my paper after its publication. Their comments and my response are documented below. First, I appreciate the SBP and its staff for taking time to read and comment on my paper. Secondly, the SBP did not challenge my numbers and methodology of forecasting debt. Thirdly, the SBP was silent on the possible accumulation of debt under the CPEC. Fourthly, it did not comment on the scale of contracted loan in the last eight years in general and two and a half years in particular.
Let me respond to the SBP's comments. Firstly, the SBP was unhappy because I mentioned the growth rates of debt accumulation and that I did not use external debt-to-GDP ratio to represents the debt carrying capacity. I mentioned the growth rates because it represents the pace of borrowing which is the main motivation of writing my paper. I did mention external debt-to-export ratio to represents the debt carrying capacity because, the way we measure GDP in Pakistan it is in no way represents the debt carrying capacity of the country.
Secondly, the SBP has reminded me the importance of foreign exchange reserves. Yes! I am aware of the importance of reserves but if it is built on extensive and expensive borrowing from traditional and non-traditional sources, it simply suggeststhe postponing of current crisis to a future date. After all, someone will have to repay these debts soon which have been accumulated to build current reserves. This is a selfish approach to avert balance of payment crisis today and shifting the problems to a future date.
Thirdly, the SBP has stated the same facts which I have narrated in my paper, that is, external debt repayments are going to rise because of the maturing Eurobonds/Sukuk, start of the repayment of Paris Club debt and the repayment of the current IMF loan. If the maturing bonds of 2006 and 2007 as stated by the SBP, are going to create repayment risks from 2016 onward, then what will happen to the bonds amounting $3.5 billion issued since 2014? As far as Paris Club debt amounting $12.5 billion is concerned, it has been accumulated since the inception of this country and more so during the decade of the 1990s. It was the then government (2002) which succeeded in re-profiling the entire stock of the Paris Club debt which benefited the country for 15 years.
The importance of structural adjustment is well-known. My question is as to what kind of structural adjustment being introduced by this government in the midst of unprecedented borrowing? What will happen to the regime who will face the music when these debts are matured? Any thoughts from the SBP?
On the SBP's comments on the use of external debt servicing as percentage of foreign exchange earnings (including exports and remittances and not to export earnings alone), my view is that given the collapse of the international price of oil, the prospects of remittances are not all that bright. The oil rich countries have already started tightening their belts and cutting down their developmental projects which will have serious implications for workers migration and flow of remittances going forward. Basing on uncertain flows is a risky game and hence my choice for export earnings alone.
The SBP has reminded me that "debt management is a complex job requiring appropriate mix of interest cost and the maturity profile". The SBP should read my paper carefully. I did not criticise the shifting of short-term debt (T-bills) to medium-to-long term (PIBs) debt. What I said is that the right strategy was executed in an absolutely wrong time. No sensible finance minister would shift low cost debt to high cost debt at the time of declining interest rate. In so doing, the minister benefited the commercial banks at the expense of national exchequer.
On the sustainability of Pakistan's debt, the SBP has referred to the 9th Review document of the IMF which has suggested that Pakistan's public debt-to-GDP ratio would decline from the current level of 64.9 percent to 55.2 percent by 2021. My suggestion to the SBP is to read the debt forecast of the IMF from one review to another. They would be surprised to see the variation ranging from positive $9.3 billion to a negative $15.1 billion from one review (quarter) to another (quarter). If the IMF fails to forecast debt for one quarter, should we rely on its forecast for 2021? Such a wild fluctuation in IMF forecast either reflects the deteriorating quality of its staff dealing with Pakistan or the non-serious attitude of its staff viz. Pakistan.
(The author is Principal & Dean at NUST School of Social Sciences & Humanities, Islamabad) Email: [email protected]