A considerable decline in cheap external financing along with falling remittances may create a serious balance of payment (BoP) problems and bring the exchange rate under pressure in case of an increase in oil prices in the international market and a surge in demand for imports. Former Principal Economic Advisor to Finance Ministry Sakib Sherani said the cost of external financing is around 2 to 2.5 percent and like the IMF lending it is for budgetary support.
Foreign inflows on account of external financing are deposited in State Bank of Pakistan (SBP) account and an equal amount of domestic currency is issued to Ministry of Finance as budgetary support, he added. Sherani said as external financing has decreased significantly in the current fiscal year, Finance Ministry has borrowed from the domestic market on relatively expensive rates and this was increasing the country's domestic debt besides shrinking credit space of private sector.
According to latest figures released by the Economic Affairs Division (EAD), the government borrowed from commercial foreign based banks seven times higher than budgeted amount of $200 million ie $1.4 billion during the first nine months of the current fiscal year due to a massive decline in budgeted foreign assistance from bilateral and multilateral sources.
Sherani said the present government has been borrowing from international bond market against Eurobonds and taking loans from commercial banks at a high rate to achieve the target of net international reserves (NIR) agreed with the International Monetary Fund (IMF) under $6.64 billion Extended Fund Facility (EFF). The repayment of loans would fast deplete much of these foreign exchange reserves, he said, adding that the decline in remittances will have a negative impact on exchange rates, which would be swift and greater in case of increase in price of oil products in the international market and increase in demand of other imports.
An official of Finance Ministry said on condition of anonymity that terms and conditions of such loans are not made public and questioned the need to agree to a NIR target during negotiations with the staff level mission that was difficult to achieve. The official maintained that overall perception in the Ministry is that such kind of commercial borrowing without inviting competitive bids is taken because it involves some financial benefits. Otherwise, there is no justification for Finance Ministry to take commercial loans without inviting bids as State Bank of Pakistan (SBP) does in relation to PIBs.
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