The spokesman of the Ministry of Finance with reference to a Comment in Business Recorder titled "Rise in external debt" dated 23.06.2016, offers the following views in response:
It states that the external debt is rising sharply, borrowing from external sources may be costly and unsustainable and government should rely exclusively on domestic sources to finance the fiscal deficit. These assertions are not based on facts and also ignore the fact that each of these types of debt has its own benefits and drawbacks, with a trade-off between costs of borrowing and exposure to various types of risks that needs to be balanced in order to ensure sufficient and timely access to cost efficient funding.
As opposed to the claim regarding rising external debt burden of the country, the external debt burden has in fact reduced during past few years ie the external public debt was only around 30 percent as a proportion of total public debt as at end March, 2016 as compared with end June, 2013 position of 33 percent when the present government took charge. Similarly, external public debt as percentage of GDP stood at 19.5 percent as at end March, 2016 as compared with end June, 2013 position of 21.4 percent.
External debt sustainability has improved as "Share of External Loans Maturing within One Year" was equal to around 28 percent of official liquid reserves at the end of June 2015 as compared with around 69 percent at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity.
Contrary to the claim regarding expensive nature of external debt, large portion of the external loans are contracted at extremely low rates and attractive terms. This is evident from the average cost of the total external debt obtained by present government till March 2016 which comes to around 3.24 percent. After including the grants mobilised by the current government, the average cost of borrowing further reduces to 3.03 percent, which is significantly lower than the domestic financing cost of about 10 percent even after one builds a margin of capital loss due to exchange rate depreciation. Thus cost of the external debt contracted by current government is not only economical but is also dominated by long term funding.
The comment presents conflicting views to exclusively finance fiscal deficit from domestic sources by printing money and at the same time describes this as an undesirable policy. It is stated that the main objective of the external borrowing is to supplement the domestic and external resources required to accelerate the pace of economic development and make positive contribution towards developing the country's infrastructure base. These developments projects will not only help increase the economic growth but also increase the debt carrying capacity of the country.
It claims that foreign exchange reserves of the country have increased on the back of high external borrowing. In this regard, it is stated that the present government has repaid around $11.5 billion of external debt till end March 2016, which mainly related to the borrowings of the previous governments. Despite this heavy repayment, the foreign exchange reserves of the country have risen to more than $20.9 billion, of which SBP reserves were $16.1 billion at end March 2016, which was equal to nearly four months of import-cover as compared to less than around 3 weeks of import-cover in February 2014 when the SBP reserves stood at $2.8 billion.
Given the concessional terms (low cost and higher tenor) associated with external loans and falling proportion of external loans in public debt portfolio, the policy of the government is to borrow more through external sources as stated in Pakistan's Medium Term Debt Management Strategy (2015/16 - 2018/19). The above facts clearly establish the fallacious views mentioned in the news item regarding the state of public debt management in Pakistan. The present government has made remarkable gains in reducing debt burden of the country and improved the fiscal and debt sustainability indicators.
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