Burgeoning external debt

The SBP has just released the data on external debt of Pakistan as of June 30, 2016. The stock of debt has ballooned up to almost $73 billion; with a largest ever increase of almost $8 billion in 2015-16. The last time we saw a big rise in external debt of over $6 billion was in 2008-09 when Pakistan was compelled to go into a relatively large Stand-by Facility with the IMF after the substantial depletion of foreign exchange reserves in 2007-08 due to the hike in oil prices.
During the first three years of the PML (N) Government the cumulative increase in external debt is of $12 billion. This represents a rate of net external borrowing annually which is 37% more than during the tenure of PPP government. Also, reserves have increased by just over $12 billion during this period. Therefore, virtually the entire increase in reserves is due to external borrowing. This inevitably raises doubts about the sustainability of such a policy.
A major concern is that in 2015-16 the rise in foreign exchange reserves was $4.5 billion as compared to net external borrowing of $8 billion. This implies that almost $3.5 billion of borrowing has been used to finance transactions in the balance of payments. Clearly, debt repayment has not been correspondingly enhanced.
The component of public external debt has increased to over $61 billion, equivalent to almost 85% of total external debt. The stock of external debt with bilateral and multilateral aid-giving agencies has increased by almost $5 billion and with the IMF by $2 billion respectively in 2015-16.
How do the debt sustainability indicators look at the end of 2015-16? One measure is the external debt to GDP ratio. Fortunately, this has remained, more or less, constant at 26% since 2012-13. Another, perhaps more relevant indicator of debt repayment capacity is the ratio of total external debt to exports of goods and non-factor services. This has skyrocketed to 266% in end-June 2016 as compared to 193% in end-June 2013.The big jump can be attributed to the large increase in external debt over the last three years and to the almost 13% fall in exports. Another adverse indicator is the increased dependence on net external borrowing to finance the fiscal deficit. In 2012-13, there was virtually no external financing. It is estimated that reliance on external borrowing for this purpose may have reached a peak of almost 40% in 2015-16.
The composition of external debt has also moved more towards relatively high cost borrowing. The share of bilateral and multilateral assistance, mostly in the form of concessional debt, has fallen from 67% in 2012-13 to 60% by the end of 2015-16. Commercial debt in the form of Euro/Sukuk Bonds and borrowing from international commercial banks has increased by over $4 billion.
The consequence is that interest payments on public external debt have increased by 50% in the last three years, while the stock of such debt has gone up by 20%. This implies that there has been a significant increase in the effective average interest rate on public external debt.
The outlook for 2016-17 is even more worrying. The Paris debt rescheduling has also come to an end. Consequently, the budget documents indicate that the repayment plus interest cost of public external debt will go up by almost $1.1 billion, an increase of over 28% over the level in 2015-16.
The Federal Government also plans to undertake gross external borrowing for budgetary purposes in 2016-17 of almost $8 billion. This includes $3.3 billion of project and program assistance, a drop of 54% over the level in 2015-16. Does this indicate a loss of comfort with international agencies following the departure of the IMF?
This fall is proposed to be compensated by an increase in commercial borrowing in the form of Euro/Sukuk Bonds of $1.7 billion and loans from international commercial banks of over $2 billion respectively. If these sources and amounts of funding materialise then Pakistan will go further into the 'debt trap'. However, this may not be forthcoming or the cost could be too high in the absence of an on-going IMF program.
The Government has used the IMF Extended Fund Facility to borrow increasingly large amounts internationally. Reserves have been built up though this strategy. For example, reserves have increased by $467 million in the week ending August 19, 2016.Is this through commercial bank borrowing at a high interest rate?
The consequence is that the economy has been afflicted by a form of 'Dutch Disease', whereby the Rupee has artificially acquired stability. This has led to substantial over valuation of the currency, which has affected export competitiveness and made imports cheaper.
There is no other option but to get out of the addiction with larger and larger doses of external borrowing and increase the extent of self-reliance. Far reaching measures will need to be adopted to boost exports, restrict imports and sustain the level of home remittances. Otherwise, possibly somewhat before or around the time of the next general elections, Pakistan could be facing another financial crisis.
(The writer is Professor Emeritus and former Deputy Chairman of the Planning Commission)