This is with reference to the news item published in Business Recorder titled "Burgeoning external debt" by Dr Hafiz Pasha. The article used incorrect basis to arrive at misleading indicators and conclusions with regard to public external debt as per the following details:
* At the very outset, the writer claims that the external debt ballooned to $73 billion which is incorrect. The writer is referring to total external debt and liabilities of the country which includes debt of other sectors which by definition are not considered as public external debt since the government is not liable to pay these obligations. It includes debt of private sector and banks etc. The external public debt stood at $57.7 billion as at end June, 2016;
*Regardless of the debt numbers, the debt burden is only understood in comparison to its relation with the GDP. In this regard, the news article acknowledges this fact that the external debt to GDP ratio remained more or less constant since 2012-13. In fact, external public debt to GDP has reduced from 21 percent in 2012-13 to 20 percent in 2015-16 indicating reduction in external public debt burden;
* The article claims that component of public debt has increased to 85 percent of total external debt and liabilities which is incorrect. In fact, external public debt remained at the level of 79 percent of total external debt and liabilities at end June 2016 as compared with end June 2013;
* Cumulative increase in external public debt stock was $9.59 billion as opposed to $12 billion stated in the article. It is worth mentioning here that this increase may include effects of other factors such translational gain/losses, thereby simply taking difference of two stocks may not represent true picture;
* The article made a false claim that foreign exchange reserves were built entirely through borrowing. It is worth mentioning here that while the external public debt has gone up by $9.59 billion during the three years, the forex reserves of SBP have increased by $12.1 billion in the same period or by $15.3 billion when compared to from February 2014 to June 2016. Further, the present government has repaid around $12 billion of external debt till end June 2016, which was mainly related to the borrowings of the previous governments. Despite these heavy repayments, the foreign exchange reserves of the country have risen to more than $23 billion, of which SBP reserves were $18.1 billion at end June2016, which is equal to over five 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;
* Further, the article claims that cost of external public debt is high and poses threat to external debt sustainability are baseless and incorrect as indicated below:
-- The average cost of the external loans obtained by present government comes to around 3 percent which is significantly lower than the domestic financing cost 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;
-- External debt sustainability has improved as "Share of External Loans Maturing within One Year" was equal to around 25 percent of official liquid reserves at the end of March 2016 as compared with around 69 percent at the end of June 2013 indicating improvement in foreign exchange stability and repayment capacity;
-- IMF recent debt sustainability analysis shows that external debt would remain on a downward trend over the medium term, with the peak in external financing needs under the most stressed scenario (3.7 percent of GDP) staying well below the risk assessment benchmark of 5 percent of GDP. Further, credit rating agencies in their recent reports acknowledged this fact that Pakistan external debt is on a sustainable path and there is very little exposure to medium term vulnerabilities.
-- The article claims that reliance on external borrowing for the purpose of financing the fiscal deficit has reached at a peak of almost 40 percent in 2015-16 which is incorrect as the correct number stood below 30 percent. Further, article's claim regarding virtually no external borrowing to finance fiscal deficit in 2012-13 indicates lack of sufficient external inflows which also put extra pressure on domestic resources. Therefore, news article apprehension in this regard is incorrect.
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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