Foreign borrowing

According to data released by the Economic Affairs Division (EAD), Pakistan received $4.1 billion from external sources during the first half of the current year - 51 percent of the total amount budgeted - in comparison to the $4.15 billion received in the comparable period of the year before. Two major observations are in order: During the first half of 2015-16, the country was still on the $6.64 billion Extended Fund Facility (EFF) negotiated with the International Monetary Fund which implied a rigid quarterly monitoring of the programme conditions agreed between the Fund staff and the government. This monitoring provided a comfort level to other multilaterals as well as bilaterals to extend programme (budget) support given that the country was embarked on a time-bound reform agenda. The last tranche under the EFF was disbursed by September 2016 and the Fund lost any leverage to ensure that the agreed reform agenda would be further pursued. In addition, with the ongoing daily Panama hearings in the Supreme Court and with general elections scheduled to be held within one year, the government is clearly not in a position to implement reforms with political implications particularly those relating to power sector and tax system. This accounts for a dramatic decline in the budgeted programme loans in the current fiscal year. Thus in 2015-16 the actual programme loans disbursed were Rs 324.6 billion while in the current year a total of Rs 133.7 billion are budgeted. Ironically, though even the project loans have been budgeted to decline from the revised estimates of Rs 306.49 billion last year to Rs 219 billion in the current year.
The second observation is generated by the comparable disbursement figures from external sources in the first half of the current year in comparison to the first half of the year before: the government was compelled to rely on much more expensive sources of funds with a very short amortisation period. Budget documents reveal borrowing up to $2 billion of high interest bearing short-term loans from the commercial banking sector abroad and the EAD data reveals that the government has already borrowed up to $900 million from the foreign commercial banking sector - a reliance that no previous government had wisely engaged in. In addition, the government issued $1 billion worth of Sukuk at a 6.5 percent rate of return - an amount that would raise the country's interest payments further next year.
The forgoing, however, does not indicate whether there is a net inflow or outflow of funds with this massive rise in short-term borrowing. Data suggests that by December 2016, there was a net outflow or in other words, incoming foreign borrowing was less than outgoing amounts earmarked for debt servicing as well as payment of principal as and when it became due. This, from an economic perspective, is a worrying situation and total debt repayment plus interest are now estimated at 15 billion dollars, payable in just two years notably 2016-17 to 2017-18. And most worrying of all is the fact that three years ago debt service plus loan repayments were around 12 to 13 percent of total exports per year and in 2016-17 this has doubled to 25 to 30 percent.
There is a tendency by the Dar-led Finance Ministry to itemise issuance of Sukuk and Eurobonds as foreign exchange reserves - items that must be placed in the debt equity column. Juggling data from one column to another is not going to solve Pakistan's problems and not likely to hide the problem for long as other indicators would reflect the situation. To conclude, there is an urgent need for the government to revisit its steadily rising reliance on borrowing and to proactively desist from the practice of borrowing from foreign commercial banks. One way out of this debt trap would be to raise revenue through taxing those with ability to pay (stock markets in Pakistan generate only around 4 to 5 billion rupees but have the potential to generate around 100 billion rupees) and at the same time curtailing all unnecessary expenditure.