Pakistan's external debt and liabilities first crossed the level of $100 billion in March 2019. Consequently, the external debt to GDP ratio reached the peak of over 36 percent. Bulk of this debt is public in nature and accounts currently for almost 80 percent of the total external debt. The remainder is the outstanding debt of commercial banks and the private sector.
Public external debt consists of long-term and short-term debt of the Government, debt owed to the IMF and foreign exchange liabilities, including deposits by central banks of other countries with the SBP, swap funds, etc. As of September 2019, Government external debt is 80 percent of the total public debt. Within Government debt, the share of long-term debt (greater than 1 year duration) is as high at 98 percent.
Total external debt has demonstrated exponential growth since 2012-13. From 2012-13 to 2017-18 it increased from $ 60.9 billion to $ 95.2 billion with an annual growth rate of 9 percent. Thereafter, it has increased further to $106.9 billion by September 2019. The PML (N) Government opted for large-scale flotation of relatively high cost Sukuk/Eurobonds and for borrowing from international commercial banks. These liabilities stand at $14.3 billion as of September 2019.
What has been the policy of the new Government with regard to external borrowing? During 2018-19 there was a sizeable increase in public external debt of almost $ 9 billion. This, more or less, matched the external borrowing level of the PML (N) Government in its last year, 2017-18.
One of the key features of the Budget of 2019-20 is the proposed even more enhanced level of external borrowing to finance the fiscal deficit up to 58 percent. This is in comparison with the contribution of external financing of only 13 percent to meeting the deficit in 2018-19.
Consequently, the total gross external inflow of borrowed funds into the Federal Consolidated Fund is projected by the Ministry of Finance at as high a level as $20 billion, with a net inflow of $12 billion, following the expected debt repayment of $8 billion in 2019-20. However, both these magnitudes have been disputed. The Economic Affairs Division has stated in its regular monthly statement that the annual budgetary requirement of external funds is much smaller at $ 12.6 billion. This large discrepancy from the Budget estimate needs to be explained.
Similarly, the IMF in its balance of payments projections as part of the Program expects Government borrowing to reach almost $18.8 billion in 2019-20, with amortization reaching a peak of $10.6 billion, thereby implying a net inflow of $6.2 billion. The IMF numbers are taken as the valid numbers for the analysis in this article.
The first point to note is the mushroom growth in the external debt servicing burden. It is projected to increase by almost 77 percent in 2019-20. Earlier it grew by 46 percent in 2018-19. Now a larger part of the external financing needs are for meeting the debt servicing obligations. Up till 2018-19 it was the financing of the current account deficit. This implies that following the success in reducing the latter by 75 percent there will be continue to be pressure for external borrowing to finance the rapid growth in the debt servicing burden.
How much has the Government borrowed from external sources in the first half of 2019-20? The EAD monthly statement indicates that $ 5.8 billion has been received up to the end of December 2019. However, this understates the inflow into the Government account. The IMF has for the first time agreed to the flow of installments under the EFF being used in the form of budgetary support. By December 2019 the Fund had disbursed over $1.4 billion to Pakistan.
Further, also for the first time in Pakistan's history, the SBP has discovered a new source of foreign funds. This is the 'hot money' which has been invested by foreign commercial banks in the Government's 3-month treasury bills. The source of financing has grown rapidly in the second quarter and exceeded $1.3 billion by end-December.
Overall, the total inflow of external borrowing up to December 2019 is $8.6 billion. This represents an increase of 35 percent over the inflow in the corresponding period of last year. The estimated quantum of external debt servicing that has taken place in the first six months of 2019-20 is $4.2 billion. Therefore, the net inflow has been $4.4 billion.
The earlier point of the emergence of debt servicing as the principal part of the external financing requirement is amply demonstrated by the developments on the external front in the last six months. The current account deficit became much smaller at $ 1.8 billion as compared to the external debt amortization of $4.2 billion. The share of the latter has risen to 70 percent.
The implication is that following the very substantial reduction in the current account deficit a floor has been reached to the external financing requirements. As debt servicing increases with the rise in the size of external debt, there will continue to be growth in future years in the external financing gap.
There is also a growing concern about the composition of external borrowing. During the first six months of 2019-20, the share of short-term borrowing has increased sharply. This includes the 0.4 billion from the short-term deferred oil payment facility of Saudi Arabia, $0.4 billion short-term funding by IDB also for oil import and the $1.3 billion of 'hot money'. With a combined total of $2.1 billion, the share of short-term borrowing has increased to 25 percent. This increases future liquidity risks due to exit of 'hot money' in the event there is a negative development on the external front.
What are the external financing requirements for the next six months and how will they be met? As per the IMF estimates, the required external inflow during the next six months into the Government account is $10.2 billion. This is 16 percent higher than the actual inflow in the previous six months. Also, debt repayment will be higher at $6.2 billion. Therefore, if the larger gross inflow target is met there will still be a net inflow of only $4 billion. There is a fairly high level of risk that there will be a shortfall in achieving the gross inflow target of borrowing of over $10 billion. If this happens, there will be pressure on the reserves.
There is a need for a change in strategy for mobilizing external assistance. First, implementation of CPEC projects must be speedily enhanced so as to enable a larger inflow of project funds from China. Second, EAD must play a more aggressive role in securing long-term concessional assistance from the multi-lateral agencies. For example, the commitment by IBRD/IDA for 2019-20 is $ 1.1 billion. The disbursement in the first six months was only $ 232 million.
Third, the utilization of the Saudi Oil facility will need to be substantially increased. Fourth, efforts must also be made to meet the target of $ 2 billion of flotation of long-term Sukuk/Eurobonds. The investors are likely to show greater interest in the presence of an IMF program, currently higher foreign exchange reserves and some improvement in international credit ratings. Fifth, the reliance on short-term 'hot money' must be reduced as it increases the risk of a fast depletion of reserves in the event of a negative development on the external front.
The bottom line is that there is no scope for complacency with the big reduction in the current account deficit. External financing needs remain large because of growing external debt repayment obligations. If these are not financed fully by inflows of external assistance then there is the risk of a decline in reserves and a return to instability in the value of the rupee.
(The writer is Professor Emeritus at BNU and former Federal Minister)
The writer is Professor Emeritus at BNU and former Federal Minister
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