The International Monetary Fund (IMF) has projected the external debt stock of Pakistan to rise, temporarily, to around 32.5 percent of gross domestic product (GDP) during 2008-2011 due to significant increase in external financing from official creditors, including the Fund itself, to help Pakistan with recent balance of payments pressure.
It has been stated by IMF in a report titled 'Pakistan: 2009 Article 1V consultation and First Review under the stand by agreement-Staff Report', released on Tuesday. Combined shocks to growth, current account, and depreciation could vault the end-period debt stock to around 45 percent of GDP, significantly higher than under the baseline scenario.
According to IMF, the debt ratio of Pakistan is projected to rise, temporarily, due to significant increase in external financing from official creditors (including the Fund) to help Pakistan with the recent balance of payments pressure. The debt stock would be around 32.5 percent of GDP during 2008-2011, and then gradually decline to 27.5 percent of GDP by 2013-14.
Pakistan's external debt burden has been relatively moderate in recent years as a result of successive debt relief undertaken in the late 1990s and early 2000s. At the end of financial year 2007-08, external debt stock stood at around 26.5 percent of GDP and debt service was about 15 percent of exports of goods and services. Most of its debt was public sector debt owed largely to official creditors, and there were limited private sector debt.
The debt service burden would increase, but remain manageable, during the projection period. Debt service as a ratio of exports of goods and receipts are projected to increase to 20 percent under the baseline scenario. This increase is sizeable but debt service burden will decline markedly following repurchase of outstanding Fund credits.
The relatively benign debt outlook under the baseline scenario is subject to serious downside risks. They include risks from higher non-interest current account deficit, lower growth, higher depreciation, higher interest rates, as well as lower FDI flows. The standard bound tests show that debt ratios are sensitive to shocks to higher current account deficits, large depreciation of exchange rate, and lower FDI inflows given the large financing needs.
The Fund said, for example, if non-interest current account deficits are higher by half of the ten-year standard deviation, the debt as a ratio to GDP would rise sharply and be over 10 percentage points higher than under the baseline scenario.
Pakistan's public sector debt burden declined through 2006/07, but has been rising since then, reflecting the expansionary fiscal stance. At the end of fiscal year 2007-08, the public sector debt stock stood at 57.4 percent of GDP, with domestic public debt 31.2 percent of GDP slightly exceeding external public debt 26.2 percent of GDP.
Interest payments 4.7 percent of GDP are a significant burden for the budget, accounting for 32.6 percent of total revenue excluding grants and 26.3 percent of current expenditures. Interest payments on domestic debt accounted for only 12 percent of total interest expenditure, partially reflecting that official creditors account for the bulk of total external debt.
The public debt ratio is projected to decline gradually, reflecting fiscal consolidation and lower interest rates in line with macroeconomic stabilisation. The stock of external public debt will increase temporarily in 2008-09 owing to external financing from official creditors, including the Fund, to address Pakistan's recent balance of payments pressure.
The total stock of public debt is projected to decline gradually to 47.5 percent of GDP by 2013-14. The burden of interest payments on the budget would be halved. The ratio of interest payments to total revenue excluding grants would decline from 31 percent in 2008-09 to 14 percent in 2013-14, despite an increase in interest expenditure on external public debt by about 65 percent in dollar terms.
The standard bound tests show that risks from shocks resulting from higher interest rates or lower growth are moderate, as they would slow down rather than reverse the medium-term decline in the public debt ratio. However, a primary balance shock as well as 30 percent devaluation and a contingent liabilities shock would lead to a perceptible increase in the public debt ratio.