It looks that mismanagement in the external sector would continue to haunt the country for a long time to come. This has become our habit to finance the current account deficit, resulting from an excess in import payments over export receipts through loans and other capital inflows from various sources which have to be repaid over time.
The structural external sector imbalance and its financing has thus become a kind of vicious circle which is hurting the country increasingly and pre-empting foreign exchange resources in larger amounts with the passage of time. According to the latest data released by the State Bank, the country's external debt servicing stood at dollar 3.654 billion including principal amount of dollar 2.836 billion and dollar 818 million of interest payment in July-March, 2009.
This was 16 percent higher than overall debt servicing of last fiscal year, which was dollar 3.161 billion (principal amount of dollar 1.931 billion and dollar 1.23 billion of interest payment). The major payments under debt servicing were made on account of public and publicly guaranteed loans, under which dollar 2.843 billion were paid while debt servicing under non-guaranteed loans stood at dollar 459 million during July-March, 2009.
Payments to IMF and Paris Club stood at dollar 160 million and dollar 295 million respectively. Major reason for current surge in debt servicing was stated to be payment of Euro Bond worth dollar 500 million and short-term loans of Islamic Development Bank. It needs to be pointed out that huge amount of dollar 1.165 billion of debt servicing was also rescheduled due to insufficient foreign exchange reserves during the first nine months of the current fiscal year as against dollar 1.2 billion during FY08.
A sharp increase in external debt servicing during the current year is indeed a disturbing development and reflects mainly the growing stock of outstanding external debt and liabilities (EDL) caused mainly by a high current account deficit of the country. The EDL which stood at dollar 46.3 billion at the close of June, 2008 are now estimated to be around dollar 50 billion. The rise in external debt servicing would not have been much of a problem if foreign exchange reserves of the country were swelling or at least adequate to meet the foreign liabilities expected in future but the position of Pakistan is quite the reverse.
Our foreign exchange reserves had declined to a dangerously low level of dollar 6.0 billion in November, 2008 from a peak level of dollar 16 billion in November, 2007 due to slow foreign inflows and rising outflows. The current level of reserves at about dollar 11 billion is not only barely sufficient to meet the country's foreign exchange needs but has been largely accumulated through contracting of more foreign loans from various sources which certainly is poor house keeping.
If the present trend continues, a substantial part of country's foreign exchange earnings would have to be earmarked for meeting the external debt servicing requirements of the country, with little left for other essential imports. Of course, the State Bank or the government cannot print dollars or other hard currencies and the only way to reverse such a dangerous trend is to earn a surplus in the current account balance of the country.
It is not difficult to understand that in order to arrive at such a sustainable position in the external sector and reduce the level of external debt servicing, the country has to expand exportable surpluses. Exporters may need to be helped with a more favourable exchange rate. The President and the Prime Minister need to press our trading partners, who claim to be our friends, for more market access and at the same time contain import demand through a combination of tight monetary and fiscal policies along with appropriate exchange rate regime to maintain our competitiveness in the international market.
SBP may need to shift the total load of oil import need on the interbank market earlier than committed to the Fund. It needs to be recognised, nonetheless, that in the recent past, Pakistani authorities have done quite a bit and tried to move in the desired direction but obviously much more needs to be done to improve the current account balance of the country to a satisfactory state.
We know the difficulties of the government, particularly at this juncture, to undertake the necessary efforts to steer the country out of the developing crisis but ignoring the problem of mounting debt servicing for a considerable length of period has also its own perils. Postponing the problem by rescheduling of debt is only a temporary respite and should only be considered as a last option under exceptional circumstances.