Earlier in the PML-N tenure the external debt was building to enhance reserves; now it’s moving up at a faster pace but just to not let reserves fall fast. The sustainability of debt piling reserves was questioned by this column in the previous quarters (for more on the issue read ‘External scorecard in red’ published on August 30, 2016 and ‘Debt piling reserves published on Mar 20, 2017); it’s been demonstrated now that how shallow the reserves base is.
The net external debt increased by $5.3 billion in Mar-Jun17 while the external reserves remained virtually unchanged. The lion’s share of debt is piled by government which increased by $3.9 billion to $56.4 billion. Multilaterals (ADB, WB etc) were generous in the quarter as the toll increased by $1.7 billion to $27.6 billion. While the government heavily relied on commercial borrowing to avert falling reserves trend - toll up by $2.7 billion to $4.8 billion. That is a dangerous trend showing desperation. This needs to be halted soon.
Reserves started falling since the start of 2QFY17 whilst the economy started growing at higher pace at the same time. The high growth in automobile, food and beverages and a few other sectors resulted in higher imports in these sectors; along with high consumption of fuel, both in power generation and transportation.
That is an irony of Pakistan economy which could perplex policymakers on whether to let private sector led growth to continue or tighten policies to no let reserves fall in tandem. Domestic economy has huge gaps in demand to be filled but high cost of doing business amid lack of innovation is making exports uncompetitive.
Bottom line is that the reserves fell by $2 billion in Oct16-Mar17, while debt was up by $1.9 billion in the same period. Had the debt remained unchanged, reserves would have fallen by $3.9 billion. To keep the currency’s artificial peg intact along with efforts to restore confidence, the government decided to not let the reserves fall further at the cost of piling external debt - the gap widened to $5.5 billion in 4QFY17.
The $5.4 billion increase is by far, the highest increase in debt in a quarter in sixteen quarters of Dar’s regime. The previous high was $3.6 billion in 4QFY14 - when reserves fell to low levels and the currency was starting to fall freely. Debt was piled at that time to avert immediate crisis whilst economic growth was low.
Lately, the equation is a bit different - reserves have been built, and private sector is growing. Debt is piled to keep both confidence and reserves high. There is no immediate crisis in offing. That said, the policy is not sustainable as it may delay the inevitable crisis, but surely cannot avert it.
The external score card is deep in red - reserves are up by $10.3 billion in the last four years while the net external debt has increased by $22 billion (from 26.3% of GDP in Jun13 to 27.3% of GDP in Jun17). Thus, $11.7 billion are consumed by domestic economy without any foreign exchange earnings. Live and consume on debt; but for how long?