The government has decided to finance current account deficit in the fiscal year 2011-12 through foreign direct investments (FDIs) ie amounts anticipated from Etisalat -around $800 million--expected by the start of next fiscal year, grants and loans estimated at $2.1 billion and portfolio investment, official sources told Business Recorder.
Gross foreign exchange reserves stand at $17.5 billion which are expected to provide import cover up to 41/2 months, based on the estimated export earnings and foreign exchange reserves available with the State Bank of Pakistan (SBP) and commercial banks, till June 2011. For the year 2011-12, the government plans to retire $1.47 billion of IMF's budgetary support, which is expected to lower external financing, resulting in considerable pressure on the domestic debt market.
For this, the government intends to formulate its medium-term debt policy with three important pillars: (1) reduction of budget (total deficit without interest) to around 'negative' 1 percent over the medium-term, (2) use of debt instruments that are low interest-yielding, including more reliance on national savings instruments, and (3) reduction of SBP borrowing to zero.
The Finance Ministry argues that due to the commencement of repayment of IMF Stand-by-Arrangement as per schedule, public debt is expected to narrow down considerably. However, repayment of IMF loans would result in reduction of gross foreign reserves. The total debt-to-GDP ratio is expected to fall below 50 percent of GDP. Real growth of revenue has been projected higher than the real growth of debt, that would ensure reduction in total public debt over revenue over the medium term.
Sources said that total public debt rose from Rs 4.4 trillion in 2005-06 to Rs 9.1 trillion in 2009-10. Last year, public debt increased to around more than 60 percent of GDP. "This is a dangerous trend for the government, especially when tax revenue to GDP ratio is below 10 percent," sources added.
Pakistan ranks high (three) in terms of total public debt to total revenue in emerging markets. Pakistan's ratio last year was around 400 percent while the average in emerging markets is around 150 percent. High fiscal deficit has led to increased interest repayments. This year, total interest liability is Rs 727 billion, which is 58.5 percent of new revenue available to the federal government.