The MoF has issued a strong rejoinder to my recent article in Business Recorder on 'Burgeoning external debt'. Accusations have been made of 'incorrect bases', 'use of misleading indicators' and 'fallacious views'.
The rejoinder concludes with the following statement:
'The present government has made remarkable gains in reducing debt burden of the country and improved the fiscal and debt sustainability indicators.'
It is indeed hoped that the above statement is valid and applicable in the medium run and that Pakistan will not find itself in 'debt trap' once again. There is a reason why I have been giving early warning signals. I was brought in to be the part of the frontline of humiliating negotiations in 1993, 1996, and 1998 with the international funding agencies to save Pakistan from default resulting from profligacy of previous governments or following sanctions.
I sincerely do not want Pakistan to face the same situation again. Also, with the likelihood of limited growth or a fall in exports, remittances and FDI it is difficult to be complacent on the future outlook of the balance of payments. Clearly, major structural reforms are required urgently to address the imbalances. Otherwise, the burden of a potential default will fall disproportionately on the people as happened in 2013.
There is need to recognise that the claim on the reserves is due not only to external public debt but also to other external debt. We have as a country to honour our overall debt obligations. If, for example, public enterprises are to service their debt obligations these will have to be met by the SBP through the available reserves.
Reference has been made to the IMFs recent debt sustainability analysis. Apparently, even in the most stressed scenario, external financing needs will reach only 3.7% of the GDP, staying well below the risk assessment benchmark of 5% of the GDP. IMF projections assume that exports will continue growing at 7% per annum up to 2018-19 and remittances will increase by 4% annually. Given recent experience, the IMF projections clearly do not represent the worst case scenario.
A perhaps more realistic set of projections would be based on more modest export growth of say half that assumed by IMF and with flattening of remittances in the medium run. In this scenario, the external financing requirement in 2017-18 approaches 5% of the GDP and rises to almost 6% of the GDP in 2018-19. Therefore the benchmark set by IMF could be exceeded.
External financing of the budget is apparently not 40% but 30% in 2015-16 according to MoF. As per the revised estimates presented in the Federal Budget documents, the net external borrowing is reported as Rs 503 billion in 2015-16. If this is 30% of the deficit, then the implied magnitude of the fiscal deficit is Rs 1676 billion, equivalent to 5.7% of the GDP. This is substantially in excess of the target budget deficit of 4.3% of the GDP. Also, even if the contribution is 30%, it has gone up substantially from 11% in 2014-15. We await the information on Fiscal Operations for 2015-16.
Despite what the MoF says, sovereign credit ratings of Pakistan by agencies like Moody's and S&P remain in the 'highly speculative' category. The country ratings are worse than those of Sri Lanka, Bangladesh and India.
A question was raised on the source of financing of the buildup of foreign exchange reserves by $464 million in the week ending 19th of August 2016. However, no answer has been given by MoF on this question.
The State Bank has also come to the rescue of the MoF. A case has been made against devaluation of the rupee, on the grounds that exports of India, Malaysia and Indonesia have fallen despite significant currency depreciation. This raises a counter factual question. They may have fallen even more otherwise. Also, a downward movement of the currency helps in restricting imports. Consequently, for example, in the case of India, imports have fallen by 15% in 2015-16 as compared to 2% in Pakistan. The result is that the trade deficit of India has declined by 14%, whereas it has increased by 7% in the case of Pakistan.
The SBP has also assured that external debt servicing obligations will not on average be more that $5 billion annually up to 2020. This is despite the end to Paris debt rescheduling, lumpy repayments against maturing Euro/Sukuk bonds and servicing of the debt acquired from the IMF during the last three years. Hopefully, the SBP will find some way of preserving our debt repayment capacity without acquiring fresh new debt.
I hope and pray that the confidence displayed by the MoF and the SBP is justified over the next few years.
(The writer is Professor Emeritus and former Federal Minister)