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Foreign debts burden

30 March, 2007

By Wasim Shahzad


Domestic currency debt jumped by Rs957 billion to Rs2.346 trillion in the first quarter of 2007 from Rs1.389 trillion in 1999
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In seven-and-half-years of the sitting government, Pakistan’s total public debt increased by Rs1.465 trillion to Rs4.411 trillion, showing a rise of almost 50 per cent from Rs2.946 trillion in 1999. And, it is still bad performer in global competitiveness when compared with India in 40 areas including business sophistication, technology application and market access abroad. Pakistan, however, is better ranked than India in government efficiency having less red-tape and influence of the powerful in policy making.

In other words, Pakistan’s official external debt has not gone down since 1999 although it has received record aid, investments, and remittances flows. It has gone up to $36.9 billion from $33.6 billion in 1999 despite receiving at least $10 billion in economic, military and development aid from the United States, over $6 billion in privatisation proceeds, and a relief of $1.6 billion in loan write-offs by foreign governments during the last seven years.

A ‘Debt Policy Statement’ issued by the finance ministry reveals that total domestic currency debt also jumped by Rs957 billion to Rs2.346 trillion in the first quarter of 2007 from Rs1.389 trillion in 1999, registering an increase of about 69 per cent. Likewise, the foreign currency debt went up by Rs508 billion to Rs2.065 trillion in the first quarter of 2007 from Rs1.557 trillion in 1999, up by 32.6 per cent in seven years.

The report says total public debt increased by 165 per cent since 1995 when it stood at Rs1.662 trillion. Its two components, domestic currency and foreign currency debt surged by 197 per cent and 136.5 per cent, respectively, since 1995.

"The coming years will see an increase in borrowing particularly in foreign currency component to finance the infrastructural development programme. The large infrastructure projects envisaged in the next decade will increase the debt burden if sufficient revenues are not generated from within the country," says the report.  The country’s total outstanding domestic debt reached Rs2.422 trillion by the end of November 2006, showing an increase of 36.5 per cent (Rs648 billion) since fiscal year 2002 when it stood at Rs1.774 trillion.

The report said the total external debt and liabilities increased by more than six per cent to $37.72 billion in the first quarter of 2007 from $35.47 billion in fiscal year 2003. Of this, public and publicly guaranteed debt rose by 13.4 per cent to $33.15 billion this year, compared with $29.23 billion in 2003. The external debt and liabilities at the end of fiscal 2006 were $37.26 billion.

This is an increase of $1.43 billion which represents a four per cent increase over the stock at the end of fiscal 2005.

The report, however, maintains that such a massive increase in overall stock of public debt should be seen in the context of gross domestic product and revenues because "the capacity of carry debt is dependent on the size of the economy as well as resources available to the government to service that debt".

On the basis of these parameters, the public debt at the end of fiscal year 1999 was about 629 per cent of total revenue and came down to 356 per cent of total revenue. Similarly, the total public debt was 100 per cent of GDP in 1999 and has come down to 50 per cent in the first quarter of 2007.

Pakistan’s liquid foreign exchange reserves, after jumping to $10 billion-level in 2002-03, have more or less stayed around that level on average. The foreign exchange reserves of even Sub-Saharan countries (excluding South Africa and Nigeria) doubled to $50 billion during the same period. Brazil and Argentina repaid all of their $25 billion debt - by utilising their foreign exchange reserves - to the IMF in early 2006 to rid their countries of its influence.

The Competitive Support Fund (CSF) – a joint initiative of Pakistan’s finance ministry and the United States Agency for International Development (USAID) based in the finance ministry, said that India showed better performance in willingness to delegate authority, staff training, reliance on professional management, incentive compensation, regional sales, research & development and capacity for innovation.

India also outperformed Pakistan in efficiency of corporate boards, staff training, technology transfer, quality of management schools, local competition, buyer sophistication, supplier quantity, venture capital availability and degree of customer orientation. India also has better basic requirements for institutions, infrastructure, macroeconomic and health and primary education.

The areas wherein Pakistan has shown improvement include public trust in government, ethics and corruption, favouritism of government officials, efficiency, undue influence and interest rates. Pakistan also outperformed India in other areas such as hiring and firing practices, time required to start business, interest rate spread, real effective exchange rate, macro economy, quality of electricity supply, malaria prevalence and government surplus/deficit.

Pakistan's current account and trade deficits are "unsustainable" in the long run and will require adjustments in monetary or exchange rate policies, the CSF said. "Currently the deficits are being financed through one-off investment flows - this is unsustainable in the long run".

It also said that despite recent improvements in the poverty picture, nearly one-quarter of Pakistan's population continued to live below the poverty line, and reducing this figure constitutes the foremost challenge for the authorities.

It further said that the weak points in the private sector are related to corporate governance and modern management and motivation of the workforce.

Pakistan's energy supplies were highly dependent on oil imports, the cost of which accounted for a large share of the country's total import bill. In addition, national power demand is outstripping supply. This is a trend likely for some time, given that Pakistan's productivity capacity needs are projected to reach a level of 162,590 megawatts by 2030, from a level of 15,500 MW in 2005.

Only 55 per cent of Pakistan's population has access to electricity from the national grid.

"In fact, Pakistan has one of the lowest per capita consumption of energy in the world," the report added.

While the debt stock has increased significantly, Pakistan’s capacity to service it has also improved more significantly as size of the economy expanded. As such, total public debt of Pakistan which was equal to 100 per cent of its GDP in 1999 came down to 50 per cent of the GDP in the first quarter of this year.

Debt equal to 70 per cent of the GDP is universally regarded as a safe margin.

The public debt was equal to 629 per cent of the federal taxes in 1999 and has come down to 336 per cent by now and the debt burden has become less heavy. The paradox is explained by the fact that as the GDP growth increased particularly in recent years, the share of the debt burden in terms of the GDP went down — more so during the last three years.

But the underlying problem that global competitiveness should have increased Pakistan’s exports to service debts and result in higher revenues could not be resolved. The foreign direct investment described by CSF as one-off source could not be relied upon in the long run, reverting back reliance on debt seeking. The higher the debt, the larger the resources diverted to reducing the debt burden and heavier the interest rates and the options to choose less costly debt also become less.

And the major lenders tend to dictate their own terms, at times arbitrarily. Hence the minimum of loans should be taken and at the lowest possible rates of interest and with a long grace period. The foreign debt is not coming down substantially as new loans are taken when the old loans are repaid. In the fiscal year 2006, foreign debt of $3.1 billion was repaid, but new loans of $3.05 billion were taken.

The Debt Policy Statement issued by the finance ministry says that if new loans are not taken, the present external loans will take about 30 years to be repaid at a rate not exceeding $1.6 billion per annum –- a total of $48 billion. But large new loans will have to be taken for building the five large dams and rebuilding the infrastructure for industrial and commercial development particularly from the World Bank and the Asian Development Bank.

Although the dams are urgently needed for providing water, the government is taking long time in making the necessary arrangements. Anyway, once the finances are committed by the donors, construction of the projects should not be delayed.

It is equally necessary to complete the projects in time as delay can mean spending far larger funds.

Foreign loans carry an extra risk. If the rupee is devalued or is floated down or if the dollar becomes stronger in the international market, the rupee cost of the foreign debt goes up and the government has to mobilise more rupees to repay the old loans. At the moment, the government is buying dollars at almost Rs61 to service foreign loans obtained at Rs 9.90 for a dollar or a little more in the 1970s and 1980s.

Another dimension of foreign loans is political riders they come with particularly when they are large. We have to accept the political terms of such loans which can infringe on our sovereignty. That is more so when it is defence aid or strategic assistance. In the case of the US, which is a major donor in the military as well economic spheres, the political riders are too heavy and their leaders even threaten to cut the aid if their demands are not fully met.

If we have to accept very costly consultants and pay them heavily out of the loans, the net loans get reduced. And if the machinery for the project has to come from the lender states, that can be more costly than the one we can get from other sources. It was said in the past that almost 85 per cent of the US aid goes back to the US.

The domestic debt, unlike foreign debt may not seem to have a political dimension, but the fact remains that year after year, the debt servicing cost is going up. It rose to Rs301 billion last year from Rs247.7 billion the year before. The interest payments on domestic debt amounted to Rs190 billion.

There is nothing wrong with borrowing in the modern world, individuals and states do that. What matters is what you do with that money, whether you invest it judiciously and create safe avenues to service the loans and eventually repay that in full in time and the country eventually benefits from such large borrowing. One can only hope that this money is not going in the hands of few – contractors, civil and military bureaucrats and politicians.

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