Pakistan’s economy is on track and there has been a steady increase in foreign exchange (FX) reserves of the State Bank of Pakistan (SBP), said Ishaq Dar, the country’s Federal Minister for Finance.
During the past three fiscal years ending June 2016, the external debt has gone up by $9.6 billion (Dh35.3 billion) and foreign exchange (FX) reserves of SBP have increased by $14.1 billion, thereby improving the SBP reserves by $4.5 billion. Further, Dar said the present government has repaid about $12 billion in external debt until the end of June 2016.
Despite these heavy repayments, the country’s FX reserves have risen to more than $23 billion, of which SBP reserves were $18.1 billion at the end of June 2016, which is equal to over five months of import-cover as compared to around one month of import-cover in June 2013 when the SBP reserves (net of temporary swap of $2 billion) stood at $4 billion.
At the time, some analysts predicted that Pakistan would not have sufficient external resources to fulfil its external debt obligations and would head towards default by June 2014. But it did not happen, thanks to constant efforts by the government to tackle related issues.
Over the past three years, Dar noted that many sceptical analysts have been citing the IMF debt and commercial borrowings as the prime reason behind external debt growth, which is incorrect.
Multilateral debt accounts for the largest share amounting to $26.4 billion and Paris club debt amounting to $12.7 billion, constituting about 68 per cent of the external debt at the end of June 2016.
While IMF loans and Eurobonds/sukuks have dominated headlines, their outstanding amounts were only $6 billion and $4.6 billion respectively, having a share of only 18 per cent at the end of June 2016.
The remaining $8 billion of external debt includes bilateral and commercial loans. Dar said international financial institutions had virtually ceased doing business with Pakistan by early 2013 due to the country’s macroeconomic instability, high risk factor and its low FX reserves, but have re-engaged in the past three years as per their respective Country Partnership Strategies once Pakistan managed to introduce structural reforms that led to a significant improvement in the macroeconomic situation.
“These partnerships are primarily aimed at removing structural bottlenecks from Pakistan’s economy and to help us in the areas of energy, taxation, ease of doing business, trade facilitation, education and promotion of small and medium enterprises (SMEs),” he said, adding that these lending programmes will be instrumental in enhancing Pakistan’s potential output by promoting efficiency and productivity.
As of today, the Finance Minister claims the country’s external debt servicing obligations are not more than an average of $5 billion a year until 2021. Pakistan has met higher obligations in excess of $6 billion a year during the fiscal years 2013 and 2014, even with much smaller volumes in FX reserves.
Dar reiterated that one must keep in mind that Pakistan is a developing country, which needs to pursue a high growth objective to expand its capacity, enhance job creation, stimulate higher per capita income, reduce poverty and improve competitiveness. Consequently, running a budget deficit becomes a necessity.
The other option, he said, is to stifle growth by curtailing development expenditures that can in turn have socioeconomic implications.
Accumulated debt
To provide some historical perspective in this regard, Pakistan’s gross public debt was 6.1 trillion Pakistani rupees (Dh213 billion) as of June 30, 2008, while net public debt was Rs5.6 trillion, which included a net domestic debt of Rs2.7 billion and external debt of Rs2.8 trillion.
By the end of 2012-13, gross public debt increased to Rs14.3 trillion while net public debt increased to Rs13.4 trillion, thereby the previous government contracted a net debt of around Rs7.8 trillion during its term (2008-13). The external debt was $48.1 billion and the net domestic public debt was Rs8.6 trillion.
During the period from July 2013 to June 2016, the gross public debt has grown to Rs19.6 trillion while the net public debt has grown to Rs17.85 trillion, of which the external debt was $57.7 billion while the net domestic debt was Rs11.7 trillion.
Thus, there is a net increase of Rs4.3 trillion in total public debt, inclusive of an increase of $9.6 billion in external debt. This constitutes an increase in net public debt at an annual compound growth rate of 9.75 per cent during the first three years of the present government, compared to 19 per cent during the previous government.
The net debt to GDP ratio in June 2008 was 53.1 per cent, which increased to 60.2 per cent in June 2013 when the present government assumed office. During the period from July 2013 to June 2016, the net debt to GDP ratio has remained unchanged at 60.2 per cent, thus showing no further deterioration, which is a clear sign of improved debt sustainability.
At the time of the general election in 2013, Pakistan’s economy was in dire need of stabilisation. Immediately after assuming office, the present government undertook remedial measures and structural reforms in order to stabilise the economy. These measures included broadening the tax base, reduction in untargeted subsidies, building up of FX reserves, restructuring public sector enterprises and reducing the fiscal deficit.
Despite curtailing the fiscal deficit from 8.2 per cent to 4.6 per cent of GDP in three years to June 2016, the present government has been able to enhance federal development spending from Rs348 billion in the fiscal year 2013 to Rs800 billion for fiscal year 2017 in order to give a push to GDP growth, which was recorded at 4.7 per cent for fiscal year 2016, an eight-year high.
Deficits
The Finance Minister noted that fiscal and current account deficits are inevitable for a developing country. The challenge of good economic management is to keep these two deficits within sustainable limits so that the former would not lead to unbridled growth in public debt while the latter would not lead to external liabilities that cannot be supported by prospective capital flows.
“Pakistan is properly managing its debt. It is convincingly dispelling any notion that the country is at risk with regard to debt obligations in the foreseeable future,” said the Finance Minister.
