Pakistan National Debt and How Pakistan Economy can Avoid Sovereign Default
By: Irfan Karim
Introduction
Pakistan Economy has been a subject of intense discussion both internally and on international forums. Being a developing country, Pakistan has been endeavoring for development of infrastructure, industry, agriculture and governance framework for the last 7 decades. The country has piled up large internal and external debt in pursuit of its economic goals. Servicing of national debt has now created new challenges, particularly on the external front, which had led to debate on sovereign default. Amid this scenario, this article discusses how Pakistan economy still remains viable to avoid default, along-with highlighting ways and means to achieve stability in debt servicing. Debt profile of Pakistan and trends under various time bands during the last fifteen years have also been elaborated.
A Background of peculiar Socio-Economic Model
Pakistan’s strategic geographic position, with fast developing neighboring economies of China, India along-with tumultuous Afghanistan in its neighborhood sensitize the need for a stable Pakistan economy. Consistent growth is inevitable for fast growing population and to maintain regional balance.
Pakistan’s economy has to feed its large population of over 225 million; plus Afghanistan largely depends on Pakistan’s trade routes for procuring essential goods and food items for its people. While Pakistan is struggling to service its own import bills, it also has to arrange foreign exchange for payments of Afghan transit trade. Smuggling on porous western borders puts further pressure on foreign exchange and revenue streams.
Post world war II, the developing countries, particularly in Asia and Eastern Europe adopted a growth strategy to improve their socio-economic culture. Pakistan also put its efforts to achieve progress and development. For this purpose, it depended heavily on domestic and external debts. However, later down the road, the way to prosperity was hindered due to a number of reasons (mentioned below), while the governments’ reliance on loans and development assistance continued unabated.
Why default scenario hovers time and again
Inconsistent growth in GDP and inability to enhance exportable surplus led to increased vulnerability of debt servicing. This situation aggravated in post-Covid slow-down of economy, leading to threats to external loan servicing in 2022. However, Pakistan’s top priority is to divert maximum resources to service the heavy debt burden.
Pakistan National Debt, in comparative time scale has remained as below:
Table –I
Trend of Total Debt and Liabilities of Pakistan (including domestic and external)
Financial Year | Exchange Rate: PKR per USD | Period-end Volume of Debt and Liabilities, domestic and external | |
Amount in billion PKR (& equivalent for external loans) |
Annual Average Growth Rate | ||
2008 | 70 | 6,690 |
|
2008 to 2013 | 99 | 16,338 | 29% per annum |
2013 to 2018 | 121 | 28,253 | 15% per annum |
2018 to 2020 | 168 | 42,000 | 24% per annum |
2020 to 2022 | 204 | 59,697 | 21% per annum |
Note: The growth rate of last two rows2020 and 2022 is inclusive of the impact of higher-than-average rise in conversion rate of USD-to-PKR applied on external loans.
Sources: Debt Policy Statement of MOF, Government of Pakistan
https://www.sbp.org.pk/ecodata/Summary.pdf, Topline Research
Here are the few reasons why Pakistan’s development objectives could not achieve the desired pace, despite benefitting from financial programs that created huge debt burden.
Events and Nationalization of 1970s
The decade of 70s was very challenging for Pakistan economy. After-shocks of 1970 war, political in-stability and a mass movement shifted focus away from economic plans. Nationalization of industry and later denationalization impacted adversely on the earlier gains of development. Governance issues and unstable politics of 70s adversely impacted the achievement of development objectives.
War on Terror leading to Less-Productive Debt Financing
War against terrorism in the last two decades created uncertain business environment. Resultant disturbance on the western borders and higher expenditure on peace-keeping could also be attributed as one of the reasons to justify less productive utilization of national debt during this period.
Non-compliance of Fiscal Responsibility and Debt Limitation Act 2005
Debt is not always a bad proposition to achieve development. However, good governance requires that loans should be utilized for productive purposes with strong plans of resource generation for timely repayments. The Parliament of Pakistan has enacted an act called ‘Fiscal Responsibility and Debt Limitation Act 2005’ whereby governments are bound to remain within maximum limit on sovereign debt. This limit is linked GDP, meaning thereby that higher loans are allowed in line with country’s ability to achieve higher GDP growth.
The Act allowed a maximum Loan-to-GDP ratio of 70%. However, against this permissible limit, the ratio had often touched at non-compliant level.
While total debt has increased (Ref Table I), growth in productive resources and GDP over this period remained under-par, resulting in high-debt-to-GDP ratio.
A comparison with other countries in the region looks like as follows:
Table –II
Regional Countries’ Debt to GDP Ratio: A Comparison
Country | Loans to GDP Ratio |
Bangladesh | 35% |
Indonesia | 41% |
India | 89% |
Malaysia | 69% |
Souurce: https://countryeconomy.com/national-debt, |
Why Pakistan will not default, Despite the difficulties
Though the debt profile and related numbers speak of a weaker financial capacity going forward, sovereign default is not a likelihood in case of Pakistan economy; why Pakistan remains afloat in debt servicing, here are the options and course of action it could follow:
Short Term Measures to avoid Default
a) Servicing of foreign currency Commercial loans and Bonds
Default discussions were at hype near the repayment date of USD 1.0 billion Sukuk bond ( a commercial loan), due on December 05, 2022. This foreign currency loan was part of foreign currency bonds that Pakistan has issued in international markets on commercial terms.
This liability was serviced timely and efficiently on December 02, 2022 setting aside the default hype, albeit for the time being.
Also read: Why Pakistan Default will Not happen in 2022/23
Pakistan’s liabilities under Bonds and SUKUK raised from international markets comprise of over USD 10 billion. The nearest maturity date of repayment due against USD 1.0 billion Eurobond falls on April 15, 2024, followed by Sept 30, 2025 and onwards.
Commercial loans and bonds carry added sensitivity in terms of their timely repayment. After servicing December 2022 commercial liability, there is no other such repayment obligation in 2023. The obligations of 2023 relate mostly to multilateral or bilateral funding and the country is pursuing strategy to address these under a long term plan (discussed under later section).
b) IMF Revival in Pipeline
Another short term plan relates to IMF Program, which is back on track. Pakistan will adopt the structural reform program and is ready to take suitable measures. After revival of IMF program, the country will be able to raise more deposits and improve its credit rating.
Long Term Measures to Avoid Default
After settling commercial obligations on time and revival of IMF program, long term solution rests with rescheduling of multilateral and bilateral loans. Pakistan should negotiate with Paris Club of bilateral lenders and also focus on Re-arrangement of liabilities owed to China, particularly resulting from China Pakistan Economic Corridor. (CPEC).
According to available IMF data, following is bifurcation of external loans (bilateral, multilateral and commercial) payable in US Dollars over time:
Table –IV
Pakistan’s External Debt Profile
Category of Lenders | Liability Amount (USD billion) |
Loans owed to IMF | 7.4 |
Due against Multilateral Assistance (World Bank, ADB etc.) | 34.3 |
Bilateral Loans, (largely Paris Club countries) | 14.6 |
Bilateral Loans from China | 23.1 |
Due against Bonds, SUKUK, commercial lenders | 10.1 |
Loans from Chinese Banks | 6.7 |
Other Commercial obligations | 2.8 |
Total principal amount | USD 99 billion |
Source: IMF Data, Topline Research
In the above profile, major bilateral lenders to Pakistan are China and Paris Club countries.
For servicing principal installments and interests on account of the above liabilities, Pakistan will need to manage an annual financing gap of around 25 billion per annum during the next few years, while persistent trade deficit will widen this gap further. While country’s foreign exchange inflows are being augmented slowly, long term solution rests only on rescheduling of multilateral and bilateral loans.
a) Rescheduling of External Liabilities
Pakistan is planning to engage Paris Club under the grounds of Covid-19 shocks (2020 to 2022) and devastating floods this year.
China is bigger lender of bilateral loans. Chinese banks have also extended commercial credit under CPEC and others. Pakistan should negotiate with Chines under the framework of shared economic goals and common interests. It is pertinent there that Pakistan and China are partners in CPEC and some of the rising numbers on external front have resulted in the short term due to imports and loans related to CPEC and commercial joint ventures. So there is a ground of common interest between the two countries and sovereign default by Pakistan will not suit to Chinese cross border economic initiatives.
Once IMF current review is finalized (expected in early 2023), World Bank and other Multilateral financiers will also work out for extension of repayment obligations.
b) Reduction of National Debt and Parliament oversight of new Foreign currency Loans
In addition to rescheduling and pushing forward the repayment obligations, a plan to gradually reduce the overall debt load (particularly external obligations) is also required. Following action plans could be implemented through this plan to ease the burden on foreign currency flows.:
- - New Long term foreign currency loans be minimized and instead. short term deposits on bilateral terms be preferred.
- - Any new bilateral or commercial loan of long term duration should be subjected to Parliament oversight/approval for more transparency, collective input and on-boarding of both the government and the government-in-waiting.
- - In this way, the Parliament would also ensure that governments remain within the limits of maximum loan allowed under Financial Responsibility and Debt Limitation Act.
Efforts are needed to bring down the price differential between grey market and interbank rates of Foreign exchange. This equilibrium in exchange rate will encourage to bring foreign exchange proceeds through banking channels and boost country’s reserves. Checks on non-banking channels of foreign currency flows will further enhance the Anti-Money Laundering controls, to which Pakistan is already committed and has taken significant reforms in the last few years.
- c) Debt-to-Equity Swaps
The plan may also consider renegotiation with major financiers of revenue generation projects for conversion of their debt into equity. This conversion may result in minimizing the repayment obligation of principal loan amount.
Side by side, Pakistan economic managers also need to plan long term initiatives of increasing local production and balancing regional trade.
Agriculture
Agriculture has long been denied of its due policy support. Expansion of cities to fertile lands and low productivity is distracting our youth from agrarian development. Agriculture has huge potential to grow. More than 65% of the country's population belongs to Rural Pakistan; modern technology and financial push can enhance yields with creation of new jobs. A robust plan from the political forces is required to promote agri-business with a target of converting import-based food security to an exportable surplus.
Facilitation for local industrial production
Once basic structural adjustments and economic numbers are fixed, Government’s initiative in extending facilitation to industry should be prioritized. Privatization has not progressed since Covid-19 slow down. Provision of electricity at economically viable cost to industry and agriculture, preferred industrial financing for SMEs and specialized export-based sectors can help in sustainable growth and import substitutions, leading to positive flows of much needed foreign exchange in the long run.
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Writer (Irfan Karim) may be approached at irfankarim33@gmail.com
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