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Pakistan’s External & Domestic Debt

February 9, 2017

Pakistan’s Domestic and External Debt have been rising at an alarming pace with Public Debt and Liability hitting Rs 14.54 Trillion and Foreign Debt surpassing USD 74.638 Billion. Finance Minister Isaq Dar in its latest Debt Article has argued that Public External Debt as of June 2016 stood at $ 57.7 Billion.

In is recent article, FM has correctly pointed out that analysts are misinterpreting the Debt figures. It is important to understand that Domestic or Public Debt is a National Debt and is Financial Obligation incurred by all Government bodies of country, which is created by borrowings against Government Paper.

External or Foreign Debt is basically Debt that is owed by the Government to Foreigners. It needs to be paid off, though it can be rolled over as well. When bond becomes due it needs to be replaced with new bond. Here, unlike Private Sector Sovereign Governments cannot get Foreclosed, go Bankrupt and Default. It can only default when Government chose to do so. It is always increased spending that leads to Higher Debt.

But his number too is inaccurate because of time lag and for not providing complete detail about the data for remaining period that has severely impacted the Debt to GDP numbers, which questions the accuracy of his numbers.

According to available SBP Data, out of Total External Debt and Liabilities as of  1st FY17 of USD 74.638 Billion, three entries i.e., Bank Borrowings of USD 1.916 Billion, Private Sector Debt of USD 3.568 Billion and Debt Liabilities to Investors of USD 2.957 Billion is not the part of Total External Debt, which amounts to USD 66.197 Billion.

Since the data provided by FM in his article is 4-month old, it does not include increase of other liabilities or Financial Derivative from USD 1.5 Billion to USD 3 Billion arranged through inter-bank market. It neither includes further borrowings from IMF and other Donor agencies.

Hence, calculation based on SBP’s latest (Feb 03) update of National Summary Data Page the total size of GDP is Rs 29.597 Trillion and by adding latest Domestic Debt plus External Debt (USD Borrowings and Interest for Deficit Financing), total debt figure should be roughly around Rs 22 Trillion, which means DEBT to GDP is around 74 pct.

In last couple of years, despite sharp drop in oil prices that have reduced country’s oil bill by nearly USD 15 Billion Pakistan has been borrowing extensively to bolster its foreign exchange reserves and cover its domestic financing needs.

However, if we look at the history of Total Size of Pakistan Debt, in 1999 it was Rs 2.907 Trillion, in 2008 it was Rs 6.475 Trillion and in 2015 it was Rs 18.467 Trillion.

Similarly, size of interest payment in 1999 was Rs 340 Billion, in 2008 was Rs 642 Billion and in 2015 was Rs 1.284 Trillion, which is likely to surpass Rs 1.5 Trillion annually.

The cause of exorbitantly high Deficit Financing is due to Shortfall in Revenue Collection, Sharp fall in Bank Lending to Corporate Sector because of investments in Government Paper. Bank’s Deposit/Advance that has plunged to around 50 pct from the highs of 74 pct in 2007 confirms my reasoning. Damage is also caused by fall in Exports due to flawed or unhelpful export policy.

According to the Fiscal Responsibility and Debt Limitation Act of 2005 (FRDL), it restrict Pakistan public debt limit up to 60% of GDP that has sharply breached the allocated limit and hence, it is now well beyond desired manageable level for which Parliament is equally responsible for not raising its voice against this serious violation.

Bottom line is that in the absence of future debt payment plan/strategy, habit of constant Domestic and Foreign Borrowings by various elected governments is a very costly and only temporary stop gap arrangement to buy time.

My argument is based on facts and not on assumptions. I do not predict doomsday scenario, but in the absence of Debt Reduction Strategy and faced with Economic Challenges, I cannot dream of Economic Stability and Prosperity, as economic condition will remain brittle and unstable due to rapid increase in debt that leads to financial difficulties or prolong slowdown in GDP growth.

Out history suggest talking of 15 or 20 year vision is a wishful thinking, as in past even the ancient concept of 5-year plan has never worked, as it required working in tandem with global trend and economic growth. Hence, unless supported by Long Term Vision Document defining its objective in boarder term, its mere sweetener to gain prominence.

It is true that large part of debt is domestic and external is a smaller portion. But what worries most is that with the pathetic export growth trend of last 7 years and likely hike in global oil prices in next few years and growing demand for oil at home and Rising Global Interest Rates trend.

In next 5-7 years borrowing cost plus debt payment will sharply surge. Debt will comfortable surpass USD 100 Billion, which means the country will roughly require USD 6-7 Billion to pay interest, as total average cost of borrowings is comfortable above 5 pct, then how are we going to manage our balance of payment? I have not included Principle amount that will mature in between.

I don’t want to dispute governments Medium Term Debt Management Strategy (MTDS). But for record sake, in 2008 Banks Holdings of GOP Securities Rs 2 Trillion, in FY-12 it was Rs 3.364 Trillion and as of now it has surged to Rs 6.477 Trillion.

While, comparatively Bank Deposit in 2008 was Rs 3.8 Trillion against current Rs 10.7 Trillion. Bank Advance was Rs 3.271 Trillion in 2008, which is currently Rs 5.467 Trillion. With little understanding of monetary economics this will surely give readers better understanding about economy and real growth.

Therefore, managing and refining risk is borrowed strategy when global planners came up with the idea of longer maturities instead of short term rollovers to avoid frequent global turbulence that was caused by crisis is Europe.

In short, Long Term Economic and Financial Vision do not carry any weight unless endorsed by Parliament with a commitment that changes can only be applied after obtaining Parliaments vote.

To meet sustainable goal any such vision is also required documentary evidence of draft approval of sub-targets that should include Defence and Internal Security Spending.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

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