Debt li­a­bil­i­ties

The Pak Banker - - EDITORIAL -

By all ac­counts, the coun­try is faced with a wors­en­ing debt sit­u­a­tion. An ev­i­dence of this is IMF's lat­est debt pro­jec­tion for fis­cal 201516 which is higher by $11.6 bil­lion com­pared to the es­ti­mates given in its first re­port in Septem­ber 2013. The IMF had then pro­jected that Pak­istan's ex­ter­nal debt would in­crease to $58.6 bil­lion by 2015-16. But two years later, the agency's 9th re­view re­port es­ti­mates the ex­ter­nal debt at $70.2 bil­lion by the end of the cur­rent fis­cal. In this con­nec­tion it is rel­e­vant to note here that in the last four months the govern­ment bor­rowed $956 mil­lion from the com­mer­cial banks with­out com­pet­i­tive bid­ding to meet its for­eign cur­rency re­serves re­quire­ments. In its Septem­ber 2013 re­port, the IMF had given the coun­try's to­tal pub­lic debt pro­jec­tions un­der ' re­form sce­nario' and ' no re­form' sce­nario. Un­der the re­form sce­nario, the to­tal pub­lic debt-to-GDP ra­tio was to fall to 60.5% by the end of 2015-16. Un­der no re­form sce­nario, the debt-to-GDP ra­tio had been pro­jected at 63.6% by 2015-16. How­ever, the lat­est re­port says that by the end of cur­rent fis­cal year the debt-to-GDP ra­tio will be 65%, which is worse than no re­form sce­nario.

For the next fis­cal year 2016-17, the IMF's pro­jec­tions are $13.2 bil­lion higher than the pro­jec­tions it made in its first re­port. The IMF has now pro­jected the ex­ter­nal debt to grow to $72.1 bil­lion or 63.2% of the GDP. How­ever, th­ese are still lower than the $77.2 bil­lion pro­jec­tions that in­de­pen­dent econ­o­mists are mak­ing for the next fis­cal year. The ris­ing pile of debt not only shows bad man­age­ment but also un­der­scores the need to im­ple­ment re­forms to cur­tail debt. But, in­stead of adopt­ing re­form mea­sures to im­prove the sit­u­a­tion, in its debt pol­icy state­ment for 2015-16 sub­mit­ted to the Na­tional As­sem­bly, the govern­ment has tried to hide the rapid growth of ex­ter­nal debts and li­a­bil­i­ties in com­par­i­son to its for­eign ex­change earn­ings by ex­clud­ing li­a­bil­i­ties. The bor­row­ings un­der China- Pak­istan Eco­nomic Cor­ri­dor and for projects fi­nanced out­side the na­tional de­vel­op­ment bud­get have been ex­cluded from the debt anal­y­sis. By Septem­ber 2015, the ex­ter­nal debt, in­clud­ing li­a­bil­i­ties, stood at $66.5 bil­lion. By ex­clud­ing the li­a­bil­i­ties, the fig­ure has been re­duced to $51.9 bil­lion. The debt anal­y­sis also ex­cludes the av­er­age cost of debt to hide the grow­ing costs due to ex­pen­sive bor­row­ings un­der Eu­robonds and from com­mer­cial banks.

The govern­ment has vi­o­lated the Fis­cal Re­spon­si­bil­ity and Debt Lim­i­ta­tion (FRDL) Act, as it could not bring down debt stocks to sus­tain­able lev­els pre­scribed un­der the law. De­spite ex­clud­ing so many el­e­ments from the to­tal debt, the re­pay­ment ca­pac­ity has fur­ther weak­ened due to an in­crease in debt-to-rev­enue ra­tio. An­other point of con­cern is that the coun­try's abil­ity to spend on de­vel­op­ment has shrunk fur­ther due to in­creased spend­ing on debt ser­vic­ing. The coun­try's av­er­age time to ma­tu­rity of ex­ter­nal debt has also wors­ened, stand­ing at 9.4 years ow­ing to re­liance on short-term loans.

The FRDL Law binds the govern­ment to keep pub­lic debt below 60% of the to­tal size of na­tional econ­omy. The rev­enues should be suf­fi­cient to fi­nance at least cur­rent ex­pen­di­tures - the two most crit­i­cal con­di­tions the govern­ment did not meet again. The pub­lic debt-to-GDP ra­tio was recorded at 63.5% by June last year, which was 3.5% higher than the limit im­posed un­der the FRDL Act. It is high time the govern­ment took steps to im­prove debt man­age­ment and ini­ti­ated re­forms to re­duce the ris­ing debt pile.

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