Commercial loans
It is a matter of concern that the government continues to borrow heavily from the commercial banks. Data released by the Economic Affairs Division (EAD) shows that the untenable policy of borrowing from the foreign commercial banking sector is continuing even after Ishaq Dar became non-functional as the country's finance minister following the Panama Papers probe. This policy is untenable because it is at a high rate of return and the amortization period is very short thereby making this source of funding economically very costly for any state. This is particularly so for an economy like Pakistan that is currently facing several challenges, including a deteriorating current account balance, eroding foreign exchange reserves and a growth rate that remains hostage to the government's sustained heavy reliance on expensive foreign and domestic borrowing that, in turn, is raising debt servicing and repayment of loans as and when due - a component of current non-development expenditure.
Pakistan, as per EAD, signed 1.172 billion dollar short-term loan agreements with commercial banking sector abroad during the first four months of the current fiscal year (July-October), against the one billion dollars budgeted from this source for the entire year, with 1.022 billion dollars already credited. If this trend continues, and there is no evidence that the Abbasi government is considering any alternative non-borrowing source for generating funds then total commercial borrowing can be projected at 3 billion dollars by June 2018. However, given that Ishaq Dar procured over 4 billion dollars last fiscal year from foreign commercial banking sector subsequent to the end of the International Monetary Fund programme in September 2016 which led to the cessation of budget support from multilateral development financial institutions due to concerns that the country may not adhere to the reform agenda agreed with the Fund.
Experts project total reliance from this source in excess of 5 to 6 billion dollars in the current fiscal year. The Finance Division recently issued a press statement in which it noted that 1.5 billion dollar sukuk/bonds will be issued again. This too is a source of serious concern for independent economists, for two reasons. First, no mention was made of the rate of return at which the bonds/sukuk would be issued which, unfortunately, is a reflection of the continuing tendency of the PML-N government to be non-transparent in all economic matters, including government-to-government deals.
Miftah Ismail led the Pakistan delegation on road shows in three major financial capitals of the world last week to assess market response. At the same time, reports indicate that the government was considering issuing Eurobond/sukuk valued at from 2 to 3 billion dollars - the sum total of the revenue shortfall projected for the current year. However, this increase in the total value of bonds/sukuk to be issued from earlier estimates to 1.5 billion dollars shows that with political uncertainty at its peak, subsequent to Nawaz Sharif's disqualification and serious criminal references filed against Dar, the rate of return would have to be much higher than even the higher than the market rate offered by Dar in 2014 of 8.5 percent for a 10-year Eurobond and a 7.5 percent for a five-year Eurobond.
These are extremely disturbing decisions being taken by the Abbasi administration and one can only hope that parliament plays its due role in checking this ever-rising reliance on borrowing that is essentially not economically sustainable. Instead, the government should tap other non-debt creating financial instruments to get out of the debt trap.