Debt re­pay­ment

The Pak Banker - - FRONT PAGE -

Ac­cord­ing to the State Bank of Pak­istan, ex­ter­nal debt pay­ment (in­clu­sive of prin­ci­pal due) was es­ti­mated at 4.969 bil­lion dol­lars dur­ing the first nine months of the cur­rent fis­cal year 2017-18. This fig­ure does not ob­vi­ously re­flect the en­tire year's fig­ure, but a merely 66 per­cent of the pe­riod, and with fi­nanc­ing needs ris­ing due to de­ci­sions taken by the PML-N gov­ern­ment whose ten­ure ex­pires one month be­fore the end of the fis­cal year. With rev­enue pro­jec­tions for the last two months grossly over­stated, it is likely that more loans, in­ter­na­tional and do­mes­tic, may have to be in­curred in the com­ing months.

Pak­istan is cur­rently not on an In­ter­na­tional Mon­e­tary Fund pro­gramme and there­fore it is highly un­likely that mul­ti­lat­er­als would ex­tend pro­gramme loans/bud­get sup­port at lower rates than avail­able on the mar­ket. This would im­ply that the the care­taker gov­ern­ment may be com­pelled to bor­row from for­eign com­mer­cial banks - a source that was un­wisely in­creas­ingly tapped by the PML-N gov­ern­ment, at rates that are close to 12 per­cent with an ex­tremely short amor­ti­za­tion pe­riod that may fur­ther com­pro­mise the flex­i­bil­ity to un­der­take pol­icy re­forms by the next elected gov­ern­ment.

It may be added here that 2.5 bil­lion dol­lars re­pay­ment on ex­ter­nal debt is due next month. For­eign exchange re­serves on 11 May 2018 were es­ti­mated at 10.79 bil­lion dol­lars as per the SBP web­site which would de­cline to 8.9 bil­lion dol­lars once the 2.5 bil­lion dol­lar pay­ment is cleared and bar­ring higher ex­ports rel­a­tive to im­ports (again highly likely) Pak­istan would have re­serves to meet less than two months of im­ports. Would these re­serves be suf­fi­cient to pro­vide a buf­fer against shocks to the econ­omy? The IMF un­der­took a sur­vey re­cently in which it ar­gued that tra­di­tional 'rules of thumb' that have been used to guide re­serve ad­e­quacy sug­gest that coun­tries should hold re­serves cov­er­ing 100 per­cent of short-term debt or the equiv­a­lent of 3 months worth of im­ports. It also said that there is a need to use "risk-weighted met­ric capital stock used to as­sess bank needs cov­er­ing po­ten­tial vul­ner­a­bil­i­ties from fall­ing ex­port in­come, sud­den stop in short-term debt in­flows, out­flows from other debt and equity li­a­bil­i­ties".

It is rel­e­vant to note that the for­eign exchange re­serve sit­u­a­tion has de­te­ri­o­rated dur­ing the cur­rent fis­cal year. On 17 Septem­ber 2017, to­tal re­serves were es­ti­mated at 13.8 bil­lion dol­lars which de­clined to 13.4 bil­lion dol­lars by 17 Oc­to­ber 2017. By 6 April 2018, re­serves had de­clined to 11.4 bil­lion dol­lars and by 11 May 2018 there was a fur­ther de­cline to 10.79 bil­lion dol­lars. The gov­ern­ment mulled over a 28 bil­lion ru­pee ex­port pack­age as a means to strengthen ex­ports but it must be borne in mind that the 180 bil­lion ru­pee ex­port pack­age an­nounced in Jan­uary 2017 failed to raise ex­ports, while im­ports con­tin­ued to grow widen­ing the trade gap.

The SBP's fig­ures re­veal that the gov­ern­ment bor­rowed 2 tril­lion ru­pees dur­ing the first 10 months of the cur­rent fis­cal year rais­ing the to­tal do­mes­tic debt to 16 tril­lion ru­pees - al­ready higher than 15.4 tril­lion ru­pees es­ti­mated in the Eco­nomic Sur­vey 2017-18. This would fur­ther con­strain the next gov­ern­ment if it opts to go back on an IMF pro­gramme as its stan­dard con­di­tion­al­ity is to bring bor­row­ing from the SBP to zero. All in all, it is im­per­a­tive that the next gov­ern­ment con­sult all the ma­jor main­stream par­ties and form a con­sen­sus on how to deal with the debt left be­hind by the PML-N gov­ern­ment and how much, if any, to bor­row to bal­ance the books by end June 2018.

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