A Crisis No Government Can Solve : Pakistan Has Mismanaged Its Debts and Has No Industrial Resilience To Tackle This Forex Crisis
Rajiv Upadhyay
Pakistan’s total external debt is $126 billion with exports of around thirty billion and remittances of thirty billion .. Its annual imports are $65 billion and GDP is around $ 350 billion. The debt is not unmanageable as many countries are having higher debt to GDP ratio. But Pakistan has a lot of high interest short term debt like 30 years Euro bonds at 8.87 % interest rate compared to 1 % interest rate of Paris Club debt .
Shortage of foreign exchange has created a raw material crisis and its 110 textile mills have closed thus reducing its exports further. Similarly shortage of fertiliser has reduced its agricultural production thus forcing import of wheat . The floods have caused further devastation . But Army is still dominating and has forced a wage increase of fifteen and 19% increase in defence budget . In spite of being the biggest landowner it even wants 40000 acres of more land for cooperative farming and wants to try its former boss Prime Minister Imran Khan in army courts ! But the army ,as usual, is clueless on how to improve the economy and as an irresponsible back seat driver , has thrown political leadership to wolves blaming them for mishandling the economy !
Yet the same Pakistan was stable and progressing very well till army decided to de stablise the Nawaz Sharif government in 2014 and 2017 for not giving extension to the then COAS Gen Raheel Sharif and befriending India without its permission !
Now every one is clueless on how to solve the problem !
Problem can still be solved but no one is telling the culprit army and the public that if the crisis is not resolved urgently Pakistan will face a civil revolution or break due to increasing poverty.
So an ill informed population is waiting for a miracle cure by divine intervention but alas ‘ God helps those who help themselves’ .
Pakistan’s flawed external debt policy : Economic Times
Story by Dipanjan Roy Chaudhury • 8h ago
Pakistan’s flawed external debt policy© Provided by The Economic Times
Pakistan’s precarious forex currency crisis had entered a crucial stage as IMF’s assistance under Extended Fund Facility (EFF) was not released due to Islamabad’s failure to comply with conditionalities by June 30. However, the IMF has reached an agreement with Pakistan on policies to be supported by a Stand-By Arrangement (SBA) in providing USD 3 billion, the last minute rescue package for Islamabad’s acute balance of payment crisis. According to major global credit rating agencies Islamabad would be compelled to default on external borrowings without the IMF assistance. Surprisingly, Pak forex reserves are now below USD 3.5 billion, hardly sufficient for less than a month’s requirement for even essential imports.
It is a pertinent question to enquire whether Pakistan’s external debt of USD 126.3 billion (by the end of December 2022) is unsustainable against the size of the economy of USD 350 billion. In fact, it is not the quantum of external debt that is a problem, but a flawed debt policy being pursued since long. There are many countries whose external debt to GDP ratio is much higher than Pakistan but are running smoothly. Islamabad is facing the threat of economic collapse mainly due to external borrowing because it borrowed through short term instruments that too on high interest rates.
Islamabad relied on commercial short term borrowings which come with higher interest rates. Some of these loans are benchmarked against LIBOR (London International Bank Offered Rate) and in case of Chinese commercial loans, the rate is backed against SHIBOR (Shanghai International Bank Offered Rate). These loans are repaid in a year or at the best within three years. It is clear from the fact that the 6-month LIBOR rate approximately doubled to 5.67% from 2.84% a year ago.
Therefore, 77% of Pak’s external debt and liabilities (USD 97.5 billion) which is directly owed by the Pak Government to various creditors do not matter as much as short term borrowings as far as the debt crisis is concerned. They carry long repayment tenures of 18 to 30 years for repayments with interest rate of less than 1%. For example, Pakistan owes around USD 8.5 billion to Paris Club which is scheduled to be paid over 40 years with interest rate of less than 1%. Most of these debts are owed to 22 major creditors like the US, France, Germany and Japan. The actual flaw in Pakistan’s debt policy is a lure for mobilizing short term loans rather than focusing on domestic revenue mobilisation.
What really pulls Pakistan into crisis is its private debts and commercial loans. Islamabad’s Euro bonds and global Sukuk bonds amounting to over USD 7.8 billion carries a higher interest rate. For example, last year Pakistan raised USD 2 billion from Euro bonds with the interest ranging from 6% for five years, 8.87% for a 30 years period. The debt policy of Pakistan is marked by both lack of restraint as well as short-sightedness.
The other is foreign commercial loans which are affecting Pak’s forex reserve position. According to analysts, Pakistan’s foreign commercial loans are expected to reach USD 9 billion by the end of June 23. Much of these commercial loans are owed to Chinese financial institutions. For example, Pakistan recently obtained a commercial loan of USD 2.2 million from China Development Bank at six months SHIBOR rate+1.5% for a period of three years. Pakistan’s policy makers relied on quick fixes for meeting their financial gaps rather than finding a sustainable solution.
It is estimated that Pakistan’s large external debt and servicing liabilities would create considerable repayment pressure at least till June 2026. The repayment of USD 77.5 billion during the period for a USD 350 billion economy is a hefty burden. On the top of it, the major repayments are due mainly to Chinese financial institutions, private creditors and Saudi Arabia in the next three years. Pakistani authorities are hoping to convince these friendly countries to refinance and rollover all these debts. However, the rollover of Chinese debt also involves higher cost as most of them are commercial loans with high interest rates.
The next fiscal year (2023-24) will be more challenging with debt servicing expected to rise to nearly USD 25 billion. It includes USD 15 billion of short- term loans (including USD 4 billion Chinese SAFE deposits) and USD 7 billion in long-term debt (including USD 1billion repayment on Eurobond). Separately, Pakistan will need to repay another USD 1.1 billion of long-term commercial loans to Chinese banks.
Many analysts point out that Pakistan is facing a forex crisis because it failed to industrialise its economy and reap the benefits of Industrial Revolution 4.0 (IR 4.0). When the global and South Asian region are witnessing significant progress in industrialization and diversification based on emerging technology, Pakistan ignored it and engaged in revenge politics and economic
mismanagement. While the whole world is sweeping with IR 4.0, Pakistan is simply projecting its geopolitical ability in terms limiting it to geo strategic location. Islamabad missed the bus of industrial revolution, which could have contributed much to its exports and employment. Ironically, Islamabad is struggling instead with de-industrialization due to several structural bottlenecks and reliance on imports of finished products. One of the major factors in missing the bus is lack of investment in R&D. In 2022, the five major economies of the world, namely the US, China, the EU, India and Japan, continued to upscale their R&D expenses in cutting-edge technologies. Instead, Islamabad is fighting with terrorism, which has had a drastic negative impact on economic performance. Money was not invested in R&D and capital development including human capital. Industrial development in Pakistan has been declining for the second consecutive year, having registered a negative growth of (-) 2.94% (provisional) during the current financial year. Further, industrial production index growth recorded in February 2023 was (-) 11.6%.
Pakistan is ranked as one of the lowest in the world in factory output, at 82 among 152 countries (CIP-competitive industrial performance index), lagging behind in the region including Bangladesh, Sri Lanka, Indonesia, and Vietnam. Industrial productivity for Pakistan also remains one of the lowest in the world. The UNIDO Industrial Development Report 2022 recommends that Pakistan adopts new approaches to industrial policies, adopting sustainability standards for the production of industrial goods and supporting the digitalization of manufacturing.
The focus of policy makers was non-economic during the last several decades. However, the Covid-19 and following the Russia-Ukraine crisis changed the entire scenario, hurting fundamentals of the economy. It is very hard for fragile economies like Pakistan to weather the new challenges. Can Pakistan overcome the crisis is a big question. In the case of Sri Lanka, at least it has a good amount of natural resources and vibrant tourism which is helping in economic revival.
Can the consumption-led importing economy of Pakistan recover from the present catastrophic circumstances? It is a big question. Because the IMF assistance is a short term breather to help overcome forex crisis shortages. The real crisis in Pakistan is its inefficient and un-diversified industrial sector, lack of infrastructure, energy and water shortages, poor human capital and lack of up-skilling programmes.
