Pakistan's Debt Crisis: Fact or Fiction?

Pakistan is taking on significant amounts of domestic and foreign debt to finance its budget deficits and to support major energy and infrastructure development projects as part of China-Pakistan Economic Corridor (CPEC).  Over one-third of this public debt is external debt denominated in US dollars, Euros and other hard currencies. At the same time, Pakistan's exports have declined over the last several years and the country's current account deficits have grown.

Critics Warnings: 

Critics believe that Pakistan is facing a severe debt crisis. They fear that it could get caught in a big debt trap laid by foreign governments. They warn that Pakistan will go broke. It will be unable to repay these mounting debts. Are they right? To answer this question, Dr. Ishrat Husain, a former central banker and governor of the State Bank of Pakistan, has analyzed Pakistan's debt as of June 30, 2017. Here are some of his key findings:
Pakistan Public Debt-to-GDP Trend. Source: Dr. Ishrat Husain
Total Public and Private Debt:

Pakistan’s total debt and liabilities (TDL) consist of public debt and private debt. Total stock of outstanding debt and liabilities on June 30, 2017 stood at 79% of gross domestic product (GDP). Of this, Gross Public Debt accounted for 85% of the total outstanding or 67.2% of GDP. The remaining 15% is the private debt mostly to borrowers outside the country, for which the government has no fiscal obligation, but the SBP has to provide foreign exchange to service this debt. Within the gross public debt, the government’s share was predominant – almost 92% while the balance was owed by the public enterprises but guaranteed by the government. Borrowing from IMF is also included in gross public debt, although it is a liability of the SBP.

As of June, 2017, Pakistan's total public debt-to-gdp ratio is 67.2%, up from 59% in 2008 and 64% in 2013, according to an analysis by Dr. Ishrat Husain, former governor of the State Bank of Pakistan.  The external debt-to-gdp ratio is 20.7%, down from 28.8% in 2008 and 21.3% in 2013.  Pakistan's external debt to foreign exchange earnings ratio has shot up to 161.9% from 123.9% in 2008 and 121.3% in 2013.
Total Debt Service as Percentage of GDP. Source: Dr. Ishrat Husain

Debt to GDP Ratio:

Public External Debt is lower in 2017 i.e. 20.7% of GDP while it was 27.1% in 2008 and 21.4% in 2013. About 93 pct of the public external debt falls under the category of Medium and Long term while 7% under the short term. Therefore the risk appetite for further short term borrowing to tide over payment difficulties cannot be ruled out as the short term public external debt to SBP reserves ratio is 5.5%. Concessional loans still form more than half of the outstanding stock and commercial loans account for only 1.6 percent of the total.

Debt Service Share of Government Revenue. Source: Dr. Ishrat Husain
Debt Servicing as Percent of GDP:

Pakistan's current debt servicing requires 5.9% of GDP. It is down from 6% in 2008 and 6.9% in 2013.  These percentages are by no means alarming. However, the external debt service component to be repaid in US dollars is of concern because of declining foreign currency earnings.

External Debt Repayment: 

A major setback has been caused by stagnation in foreign exchange earnings due to a $ 4 billion drop in export receipts since 2013 .This has raised the EDL (external debt and liabilities) to FEE (foreign exchange earnings) ratio from 121 to 162 in 2017 . There has been some growth in exports in last few months but the pace is unspectacular to make a dent. The other element which is picking up is Foreign Direct Investment but that also won’t be able to lower this ratio significantly. On the fiscal side, almost 24% of government revenues were pre-empted by payments of interest and foreign loan repayments . The average interest rate is down to 6.3 percent with domestic debt being relatively expensive at 8.2 percent.
External Debt as Percentage of Foreign Exchange Earnings. Source: Dr. Ishrat Husain


As of June, 2017, Pakistan's total debt-to-gdp ratio is 67.2%, up from 59% in 2008 and 64% in 2013, according to an analysis by Dr. Ishrat Husain, former governor of the State Bank of Pakistan.  The external debt-to-gdp ratio is 20.7%, down from 28.8% in 2008 and 21.3% in 2013. Pakistan's current debt servicing requires 5.9% of GDP. It is down from 6% in 2008 and 6.9% in 2013.  These percentages are by no means alarming. However, the external debt service component to be repaid in US dollars is of concern because of declining foreign currency earnings.  Pakistan's external debt to foreign exchange earnings ratio has shot up to 161.9% from 123.9% in 2008 and 121.3% in 2013. Of these, the critics are absolutely right about the last one---the ratio of external debt to foreign exchange earnings. Pakistan has to heed their warnings and urgently address its declining exports and rising current account deficits to avoid the potential external debt trap.

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Riaz Haq said…
Economist Magazine: "Just 1% of the vast #Thar #coal reserve discovered in 1992 could supply a fifth of #Pakistan's current #electricity generation for half a century" #CPEC #energy #infrastructure

PAKISTAN’s enormous mineral wealth has long lain untapped. Since a 1992 geological survey spotted one of the world’s largest coal reserves in Thar, a scrubby desert in the southern province of Sindh, prospectors have hardly dug up a lump. Among those to flounder is a national hero. Samar Mubarakmand, feted for his role in Pakistan’s nuclear-weapons programme, has just shut the coal-gasification company he founded in 2010, when he vowed on live television to crack Thar.


To such qualms, the government offers three rejoinders. First, severe power shortages have long blighted the nation, and renewable sources cannot offer the daylong, year-round power it needs. Second, coal accounts for less than 1% of current generation, compared with 70% in neighbouring India and China. And third, domestic coal would allow the country to forgo expensive imports of the fuel for newly built power stations, a drain on fast-dwindling foreign-exchange reserves.


Eight years ago Engro bought the rights to one of Thar’s 13 blocks, containing 1% of the reserve (more than enough given the gargantuan size of the mine). To work on extraction, it formed the country’s biggest ever public-private partnership, the Sindh Engro Coal Mining Company (SECMC), in which Engro digs and the state provides infrastructure. Relying on the state can break strong firms. Engro itself almost went bankrupt in 2012 after the government refused to honour a sovereign guarantee to provide gas to one of its fertiliser plants. Yet without similar government support, no other Thar block-owners have secured financing, leaving Engro’s diggers, which began work last year, to move ahead.

The endeavour benefits from being in the group of infrastructure projects that make up the $62bn China Pakistan Economic Corridor, a hoped-for trade route. Western banks shook their heads when approached about a coal project, so Engro has relied on Chinese financing. Analysts note an irony in China’s promotion of coal abroad as it withdraws from the fuel at home. Handling the extraction at Thar is the China Machinery Engineering Corporation, a state-owned firm with expertise beyond Pakistan’s reach.

Around 126 metres below the sands of Thar, with just 20 more to go, Engro’s diggers can now almost touch their prize. When the coal is reached, as is expected in mid-2018, it will feed a pit-mouth power station constructed by Engro, and, in time, three others owned by partners in the SECMC. These stations will furnish around a fifth of the country’s electricity for the next 50 years. The financial rewards could be vast. “All my richest friends are jumping up and down [because they did not get there first]”, says the boss of one big multinational construction business.

Hurdles remain, not least complaints from nearby villagers about the disposal of the vast quantities of wastewater from the mine on their ancestral grazing lands in the form of a reservoir. In reply, Engro stresses its social work in the surrounding district of Tharparkar, the poorest in Sindh, which includes the construction of several free schools. More self-interestedly, it is training locals to drive so they can man the dump trucks that trundle day and night around the mine. According to Shamsuddin Shaikh, chief executive of Engro Powergen, the conglomerate’s energy division, Engro also has its sights on Reko Diq, a gargantuan and long-stalled copper mine in Balochistan, the least developed of Pakistan’s provinces. To tap one of the country’s two largest and most niggardly mines is hard enough. Imagine cracking them both.

Riaz Haq said…
Credit take-off, remittances set to lift Pakistan economy
M. Aftab
Filed on February 24, 2018 | Last updated on February 24, 2018 at 06.43 pm

Rising credit off-take of commercial banks indicates a significant growth of the economy, while a major campaign has been launched to ensure a fast track service for home remittances. This is confirmed in the Banks Lending Survey (BLS) just unveiled by State Bank of Pakistan (SBP), the central bank. The survey conducted during second quarter of financial year 2017-18.


SBP's 'good-business' report said after receiving the feedback from senior bankers of 18 banks, the central bank identifies two main factors supporting the expansion in the credit demand. These factors include 'the need of firms for building up their inventories and working capital' and 'improved economic conditions'.

"Increase in fixed investment and seasonal increase in credit demand are two other factors," it further said.

The overseas Pakistanis sent home $11.4 billion remittances during the first 7 months of 2017-18, the SBP reported.

The inflow was 3.55 per cent higher than the like period of 2016-17. The SBP data showed that the inflow was significantly high from US, UK and EU. The remittances from Saudi Arabia at $2.914 billion were the highest, followed by the UAE with $2.512 billion and rest of the GCC countries with $1.314 billion. The remittances from UK totalled $1.585 billion followed by US $1.504 billion and EU $371 million.

In order to help the overseas Pakistani and their families back home, the government of Pakistan and the Sate Bank of Pakistan are pushing the commercial banks to reduce their handling charges to encourage the remittances inflow.

"We are urging all the commercial banks to improve their system for timely payments of remittances into the accounts of recipients," said Jamil Ahmed, deputy governor of SBP.

"We are doing our best to encourage the overseas Pakistanis so that they can transfer their money through official channels instead of 'hundi' and 'hawala'," he added.

Jamil made these remarks at the launch of a documentary film called 'hundi to kundi lagao' (Lock up the hundi), prepared by National Bank of Pakistan. It was a part of the bank's awareness campaign to encourage overseas Pakistanis to use official banking channels for remittances.

Jamil advised the bankers to use social media for marketing services. He said the amount sent by overseas Pakistanis through official channels rose 16 per cent between 2009 and 2017, making Pakistan. It is indeed heartening to note that the focused efforts of all stakeholders resulted in an increase of 13.2 per cent during the first two months of 2017-18 as against a fall of 3.1 per cent in 2016-17.

"Now there is a need to maintain this momentum and a positive growth trajectory in the coming months," he said, adding that the "focused area of inflow of remittances are the UAE, Saudi Arabia and other Gulf countries, which contribute 87 per cent to the remittances we receive."

Seed Ahmed, president of National Bank of Pakistan, speaking on the occasion said Pakistan is facing the challenge of balance of payment deficit and to meet this challenge the remittances play an important role.

"Inflow of remittances can be much improved if banks adopt the system of the fastest payment of remittances to the recipients," he said, adding that the idea behind making this movie is to urge the people that whatever money is coming into Pakistan, it should be routed through legal channels.

"Banks will serve the customers with an exceptional efficiency."

The banking industry is now doing its utmost to help the overseas Pakistanis with transfer of their remittances through fast track legal channels. That is a good news.
Riaz Haq said…
Pakistan's foreign exchange position stable: spokesman

Clarifying a news item titled “Pakistan’s net reserves stand a minus $724 million” published in a section of press, the spokesman said the story was based on the recently published Post Programme Monitoring (PPM) report by the International Monetary Fund (IMF).

He said,” The Net International Reserves (NIR) position reflects foreign currency assets of the Central Bank as against its liabilities.” The story was comparing spot position of foreign exchange reserves with long term liabilities of the State Bank, which was not a good comparison as liabilities were to be retired gradually over a period of five to ten years time and not immediately in one instalment, he added.

He said the IMF loan for instance was to be repaid by the year 2026 meaning approximately $800 million repayment a year starting from 2018.

It was also pertinent to mention that when present government took charge in 2013, Pakistan’s NIR was negative $ 2.5 billion, he added.

He said the decrease in foreign exchange reserves were mainly due to current account deficit of which imports were the main component. Imports had shown unprecedented increase during 2016-17, while exports were declined.

The spokesman further said the negative trend in exports had bottomed out and the government initiatives had shown positive result as exports had increased by about 12 percent workers’ remittances improved by 3.4 percent during July-February, 2017-18 and the Foreign Direct Investment (FDI) also posted strong growth of 15.6 percent during July-Feb, FY2018 over last year.

He said while the current account deficit which had seen expansion above 210 percent in July of current fiscal year had now been started contracted as during Jul-Jan FY2018 it had been contained at 48 percent. With these positive trends strengthening, incoming months the current account deficit will improve in FY18, the spokesman said.

He added that the writers, in fact, had ignored the positive side of Fund’s assessment and had focused only on interpreting the potential challenges to the economy highlighted by the Fund.

He said the IMF had also endorsed the positive and favourable outlook for economic growth, with real GDP estimated to grow at 5.6 percent in 2017/18 within favourable inflation environment. The Fund had mentioned that the economic growth had continued to strengthen supported by improved energy supply, investment related to the China-Pakistan Economic Corridor, strong credit growth, and continued investor and consumer confidence.

The spokesman said it was important to share some positive trend of the economy during the current fiscal year. The government had been able to achieve fiscal consolidation without compromising development expenditures as fiscal deficit had been contained at 2.2 percent of GDP during first half of current fiscal year against 2.5 percent in the same period of FY2017.

He said PSDP expenditures increased to Rs.733 billion during FY2017 over last year and this year the allocation was Rs.1 trillion. FBR tax collection continued to show impressive growth above 17 percent during July- February, FY2018 while inflation had been contained at 3.84 percent during July-Feb, FY2018 against 3.90 percent in the same period of FY2017. LSM had shown impressive broad-based growth of 6.33 percent during July-Jan,FY2018 compared to 3.59 percent of last year.

FDI after witnessing a subdued growth during last two months of CFY2018 had improved in February 2018 by 235 percent over January 2018, and by 15.6 percent during July-Feb, FY2018, he added.
Riaz Haq said…
Adviser to the Prime Minister on Finance Miftah Ismail, Thursday, said that Pakistan’s net debt has increased from 60.2 per cent to 61.4 per cent while liquid forex reserves have declined by $4.5 billion.

Miftah Ismail said net debt has increased from 60.2 per cent to 61.4 per cent, while the external debt has decreased from 21.4 per cent of Gross Domestic Product (GDP) to 20.5 per cent of the GDP during FY17-18. He said the government has had to take on external debt to finish projects that the previous governments had taken on and not completed.

On Thursday, the adviser to the Prime Minister on Finance along with the Minister for Planning and Development Ahsan Iqbal revealed the economy’s performance over the fiscal year 2017-18 (FY17-18), a day before the announcement of federal budget FY 2018-19.

According to the Pakistan Economic Survey (PES), the total public debt stood at Rs22.82 trillion by the end of December 2017 and it recorded an increase of Rs1.4 trillion during the first six months of the current fiscal year.

“With the current account deficit widening and not being fully offset by financial inflows, the country’s total liquid forex reserves fell by $4.5 billion during July-March FY17-18,” the PES said.

“Pakistan’s current account deficit contracted by 9.2 per cent on a month-on-month basis in March 2018 and reached $1.16 billion compared to $1.28 billion in February 2018. However, the current account deficit widened by 50.5 per cent and reached $12.03 billion (3.8 per cent of GDP) during July-March FY17-18,” according to the PES.

The PES also said that this was mainly due to 20.7 per cent widening in the trade deficit, amounting to $22.3 billion. The widening of trade deficit is mainly due to a surge in the import bill by 16.6 per cent, reaching $40.6 billion.

About fiscal position, PES said that total revenues grew by 19.8 per cent to reach Rs2.38 trillion (6.9 per cent of the GDP) during July-December, FY17-18 against Rs1.99 trillion (6.2 per cent of the GDP) in the same period last fiscal year.

“The impressive performance both in tax and non-tax revenues is attributed to a significant rise in total revenues. During the first nine months of the current fiscal year, the Federal Bureau of Revenue has been able to collect around Rs2.63 trillion against Rs2.27 trillion during the same period of FY16-17, posting growth of 15.8 per cent,” according to the survey.

“Total expenditure increased by 14 per cent during July-December, FY17-18 and stood at Rs3.18 trillion (9.2 per cent of GDP) against Rs2.79 trillion (8.7 per cent of GDP) in the same period of FY16-17. Within total expenditure, development spending (excluding net lending) increased sharply and were recorded at 23.4 per cent to reach Rs613.8 billion during July-December FY17-18 as compared to Rs497.4 billion in the comparable period of FY16-17,” the PES said.

The fiscal deficit in the first six months of FY17-18 was restricted to 2.3 per cent of the GDP compared to 2.5 per cent during the corresponding period last year due to strong growth in revenues relative to expenditures, according to the PES 17-18.

Speaking on the occasion, Minister for Planning and Development Ahsan Iqbal said the current fiscal year has seen continued exports growth in all nine months as the exports increased by 12 per cent while imports have slowed down to 16.6 per cent as compared to 48 per cent at the start of the current financial year.

The PES said that exports from July-March in FY17-18 had reached $17.1 billion, compared to $15.1 billion in the corresponding period last year, registering 13.1 per cent growth.

Imports grew 15.7 per cent during the same period, rising from $38.37 billion in FY16-17 to $44.38 billion this year, registering an increase of $6.01 billion in absolute terms, the PES said.
Riaz Haq said…
From Express Tribune:

“Every statistic has improved and we have managed to increase gross domestic product growth rate and at the same time contained the budget deficit and inflation,” said Ismail. Pakistan’s economy expanded to $313 billion, the highest in history.


Ismail admitted problems on the external front and expressed the hope that the recent two devaluations of the rupee against the US dollar would help narrow down the widening current account deficit. He said that the government did not want to curtail imports but was trying to bridge this gap by increasing exports and remittances.


Investment and savings

The investment-to-GDP ratio stood at 16.4% against the five-year target of 22.8%. This ratio was slightly better than last year’s revised rate of 16.1%. Savings slipped below last year’s level of 12% and stood at 11.4% of GDP, far below the five-year target of 21.3% of GDP.

Fixed investment remained at 14.8%. Public investment increased to 5% of GDP, which was better than the previous year. The target of private investment was also missed by a wide margin, which stood at 9.8% of GDP against the five-year target of 16.7%. Results for private investment are worse than last year when they had been estimated at 10%.

GDP growth

The PML-N government claimed to achieve an economic growth rate of 5.8% in its last year in power that is the highest over the past 13 years. But it is significantly lower than the 7% target the incumbent government wanted to achieve when it came to power in 2013.

However, the current growth rate is decent enough to give a political advantage to the ruling party in the upcoming general elections.

In 2012-13, which was the last year of the PPP tenure, the economic growth rate was 3.7%.

Just under than two-thirds of growth — 66.4% to be precise — came from the services sector, which performed slightly better than the expectations. The government achieved growth targets for services and agriculture sectors but missed the industrial sector growth target again.

Despite a better economic performance, the growth rate was still insufficient to absorb the youth bulge — Any pace of growth below 7% rate would increase unemployment.
Riaz Haq said…
Pakistan’s external debt soars to record $91.8b
By Shahbaz Rana /

Pakistan’s external debt and liabilities have soared to a record $91.8 billion, showing an increase of over 50% or nearly $31 billion in the past four years and nine months, the State Bank of Pakistan (SBP) has reported.

The external debt and liabilities of $91.8 billion as of March-end suggest that the figure may touch $100 billion very soon as the country faces grave challenges in meeting growing external financing requirements. Pakistan is scheduled to make some bullet debt and interest payments in the last quarter (April-June) of the current fiscal year, according to sources in the finance ministry.

The $91.8-billion external debt and liabilities were higher by $30.9 billion or 50.6% compared to the level recorded in June 2013 when the Pakistan Muslim League-Nawaz (PML-N) government came to power.

Of the total external debt and liabilities, the government’s public debt obligations including foreign exchange liabilities were $76.1 billion at the end of March.

In the past four years and nine months, the public debt-related obligations increased 42.5% or $22.7 billion, showed the central bank data. In June 2013, the external public debt including foreign exchange liabilities stood at only $53.4 billion.

A major hike came in the external debt contracted by issuing sovereign bonds and taking expensive commercial loans.

Since June 2013, the PML-N government has acquired a whopping $42.6 billion in external loans, which is taking its toll on the national exchequer due to the mounting debt servicing cost.

Starting from July 2013, with every passing year, the quantum of external debt has kept growing due to the government’s inability to implement policies that could have ensured sufficient non-debt creating inflows.

The International Monetary Fund (IMF)’s first post-programme monitoring report shows Pakistan’s gross external debt in terms of exports was 193.2% in 2013, which is projected to deteriorate to an alarming 316% in June this year.

During this period, Pakistan’s gross external financing requirements have swelled from $17.2 billion to $24 billion.

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