The Vicious Debt Trap Government Forced to Borrow to Repay Old Debt

ISLAMABAD: With an overall debt of 5.5 trillion dollars, including debt of more than 127 billion dollars, the Pakistani economy remains stuck in a vicious circle. The government is forced to borrow every possible quarter just to meet debt repayment obligations and finance the budget deficit.

Experts believe the government should review and revise its debt management strategy on modern global best practices to boost its currencies and keep the current account deficit at a manageable size.

Pakistan’s debt-to-GDP ratio after rebasing the economy stands at 86%. Previously, it was almost 100%.

The co-executive director of the Sustainable Development Policy Institute (SDPI), Dr. Vaqar Ahmed, said international market volatility makes it difficult to forecast government borrowing needs.

“Right now the Ministry of Finance is operating with multiple accounts and that is why it is difficult to determine the exact debt figures,” he said, advising the government to manage its finances through a single account. Treasury account, which is also one of the conditions of the International Monetary Fund (IMF).

But one of Pakistan’s leading economists, Dr Ashfaque Hasan Khan, said the suggestion of a single treasury account remains a non-issue as all government money is already accounted for.

“I wonder why this was included in the SBP Bill when it was already in the Public Financial Management Act 2019,” he said.

Only the budget for the defense and strategic planning division goes into separate accounts, which are also accounted for, he said.

Former Finance Minister Dr. Hafiz A Pasha said the situation has become difficult to manage as Pakistan’s external financing needs have soared to at least $30 billion in the short term.

“Debt repayment would increase further in the next fiscal year 2022/23 as the country enters election fever after the end of the PTI government’s five-year term,” he said.

The current account deficit could touch 15 to 16 billion dollars for the current financial year. In such a scenario, Dr Pasha warned that foreign exchange reserves could start to dwindle, so there are fears the country could face another balance of payments crisis, he said.

Over the past two decades, Pakistan’s economy has developed structural problems, shifting from an indigenous resource-based economy to an import-based economy.

“In a situation where crude oil is likely to touch $100 a barrel, it is difficult to predict borrowing needs, as is debt accumulation,” Dr. Vaqar said.

Due to this economic imbalance, the country’s debt has multiplied and external sector vulnerabilities have multiplied and reached alarming levels.

The government is due to repay $8.64 billion in foreign loans in the second half (January-June) of the current fiscal year.

The government somehow managed to get IMF approval for the 6th tranche loan of $1 billion. Additionally, it recently raised $1 billion through the offering of Sukuk bonds in the international market at a limit yield of 7.95%, the highest rate of return offered on a Sukuk in history. .

Pakistan’s debt surged after receiving inflows of $3bn from Saudi Arabia, more than $2bn from the IMF, $1bn through Eurobond issuance in the first half of the year (July-December), resulting in the depletion of foreign exchange reserves. Due to the skyrocketing current account deficit of over $9 billion in the first six months and the trade deficit of $24.4 billion, the foreign exchange reserves of the State Bank of Pakistan have decreased by nearly $4 billion.

Due to heavy borrowing and devaluation, repayment of foreign loans has increased by 399% over the past four years in terms of rupees. It stood at 286.6 billion rupees in 2017/18 and is now estimated at 1.427 trillion rupees.

In dollars, Pakistan had to repay foreign loans, both principal and mark-up, worth more than $12.3 billion in the current fiscal year.

The government had already paid in principal and mark-up on the foreign loan account worth $3.78 billion in the first five months (July-November) of FY22. Of this amount, $974 million was repaid to multilateral donors, $34 million to bilateral creditors and $2.74 billion to commercial banks, international bonds and the IMF.

Dr Vaqar said the main reason for the rapid accumulation was the country’s twin deficits, which widened largely due to the stimulus of low interest rates and the industrial relief program to boost GDP.

“The government did not foresee or design the fact that international commodity prices can rise so rapidly and this miscalculation has overheated the economy and forced it to borrow excessively,” he said. added.

For Dr. Vaqar, the government is in a no-win situation where it must not only service its debts but, at the same time, accumulate more debt to fill the growing deficit.

“Right now, we are the main buyers of expensive loans in the international debt market,” he said, adding that the government was desperately considering friendly countries such as China, Saudi Arabia and the United Arab Emirates to refinance the debt, but apparently that seems unlikely. .

“Better diplomacy could have brought cheaper loans and easing in the IMF program,” he said.

“On the recent developments in Afghanistan, we overreacted because the Taliban’s takeover of Kabul was not welcomed by the international community, especially developed countries,” he said. he declares. Sanctions against Afghanistan have put a lot of pressure on Pakistan’s exchange rate.

Finance Minister Shaukat Tarin also acknowledged the fact that at one time the outflow of dollars to Afghanistan amounted to $20 million a day.

Dr. Vaqar said that this time the IMF program is tough compared to the last one put in place by the Pakistan Muslim League (PML-N) government.

“During the PML-N government, the IMF knew that Pakistan was not desperate to get its program due to the inflow of dollars from the China-Pakistan Economic Corridor (CPEC), but this time the situation is different and the relationship strained between the United States and China also had an impact on the ongoing IMF program,” he added.

Finance ministry spokesman Muzammil Aslam, however, dispelled the impression that an increase in debt was becoming a source of concern for the PTI government.

“Debt accumulation under the previous PML-N government was $4.5 billion a year, while the current government has reduced it to $3 billion a year,” he said.

Regarding the borrowing of expensive loans, he said that due to inflationary pressure and soaring international commodity prices, interest rates across the world have risen sharply.

“US bonds, which previously traded at a yield of less than 1%, are now offered at over 2%, it must be understood that high interest rates are a global phenomenon,” he said.

Muzammil expressed hope that the January trade figures could reflect the downward trend in the import bill.

Sources in Pakistan Tehreek-e-Insaf (PTI) said Prime Minister Imran Khan may also ask his Chinese counterpart for a $2 billion loan and a further extension of repayment of existing loans.

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