10-13-2009, 04:51 AM
<b>Unrestrained borrowing : Dr Ashfaque H Khan</b>
<b>Pakistan's public and external debt have increased over the last two years at a pace never witnessed in the country's history. Public debt grew at an average rate of 26 percent per annum, as against 6.6 percent in 2000-07. As a result, Pakistan added Rs2,827 billion in public debt alone in the last two years, as against Rs1,796 billion in the previous seven.</b>
Similarly, external debt and liabilities grew at an average rate of 15.5 percent, as opposed to an average 0.9 percent between 2000 and 2007. In other words, Pakistan added almost $12 billion in external debt during these two years, as against $2.6 billion in the previous seven.
Many factors have contributed to the recent surge in debt. These include the persistence of large fiscal and current-account deficits, sharp depreciation in the exchange rate and unrestrained borrowing. The depreciation of the exchange rate alone added Rs944 billion in public debt. In other words, without borrowing a single dollar or rupee, the country added Rs944 billion in public debt. It had taken five years to add a similar amount of debt between 1999-2000 and 2004-05).
The pace of debt accumulation is alarming, and a sure recipe for fiscal and balance-of-payment crises in the medium term. The massive surge in public debt is bound to increase debt-servicing which, in turn, will consume most of the government revenue and little will be available to spend on physical and human infrastructure. In 1999-2000, almost 72 percent of total government revenue was consumed by debt-servicing alone, leaving hardly anything to be spent on public welfare. With prudent fiscal management, this ratio was brought down to 35 percent by 2006-07; thus creating enough fiscal space for improving the country's physical and human infrastructure and reducing poverty. In the last two years, this ratio has jumped to almost 49 percent. Debt-servicing consumed almost one-half the government's revenue in 2008-09, and as such has become the single-largest expenditure item of our budget.
The way Pakistan has borrowed in the last two years is unprecedented and has injected significant risks to the budget and balance-of-payments going forward. Interestingly, the IMF itself is concerned about the growing risks to its own fund. The IMF has agreed to provide $11.3 billion under the Standby Arrangement to Pakistan. This amount also includes the recent augmentation of loan equivalent to $3.236 billion. The IMF has so far disbursed $5.326 billion to Pakistan and the remaining amount ($6.0 billion) will be disbursed in different tranches by December 2010. Pakistan has also borrowed from the IMF under the Poverty Reduction and Growth Facility (PRGF) in the past and, including this amount, the total exposure would reach $12.0 billion by the end of 2010. As such, the IMF has emerged as the single-largest source of external financing, and Pakistan has become its fourth-largest borrower.
Such massive borrowing from the IMF involves substantial financial risks to this institution itself. The IMF has stated that "at the time of approval of the Programme, the level of access was already large in terms of Pakistan's economy and debt servicing capacity." The augmentation of $3.2 billion assistance has further aggravated the situation. "Debt service to the Fund will become a significant fiscal burden, and is particularly high relative to reserves, which remain vulnerable to weaker exports, remittances, FDI and possible delays in donor disbursement."
<b>The question then arises as to why the IMF became so generous in lending money to Pakistan when the fragile nature of its debt-carrying capacity was known to them? Why did it bring about substantial financial risks to its own institutions? Why did it create a significant fiscal burden on Pakistan?</b> On our part, did we require such large resources from the IMF? Was it necessary to go for augmentation of resources from the IMF? Why did we opt for an expansionary fiscal policy when there was a resource crunch? Why did we allow our exchange rate to depreciate to an extent where we added nearly Rs1.0 trillion to public debt, without increasing a single dollar in our exports? These are valid questions and must be answered by the government and the IMF.
<b>Under a very optimistic assumption of fiscal (3.6 percent of GDP, on average) and current account (4.5 percent of GDP) deficits, the IMF has projected that Pakistan's total external debt will be $72.0 billion by 2014-15. Given the security environment, the quality of governance, the lax-expenditure environment in the provinces, especially in Punjab, and the economy not being on the radar screen, it is simply next to impossible to expect such level of financial and policy discipline in the government. The present government pursued a right fiscal and monetary policy in 2008-09 and gained considerable dividend as a result.
However, it changed its policy stance in 2009-10, and is unlikely to maintain such discipline going forward. <span style='font-size:14pt;line-height:100%'>External debt is, therefore, expected to rise to $95 billion by 2014-15.</span></b>
Pakistan will start repaying the IMF loan from 2011-12 and in four years (until 2014-15), it will have to repay $12.0 billion. Will Pakistan be able to repay such a large amount to the IMF alone? How is Pakistan going to bridge its financing gap in the medium term? Will Pakistan be ready to sign yet another Standby Arrangement or PRGF in January 2011? In my judgment, this will indeed be the case.
The writer is dean and professor at NUST Business School in Islamabad. Email: ahkhan@nims.edu.pk
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