Does the rate of external borrowing currently represent a jump from the rate in recent years? If yes, what explains the more rapid build-up of debt? Beyond the total increase, what is happening to the composition of external debt? Is the growth in volume and change in composition making Pakistan even more vulnerable to a more serious balance of payments crisis in the not so distant future?
The previous government of PML (N) has been severely admonished for having engaged in heavy external borrowing during its tenure. From 2012-13 to 2017-18 the external debt of the country went up from $60.9 billion to $95.2 billion. This represents a cumulative increase of $34.3 billion, thereby implying an annual increase on average in external debt of $6.9 billion. However, during its last year, the increase in external debt in 2017-18 was as much as $11.8 billion. Despite this reserves with the SBP fell by $ 6.4 billion.
Given the monthly rate of increase in external debt up to March 2019 of almost $1.2 billion, the annual jump in external debt could approach $14 billion in 2018-19. As such, the increase this year is likely to be even higher than the peak annual rate of build-up of external debt during the PML (N) tenure in government.
Why has there been a need to resort to such a high level of external borrowing? The answer lies in the large external financing requirement and the absence of a large cushion of foreign exchange reserves with the SBP. In fact, if the repayment of $5.2 billion is added to the increase in external debt of $10.6 billion, the actual level of gross external borrowing is $15.8 billion up to March 2019.
The estimate of the external financing requirement in the first nine months of 2018-19 was close to $16.0 billion. This consisted of a current account deficit of $9.5 billion and external debt repayment obligations, public and private, of $6.5 billion. The non-debt creating inflow of foreign investment was close to $1 billion. Therefore, the financing requirement through borrowing was $ 15 billion. Consequently, with borrowing at $15.8 billion there has been some rise in foreign exchange reserves with the SBP of $0.7 billion as of the end of March 2019.
Apparently, the Government has been able successfully to find enough sources and amounts of borrowing to meet the external financing requirement in the first nine months of 2018-19. However, this has been achieved largely by reliance on unconventional sources. This includes the placement of short-term deposits with the SBP by Saudi Arabia and UAE of $3 billion and $2 billion respectively. In addition, there has been Government-to-Government bilateral long-term lending largely by China and medium-term commercial borrowing, mostly also from Chinese banks. These two sources have provided loans of over $6.5 billion. Residual funding of $ $4.3 billion has come from other sources.
The fundamental problem is that the maturity period of new external loans is becoming increasingly short and repayment liabilities will consequently grow exponentially. Already, the IMF has made the agreement on the Extended Fund Facility (EFF) to Pakistan a function of the rollover of deposits and 'swap' funds with the SBP. Furthermore, the likelihood of additional inflows from brotherly Muslim or other countries in 2019-20 is low. Hopefully, China will continue to provide bilateral assistance for projects, especially these in the CPEC portfolio, and, not only will Chinese commercial banks reschedule Pakistan's debt to them but also give new loans. However, the probability of the latter happening, especially the rollover, cannot be considered as very high.
What is the outlook for 2019-20? This projection is based on the presence of an IMF Programme and prior to the agreement the rollover of short-term and other maturing loans should have already taken place. With a big reduction of almost half or more in the current account deficit to $6 billion and repayment of debt not rolled over of $12 billion, the external financing requirement in 2019-20 is likely to approach $18 billion. This will be equivalent to over 6.7 percent of the GDP.
How can this external financing requirement be met? If the IMF releases $2 billion annually then, net of repayment, the financing by it will be only $1.2 billion in 2019-20. As highlighted by the Finance Advisor, multilateral sources like the World Bank, ADB and IDB could provide combined funding up to a maximum of $4.5 billion. Hopefully, foreign investment will recover somewhat to $2 billion and borrowing by others, like the private sector and the local banks, could approach $2 billion. Also, bilateral assistance of up to $3 billion is likely to continue.
Therefore, under favourable assumptions, the total gross external financing that could become available in 2019-20 is $12.7 billion. As such, there may still be a gap of $5.3 billion. Clearly, under the cover of the IMF Programme, Pakistan may have to float Euro/Sukuk Bonds and/ or seek more commercial loans, yet again mostly from Chinese Banks, of up to a combined amount of over $5 billion.. Needless to say, if the current account deficit is not reduced by as much as half the 2018-19 level in 2019-20 then the financing gap will be even larger and more difficult to finance. A big depreciation again of the exchange rate will be required to bring about a large reduction in the current account deficit in 2019-20 as has been the case up to now in 2018-19.
The unfortunate fact is that even in the presence of a Fund Programme and rollover of loans due for repayment the balance of payments position will remain precarious in 2019-20. This indicates why Pakistan has had to go to the IMF to obtain a Programme which enables a diversification of sources of external funding and a larger share of concessional assistance. However, the policy makers and implementers are unfortunately likely to have many sleepless nights from here onwards.
(The writer is Professor Emeritus at BNU and former Federal Minister)