The cumulative rise in the last two years has led to a big increase in the external debt of $22.9 billion since 2016-17. Consequently, the overall external debt to GDP ratio has surged from 27.4 percent to 45 percent. The increase in 2018-19 was much bigger at 14.2 percentage points as compared to 3.4 percentage points in 2017-18. This was due to the big decline of 24 percent in the dollar value of the GDP in 2018-19, caused by the big devaluation of the rupee.
The debt burden of 45 percent of the GDP exposes Pakistan to a high level of risk in servicing the repayment and interest obligations. Combined together these were equivalent to over 10 percent of the outstanding debt in 2018-19. The growth in 2018-19 is high at 41 percent. Therefore, not only is the level of external debt rising sharply but the concomitant payment obligations are also increasing disproportionately.
The composition of external debt and liabilities is also changing rapidly. Historically, Pakistan had relied on long-term concessional credit inflows from multilateral and bilateral sources. The outstanding debt with the World Bank, Asian Development Bank and other multilaterals still remains the largest among the different lenders to Pakistan at $27.8 billion. However, the net inflow has now turned negative.
Similarly, there has been a decline in inflows from the Paris Club. Prior to entering into an agreement with the IMF by Pakistan, there was an increasing reluctance of multilateral and bilateral agencies to lend to Pakistan. Fortunately, largely as part of CPEC financing, China has been giving large project loans to Pakistan. The outstanding debt with China has virtually doubled over the last two years.
There has inevitably been a greater resort to more medium-and long-term commercial financing. The outstanding stock of Euro/Sukuk bonds stands at $6.3 billion on June 2018, after a repayment of $1 billion during the year. Pakistan was unable to float any bonds in 2018-19 due to the heightened risk perceptions and lower credit ratings. The last big successful flotation was of $2.5 billion in 2017-18, with yields approaching 8 percent.
Commercial loans have become an increasingly important source for financing. The outstanding debt with international commercial banks has risen from $4.8 billion in June 2017 to $8.5 billion in June 2019. The likelihood is that it will continue to rise. Fortunately, there has been a curtailment in short-term borrowing in 2018-19.
The rise in external debt repayment and interest payment obligations was clearly one of the major factors which motivated the Government to enter into a Program with the IMF. In the absence of such support, a limit was being reached to the extent of external financing available. Already, the multilaterals and many bilateral agencies have substantially reduced their assistance. Bond floatations have become very costly due to the enhanced risk perceptions of Pakistan and international commercial banks are also increasingly shy about lending to the Government.
Meanwhile, the external financing requirements remain high. These include the quantum of external debt repayment plus the current account deficit in the balance of payments. They reached a peak of over $25 billion in 2017-18 when the current account deficit rose to the record level of almost $20 billion. They stood at $22.3 billion in 2018-19, with the fall in the size of the current account deficit being partly neutralized by the rise in external debt repayment outflows.
The projected external financing requirement in the presence of the Fund program remains close to $20 billion in 2019-20. This will include almost $7 billion financing of the current account deficit, provided it can be almost halved from last year's level. External debt repayments are projected to increase to $10 billion. These would have been higher if rollover of some loans had not been obtained as a prior condition for the IMF program. In addition, $3 billion will be required to bolster foreign exchange reserves to provide for at least two months import cover as per the target in the Fund program for June 20. A very small part of this financing requirement is likely to be met by non-debt creating inflows.
The MOF has put in place an ambitious strategy for mobilizing external financing in 2019-20, as per the budget documents. As highlighted above, the target is almost $20 billion. This includes the Saudi deferred oil payment facility of $3.2 billion, program and project loans from multilaterals and bilateral agencies of $3.3 billion and $1.1 billion from the Islamic Development Bank.
Further, Euro/Sukuk bonds of $2 billion are to be floated during 2019-20. Commercial loans of $3 billion are to be obtained. Two unconventional sources are also to be tapped. The IMF program support of $2.2 billion in 2019-20 will be used for the first time for budgetary financing. In addition, $5 billion of budgetary support is to be arranged from friendly countries.
The external debt repayments on the budgetary account are expected to aggregate to $8 billion. As such, the net inflow of Government external borrowing is projected at $12 billion. Inclusive of net inflow of funds to PSEs, banks and the private sector, the overall projected increase in the total external debt is likely to be close to $14 billion.
This will be even larger than the big increases in external debt in 2017-18 and 2018-19. It will not be surprising if the external debt-to-GDP ratio approaches 55 percent in 2019-20. This will imply that over a seven-year period, since 2012-13, the external debt-to-GDP ratio will have doubled.
The big concern at this time is the feasibility of gross external borrowing of $20 billion by the Government in 2019-20, even in the presence of a Fund Program. First, will it be possible to float Sukuk/Eurobonds? This becomes problematic especially after the recent assessment by Moody's that Pakistan is one of the countries 'facing serious external financing risk'.
Second, is budgetary support of $5 billion likely from friendly countries? Apparently, Qatar has promised to deposit a significant amount with the SBP and $500 million has already been received. However, given the support already provided in 2018-19 by Saudi Arabia, the UAE and China, the expectation of another $5 billion may be optimistic. Third, will international commercial banks be willing to increase their exposure with Pakistan significantly at a time when reserves remain well below the level required to provide at least two months import cover?
There is no doubt that there are substantial external financing risks, especially when the target is as high as $20 billion. Needless to say, the risks will be vastly multiplied if the IMF Program flounders during the year due to the inability to meet the performance criteria.
The first indications during the month of July are mixed. The very positive development is the extremely big reduction in the current account deficit of 73 percent in relation to the level in July 2018. However, the net inflow of foreign assistance to the Government during the month was $1.1 billion, including the first tranche of $1 billion from the IMF, as compared to $2.4 billion in July last year. This represents a fall in the net inflow of external borrowing of almost 54 percent. Also, there is no information yet about any impending flotation of bonds. A repayment of bonds of $1 billion is due in November.
Overall, if the Government's ambitious external financing plan flounders then the markets could turn very volatile and create a high level of instability. We hope and pray that this does not happen.
(The author is Professor Emeritus at BNU and former Federal Minister)