Declining Forex reserves to external debt ratio to keep currency under pressure

April 16, 2019 (MLN): For several months, Pakistani economists have been warning that the country is heading towards a serious debt problem that will destabilize the economy.

The country’s total external debt and liabilities shot up to $99.1 billion by the end of December last year compared to $95.3 billion, indicating almost $4 billion was added to the debt pile in the first half of the current financial year 2018-19.

Pakistan's external debt level has been the major concern for the economy. In terms of percentage of  GDP, Pakistan’s external debt looks manageable (at 33.7% for FY18, at par or below most emerging economies). But a look at other debt ratios presents a more alarming situation.

Ismail Iqbal Securities in its latest research report written by Ms. Madiha Javed on Pakistan's external debt situation highlights that, the ratio of foreign exchange reserves to external debt has declined over time and is expected to  continue to fall below 15% which will continue to pressure the currency especially during periods of massive outflows.

 The report further adds that, the  external debt-to-exports ratio is expected to remain  at an unsustainable high level of 4.1timesby FY20. This indicates the ongoing need for foreign exchange reserves to ensure future debt payments.

In addition, due to debt maturities and increasing interest payments that are in line, Pakistan’s debt servicing is expected  to cross USD 10bn for FY19 (including USD2.6 billion of interest payments) compared to USD 7.5 billion in FY18. With a similar level for FY20, this will put pressure on foreign exchange reserves.

These significant payments include USD 1bn Sukuk maturity due in November 2019, IMF payments of USD 980mn in FY20 (with additional USD 126mn interest), World Bank and ADB disclosed repayments of approx. USD1.2bn.

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