July 9, 2019 (MLN): The much-awaited detailed document regarding all the commitments between IMF and the government of Pakistan has been revealed by the fund on their website. This is an important document for those who closely monitor and keep an eye on Pakistan’s economy to forecast where the country is expected to go in future.
The alarming part of this document was the projection regarding Pakistan’s obligation to pay up to $37.359 billion as external debt and liabilities over the programme duration. More than 40% of this amount which is around $16.278 billion is to be paid as Non-Paris Club Bilateral debt.
Of the total Non- Paris Club bilateral debt, the large chunk i.e.$7.946 billion will be paid to China, $6.265 billion will be to Saudi Arabia (includes expected amounts and outflows from oil facilities) and $2 billion will be to the UAE. While the remaining $49 million and $1 million will be paid to Kuwait and Libya respectively.
Since economic numbers don’t make sense on their own. They either make sense when shown as a proportion or trend. External debt is projected to rise to around 37% of GDP at end of FY2019 mainly driven by sizable external borrowing, a large current account deficit and currency depreciation.
However, under the Extended Fund Facility (EFF) program that consists of strong macro policy adjustments and structural reforms, external debt is projected to steadily decline after peaking in FY2021, returning to a more sustainable path. The moderation in external debt is mainly driven by a narrower current account deficit, non-debt creating capital inflows, and a recovery in economic growth.
In case of domestic debt, as of March 2019, 57% of domestic public debt had a maturity of less than a year, up from 54% in June 2018. Moreover, the stock of short-term debt from the Central Bank more than doubled in last ten months, reaching 19% of GDP in March, while three-month T-bills declined but remained high at 8% of GDP.
While the Treasury bills are denominated in local currency, which mitigates rollover risk as long as there is sufficient liquidity in the domestic banking system, the large amount of short-term debt raises the government’s exposure to interest rate risk.
As strong fiscal consolidation is required to restore public debt sustainability, IMF staff recommends an adjustment of 4.4% of GDP in primary fiscal balance over four years starting from FY 2020, together with an end to currency intervention.
According to the IMF document, during the program, public debt is projected to reverse its trajectory from 2020 onwards. Debt is expected to reach 80.5% of GDP in 2020, partly reflecting currency depreciation, but to fall sharply to 67% of GDP by FY2024.
Public debt excluding guarantees will come down to 64% of GDP. Gross financing needs are expected to decline sharply to 23% of GDP in FY 2020 and further to 16.7% by FY2024, reflecting the reprofiling of short-term domestic debt held by the Central Bank.
Since debt and its management have become a crucial challenge for the current government, nonetheless, as per the document, strong fiscal adjustment in the program and firm commitments from major bilateral official lenders to maintain their exposure well beyond the program period will mitigate risks, therefore debt is judged sustainable.
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