July 5, 2019 (MLN): The speed at which the current government has borrowed since it assumed power, has caused serious alarm in various circles as the rapid increase in external debt over the last decade has prompted numerous reports questioning its sustainability and possible adverse impact on the country’s economic stability and growth.

Curbing foreign investment, pressures on exchange rate, capital flight, limiting government to undertake counter cyclic policies and continuation of irrational taxation are the outcomes of rising external debt and the current state of Pakistan’s economy is the mirror image of the outcomes of reckless borrowing and if the pace of borrowing remained unchecked then the size of the external debt, in particular, would become large enough for Pakistan to service its external debt obligations in an orderly manner.

The external debt and liabilities stood at $22 billion only till the end of the 1980s. However, the current figure of total external outstanding debt i.e. $105.8 billion as of March 2019, depicts that Pakistan’s dependence on foreign loans has been going up with the passage of time, despite consistent claims by every successive government/regime that it had done wonders to improve the economy.

If we look into history and compare the Pakistan external debt situation and how it evolved in different regimes from 1995 to present, we see except the periods 1999- 2001 and 2011-2013 where Pakistan’s total external outstanding debt has decreased, it shows an increasing trend over the years.

When Gen Musharraf had taken over in October 1999, toppling Nawaz Sharif, the country’s foreign debts stood at $37.9 billion. At the end of June 2007, when Gen Musharraf was still in power, the loans rose to $40.32 billion. This means the increase in external debt did not register much increase. Moreover, macroeconomic indicators had improved since 2002. In particular, external conditions had become more favorable to Pakistan since September 2001. 9/11 could virtually be said as the turning point in the Pakistan economy as this had significantly reduced Pakistan’s debt servicing burden owing to debt rescheduling by creditors.

Following 9/11, there had been increased official transfers, worker’s remittances and foreign direct investment (FDI). All had helped to improve Pakistan’s debt situation.

When PPP government came into power in 2008, it set new records of getting loans from foreign creditors, as the country’s external debt was $45 billion at that time which was increased to $61 billion at the end of its tenure. The substantial rise in the size of country’s external debt at that time were attributable to fragile macroeconomic situation of the country such as growing debt servicing or repayments requirements, heavy public sector borrowing to finance fiscal deficit and decline in tax revenue receipt.

PPP formed a government during the worldwide economic and financial recession in 2008, during which Pakistan was facing the crisis of depleting foreign reserves and the possibility of defaulting on current account payments which left the government with no option but to seek credit from the International Monetary Fund (IMF).

However, during the last three years of PPP government, external debt and liabilities were increased in absolute terms, but decreased in relation to GDP due to key role played by current account deficit on a country’s debt burden. This suggests that the GDP growth outpaced the growth in external debt, leading the total external debt to decline from 29.5 percent of the GDP to 23.4 percent, a reduction of 6.1 percentage points.

Following the same path, PML-N government's borrowing splurge from external sources during the last five years, left the country with external outstanding debt of $95 billion (against the 2013 total of $61 billion).

Shortly after coming to power, it faced the same issues as those faced by the PPP except the global crisis that led them to seek a bailout from the IMF to repay external debt and keep official foreign currency reserves at a level which could give a sense of economic stability to investors. But as growth returned, and some problems were resolved, the PML-N government also failed to efficiently deal with Pakistan’s debt crisis. In addition, the massive rollout of the China-Pakistan Economic Corridor (CPEC), further led to inflows of external loans.

The PML-N government increased external debt by 56 percent against an increase during PPP government by 36 percent. About nearly half of the external borrowings were utilized for the repayments of previous external loans. The total debt as a percentage of the GDP in the period 2013- 2018 increased by 11.2 percentage points, going from 67.2 percent of the GDP to 78.4 percent.

Thus, all the previous regimes, may it Pervez Musharraf, the PPP or the PML-N; all have made huge borrowings, pushing the country into debt trap. All of them made tall claims that on assuming power they will get rid of the “cancer of external debts” and promised to break the begging bowl but, after coming into power, they proved no different from their successive ones and started knocking the doors of international lenders more vigorously than the previous one. The debt burden is mounting every day leaving little space for the government to spend on much-needed social sectors; health and Education.

At present, in the current regime, outstanding foreign debt hovered to $105.8 billion as of March 2019, moreover, Pakistan has acquired a sum of $16.6 billion as foreign loan from Saudi Arabia, China, United Arab Emirates (UAE) and Qatar jointly. Disappointingly, these loans were not adequate to resolve Pakistan’s economic woes.   

Cognizant of the looming financial woes, the government decided to go to the IMF which offered a $6 billion Extended Fund Facility (EFF) for a period of 3 years. Now the biggest challenge that PTI government has to face is the rising situation of foreign currency denominated debt which is likely to worsen in the coming years given the low debt servicing capacity, especially that of external debt which is very much dependent on current and future earnings of the foreign exchange and the level of reserves.

Since Pakistan has borrowed excessively in last 10 years, Prime Minister Imran Khan has formed an 11-member commission of inquiry to investigate if increase in external debt between 2008 and 2018 was justified by infrastructure development program or misused by public office-holders of the last two governments of the PPP and the PML-N.

Apart from bringing the ones to task who had caused the country to fall into such dire straits, government should focus on reducing external borrowing because if the current style of excessive borrowing  by the government continues, the rising external debt situation will have serious repercussions, as external debt on their own has a snowball effect.

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