As recently as October of last year, Pakistan’s foreign exchange reserves stood at an all-time record high of $24 billion. Since then, however, a combination of the rapidly increasing international price of oil and an uptick in our import bill have caused our reserves to plunge, with the State Bank of Pakistan now holding at $16.5 billion with another $5 billion held by commercial banks. In response, the SBP is now borrowing dollars from local and foreign commercial banks so that there is no further depletion of our foreign exchange reserves. In the short term, the borrowing is not too worrisome since interest rates around the world are at historically low levels. We are also supposed to receive $650 million in Coalition Support Fund payments from the US, after the first tranche of $350 million were released last month. Pakistan’s larger worry is for the longer-term. The main reason the country’s foreign exchange reserves are still relatively healthy is the amount of money the IMF has been pouring into the country. These loans are going to be due eventually and we already spend much of our foreign exchange in servicing debts. As yet, there has been no corresponding increase in exports to offset debt-service payments.
Pakistan is hoping that the China-Pakistan Economic Corridor will eventually solve all its economic problems, including foreign exchange reserves. The hope is that all the foreign exchange we are spending right now on importing capital goods for CPEC projects will eventually pay off in the form of increased productivity. But the dark side of CPEC are the loans that have been taken from China to fund these projects. Details about the exact debt burden Pakistan faces due to CPEC haven’t been publicly released but we do know that Pakistan has borrowed $15 billion from China for infrastructure financing, which has to be paid back at a 2 percent rate of interest over 25 years. Economists have also estimated that Pakistan will have to pay at least $2.5 billion a year in loans for energy projects. Until we expand our exports, we are not in a position to pay off these amounts without depleting our foreign exchange reserves. Borrowing from banks is only a stop-gap measure which will only add a burden on Pakistan if CPEC does not deliver all the benefits it promises. The country should not have to rely on IMF bailouts to make up the difference either. Eventually all our bills will come due and we do not seem to have taken any sustainable measures to ensure they can be paid. https://www.thenews.com.pk/print/198264-Borrowed-money
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