It is quite disturbing to note that the government continues to borrow heavily from external sources to keep foreign exchange reserves high amid growing external debt repayments. According to a report, the federal government has taken dollar 1.8 billion in fresh foreign loans including dollar 900 million from commercial banks over the past three months. With the fresh borrowings, total foreign loans obtained during the tenure of the PML(N) government have shot up to dollar 26.8 billion. Of these, dollar 13 billion were spent on the repayment of previous loans while the remaining amount was added to the debt stock. This does not include dollar one billion the government has recently raised by floating Sukuk at an interest rate of 5.5 percent. During the last three months (July-September, 2016), Pakistan repaid dollar 1.1 billion to foreign creditors and net addition to the external debt was dollar 795 million. The most worrying aspect on the debt horizon was heavy borrowings from the commercial banks amounting to dollar 900 million, out of which dollar 700 million were extended by China Development Bank and dollar 200 million by UAE-based Noor Bank during the last three months. It needs to be mentioned that such non-conventional loans by the government have become a norm instead of an exception as Pakistan has borrowed dollar 2.8 billion from foreign commercial banks since June, 2013.
The recent alarming growth in external borrowings should be a major cause of concern for the economic policymakers of the country but nothing concrete seems to have been done or is in the offing to reverse this trend. Another worry is that the country now appears to be relying more on borrowings from the overseas commercial banks rather than multilateral financial institutions which offer loans at a concessional rate and the funds are more project-oriented. Besides, such loans are generally granted after the country agrees to follow certain reform measures which are in the long-term interest of the country. It seems that the net inflows from traditional multilateral sources like the World Bank and ADB have dried up due to previous heavy borrowings from these sources and slow pace of processing of loans and project implementation. Another concern is that unlike international bonds that are issued in a transparent manner and foreign borrowings from the multilateral institutions which carry a predetermined rate, loans from commercial banks are obtained without competitive bidding, allowing for the possibility of higher rates and corruption in the deal.
Anyway, external debt of the country is ballooning amid warnings from independent economists and other entities that this was not a sustainable way to increase foreign exchange reserves of the country and stabilise the exchange rate of the rupee. Obviously, a day will come when debt servicing liability would exceed the repayment capacity of the country. It is like individuals and households who don’t live within their means and borrow excessively to lead a comfortable life at present without caring for the difficult days lying ahead. The end-result would be that such economic units would ultimately have to declare insolvency and end up as paupers. Pakistan, as such, needs to immediately take measures to do away with the habit of resorting to heavy external borrowings and bring down the C/A deficit to the minimum to reverse this situation. We know that it is difficult to follow such a course, especially when home remittances and foreign investment are on the decline. Expansion in exports and containment of imports are the only way out to overcome the rapidly deteriorating situation but the government, unfortunately, is not realising the gravity of the situation and is hell-bent to push the foreign exchange reserves to record levels through heavy external borrowings with a view to gaining political mileage. Packages for exports and other minor incentives could increase the level of exports to some extent temporarily but would prove to be a burden on the budget and cannot contain the level of imports. The solution to the problem lies in enhancing the productivity of the economy, clearing the backlog of refund claims and improving the competitiveness of exports immediately. In particular, there is a need to depreciate the rupee to make exports more attractive for foreign buyers and substitute imports with the domestic products. Such a policy shift has been emphasised repeatedly by multilateral financial institutions and reputed economists of the country. The government needs to listen to their advice and act upon it to reduce the need of foreign borrowings and lift the heavy load of debt servicing from our backs. http://www.brecorder.com/editorials/0:/99490:the-worsening-external-debt-situation/?date=2016-11-03
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