Tuesday, January 30, 2018

Pakistan's Debt Crisis: Fact or Fiction?

Pakistan is taking on significant amounts of domestic and foreign debt to finance its budget deficits and to support major energy and infrastructure development projects as part of China-Pakistan Economic Corridor (CPEC).  Over one-third of this public debt is external debt denominated in US dollars, Euros and other hard currencies. At the same time, Pakistan's exports have declined over the last several years and the country's current account deficits have grown.

Critics Warnings: 

Critics believe that Pakistan is facing a severe debt crisis. They fear that it could get caught in a big debt trap laid by foreign governments. They warn that Pakistan will go broke. It will be unable to repay these mounting debts. Are they right? To answer this question, Dr. Ishrat Husain, a former central banker and governor of the State Bank of Pakistan, has analyzed Pakistan's debt as of June 30, 2017. Here are some of his key findings:
Pakistan Public Debt-to-GDP Trend. Source: Dr. Ishrat Husain
Total Public and Private Debt:

Pakistan’s total debt and liabilities (TDL) consist of public debt and private debt. Total stock of outstanding debt and liabilities on June 30, 2017 stood at 79% of gross domestic product (GDP). Of this, Gross Public Debt accounted for 85% of the total outstanding or 67.2% of GDP. The remaining 15% is the private debt mostly to borrowers outside the country, for which the government has no fiscal obligation, but the SBP has to provide foreign exchange to service this debt. Within the gross public debt, the government’s share was predominant – almost 92% while the balance was owed by the public enterprises but guaranteed by the government. Borrowing from IMF is also included in gross public debt, although it is a liability of the SBP.

As of June, 2017, Pakistan's total public debt-to-gdp ratio is 67.2%, up from 59% in 2008 and 64% in 2013, according to an analysis by Dr. Ishrat Husain, former governor of the State Bank of Pakistan.  The external debt-to-gdp ratio is 20.7%, down from 28.8% in 2008 and 21.3% in 2013.  Pakistan's external debt to foreign exchange earnings ratio has shot up to 161.9% from 123.9% in 2008 and 121.3% in 2013.
Total Debt Service as Percentage of GDP. Source: Dr. Ishrat Husain

Debt to GDP Ratio:

Public External Debt is lower in 2017 i.e. 20.7% of GDP while it was 27.1% in 2008 and 21.4% in 2013. About 93 pct of the public external debt falls under the category of Medium and Long term while 7% under the short term. Therefore the risk appetite for further short term borrowing to tide over payment difficulties cannot be ruled out as the short term public external debt to SBP reserves ratio is 5.5%. Concessional loans still form more than half of the outstanding stock and commercial loans account for only 1.6 percent of the total.

Debt Service Share of Government Revenue. Source: Dr. Ishrat Husain
Debt Servicing as Percent of GDP:

Pakistan's current debt servicing requires 5.9% of GDP. It is down from 6% in 2008 and 6.9% in 2013.  These percentages are by no means alarming. However, the external debt service component to be repaid in US dollars is of concern because of declining foreign currency earnings.

External Debt Repayment: 

A major setback has been caused by stagnation in foreign exchange earnings due to a $ 4 billion drop in export receipts since 2013 .This has raised the EDL (external debt and liabilities) to FEE (foreign exchange earnings) ratio from 121 to 162 in 2017 . There has been some growth in exports in last few months but the pace is unspectacular to make a dent. The other element which is picking up is Foreign Direct Investment but that also won’t be able to lower this ratio significantly. On the fiscal side, almost 24% of government revenues were pre-empted by payments of interest and foreign loan repayments . The average interest rate is down to 6.3 percent with domestic debt being relatively expensive at 8.2 percent.
External Debt as Percentage of Foreign Exchange Earnings. Source: Dr. Ishrat Husain


As of June, 2017, Pakistan's total debt-to-gdp ratio is 67.2%, up from 59% in 2008 and 64% in 2013, according to an analysis by Dr. Ishrat Husain, former governor of the State Bank of Pakistan.  The external debt-to-gdp ratio is 20.7%, down from 28.8% in 2008 and 21.3% in 2013. Pakistan's current debt servicing requires 5.9% of GDP. It is down from 6% in 2008 and 6.9% in 2013.  These percentages are by no means alarming. However, the external debt service component to be repaid in US dollars is of concern because of declining foreign currency earnings.  Pakistan's external debt to foreign exchange earnings ratio has shot up to 161.9% from 123.9% in 2008 and 121.3% in 2013. Of these, the critics are absolutely right about the last one---the ratio of external debt to foreign exchange earnings. Pakistan has to heed their warnings and urgently address its declining exports and rising current account deficits to avoid the potential external debt trap.

Related Links:

Haq's Musings

Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

Information Tech Jobs Moving From India to Pakistan

Pakistan is 5th Largest Motorcycle Market

"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Home Appliance Ownership in Pakistani Households

Riaz Haq's YouTube Channel

PakAlumni Social Network


Z Basha Jr said...

Riaz Sb...Very unique perspective of the problem.. What does domestic debt constitute? Is it the savings we put in the banks that the banking system owes us? Or govt bonds we buy? Is one kind of debt better than others?

nayyer ali said...

Debt to GDP is always moving, and fluctuates based on growth in GDP and new debt. The current GDP is about 40 trillion rupees, if that grows 10% this year (real growth plus inflation) and the government takes on new debt that is 6% of GDP, the ratio stays the same at around 60% debt to GDP. If growth is faster and new debt is less, then the ratio will decline and vice versa. The most important element to avoid excessive debt burden is to maintain rapid economic growth. The CPEC investment adds debt, but if it raises growth rates it more than pays for itself.
The other element to consider is wether the GDP is an accurate number. The debt is easy to measure, but as you have pointed out before, Pakistan's GDP is undercounted. We are supposed to get a rebasing of GDP in 2018, for the first time in over 10 years (the US essentially rebases every year), and I expect the size of the GDP will be increased by 20% or so. That will result in the debt to GDP declining from 60% of GDP to about 50% of GDP.

Riaz Haq said...

NA: "The CPEC investment adds debt, but if it raises growth rates it more than pays for itself."

I agree with you in general. However, external accounts have always been a problem and need to be carefully watched and managed to avoid having to go to IMF for yet another bailout,

Repaying Pakistan's external debt requires that Pakistan bring in enough US $ and other currencies through exports, remittances, foreign investments etc.

A recent BMI report published by the World Economic Forum recently at Davos says that "Pakistan will develop as a manufacturing hub over the coming years, with the textile and automotive sectors posting the fastest growth at the beginning of our forecast period. Domestic manufacturing investment will be boosted by the windfall from lower energy prices compared to the last decade, and improved domestic energy supply."

If CPEC makes it happen, then I think Pakistan will be in good shape with respect to exports and its current accounts.


nayyer ali said...

Exports have been weak for several years, the primary reason is an overvalued rupee. Rupee was at 60 to the dollar in 2007. Since then Pakistan inflation has run a cumulative 120%, while US inflation has been 20%. As such the exchange rate should have slid to 120 to 130 to the dollar, but has been kept substantially overvalued at 100 to the dollar (the government recently let it slip to 105). An overvalued rupee hurts exporters while keeping imports relatively cheap. This pleases urban consumers who buy imported goods, while a major devaluation would be politically damaging in front of an election. I expect, and hope, that after elections this year the new government lets the exchange rate get back into balance. Actually, the Asian Tigers developed on the backs of deliberately undervalued currencies, which gave exporters a boost and depressed imports without having to resort to erecting tariff barriers. Pakistan should pursue the same strategy. A devaluation would in the short run increase the burden of dollar denominated foreign debt, but Pakistan's foreign debt burden is still modest.

Riaz Haq said...

NA: "Actually, the Asian Tigers developed on the backs of deliberately undervalued currencies, which gave exporters a boost and depressed imports without having to resort to erecting tariff barriers."

Yes, Asian Tigers did keep their currencies undervalued. But they also made themselves much more competitive by building energy and infrastructure to support manufacturing. And they diversified their exports by bringing in US tech companies for higher value products. Hope CPEC helps Pakistan do that in special economic zones like the one that just opened in Gwadar.


Riaz Haq said...

Pakistan’s trade prospects in 2018
Dr Vaqar Ahmed January 7, 2018


The past few months have seen a decent uptick in Pakistan’s merchandise exports. The first five months of 2017-18 have seen exports grow by 10.5 per cent over the same period during previous fiscal year. The November 2017 monthly export data indicates a growth of 12.3 per cent in comparison to November 2016.

Similarly, during the first four months of the ongoing fiscal year, large-scale manufacturing has posted a growth of 9.6 per cent. Sectors which have posted positive growth include: iron and steel, automobiles, petroleum, food and beverages, electronics, non-metallic products, pharmaceuticals and textile.

While several of the above-mentioned sectors are beneficiaries of the ongoing investments under China Pakistan Economic Corridor (CPEC) programme, it is noteworthy that some key sectors with export potential have seen falling production in the current fiscal year, including leather, engineering products, and chemical sectors.

One hopes that in 2018 the government will be better prepared with feasibilities of all nine Special Economic Zones (SEZs). As of now we understand that even in the existing industrial estates across Pakistan it is a challenge to get new electricity and gas connections.

Riaz Haq said...

Economist Magazine: "Just 1% of the vast #Thar #coal reserve discovered in 1992 could supply a fifth of #Pakistan's current #electricity generation for half a century" #CPEC #energy #infrastructure


PAKISTAN’s enormous mineral wealth has long lain untapped. Since a 1992 geological survey spotted one of the world’s largest coal reserves in Thar, a scrubby desert in the southern province of Sindh, prospectors have hardly dug up a lump. Among those to flounder is a national hero. Samar Mubarakmand, feted for his role in Pakistan’s nuclear-weapons programme, has just shut the coal-gasification company he founded in 2010, when he vowed on live television to crack Thar.


To such qualms, the government offers three rejoinders. First, severe power shortages have long blighted the nation, and renewable sources cannot offer the daylong, year-round power it needs. Second, coal accounts for less than 1% of current generation, compared with 70% in neighbouring India and China. And third, domestic coal would allow the country to forgo expensive imports of the fuel for newly built power stations, a drain on fast-dwindling foreign-exchange reserves.


Eight years ago Engro bought the rights to one of Thar’s 13 blocks, containing 1% of the reserve (more than enough given the gargantuan size of the mine). To work on extraction, it formed the country’s biggest ever public-private partnership, the Sindh Engro Coal Mining Company (SECMC), in which Engro digs and the state provides infrastructure. Relying on the state can break strong firms. Engro itself almost went bankrupt in 2012 after the government refused to honour a sovereign guarantee to provide gas to one of its fertiliser plants. Yet without similar government support, no other Thar block-owners have secured financing, leaving Engro’s diggers, which began work last year, to move ahead.

The endeavour benefits from being in the group of infrastructure projects that make up the $62bn China Pakistan Economic Corridor, a hoped-for trade route. Western banks shook their heads when approached about a coal project, so Engro has relied on Chinese financing. Analysts note an irony in China’s promotion of coal abroad as it withdraws from the fuel at home. Handling the extraction at Thar is the China Machinery Engineering Corporation, a state-owned firm with expertise beyond Pakistan’s reach.

Around 126 metres below the sands of Thar, with just 20 more to go, Engro’s diggers can now almost touch their prize. When the coal is reached, as is expected in mid-2018, it will feed a pit-mouth power station constructed by Engro, and, in time, three others owned by partners in the SECMC. These stations will furnish around a fifth of the country’s electricity for the next 50 years. The financial rewards could be vast. “All my richest friends are jumping up and down [because they did not get there first]”, says the boss of one big multinational construction business.

Hurdles remain, not least complaints from nearby villagers about the disposal of the vast quantities of wastewater from the mine on their ancestral grazing lands in the form of a reservoir. In reply, Engro stresses its social work in the surrounding district of Tharparkar, the poorest in Sindh, which includes the construction of several free schools. More self-interestedly, it is training locals to drive so they can man the dump trucks that trundle day and night around the mine. According to Shamsuddin Shaikh, chief executive of Engro Powergen, the conglomerate’s energy division, Engro also has its sights on Reko Diq, a gargantuan and long-stalled copper mine in Balochistan, the least developed of Pakistan’s provinces. To tap one of the country’s two largest and most niggardly mines is hard enough. Imagine cracking them both.

Riaz Haq said...

Government debt as share of GDP.

Japan: 250%
Greece: 179%
Italy: 132%
US: 106%
Spain: 99%
France: 96%
Canada: 92%
UK: 89%
India: 69%
Brazil: 69%
Germany: 68%
Pakistan: 66%
Netherlands: 62%
Israel: 62%
China: 46%
South Korea: 38%
Turkey: 28%
Russia: 17%
Saudi Arabia: 13%


Riaz Haq said...

Economy: real and monetary
By Dr Pervez TahirPublished: March 16, 2018


A debate is raging that the economy is in dire straits and the continuation of present policies is a recipe for complete disaster. Any economy has two sides, the real and the monetary-financial. The disaster story relates to the latter. The classical economists used to think that money is merely a veil and what matters is the real economy of goods and services.

It was, however, Lord Keynes who discovered that the Great Depression of the 1930s was caused by insufficient demand for the existing industrial capacity. Boosting demand by printing currency would revive the economy. He was concerned with the short run in which money does matter. Classical economists were talking of the long run over which the industrial capacity is created. Long-term growth is what matters in developing economies like Pakistan. Investment is the strategic variable along with a proper choice of technique to employ the growing labour force. The chosen technique can be labour-saving, labour-intensive, or labour-absorbing. The last-mentioned was prescribed by the celebrated Cambridge economist Joan Robinson in the case of China. (Incidentally, besides being a woman, her love for China cost her the Nobel prize.)

In Pakistan, the cohabitation of political transitions and economic crisis is a familiar sight. The story line begins with the external sector and the government sector in terms of financial and monetary indicators. For the February 2008 elections, the transition fiscal year was 2007-08. Total debt was 63.2% of GDP and the external debt and liabilities were 30.7% of GDP. The SBP’s liquid reserves were 8.8 billion dollars, covering imports of 17 weeks. Short-term external debt was 8.2% of reserves. Inflation, current account deficit and fiscal deficit at 12%, 8.5% and 7.6% had all crossed danger zones. GDP growth of around five per cent was the lowest in five years. The economy was clearly on the downhill, touching the bottom at 0.36 in 2008-09. The transition fiscal year for elections in May 2013 was 2012-13. Total debt was 69.5% of GDP and the external debt and liabilities were 26.3% of GDP. The SBP’s liquid reserves were 6.1 billion dollars, covering 14.3 weeks’ imports. Short-term external debt was 4.4 % of reserves. The rate of inflation, current account deficit and the fiscal deficit were 7.4%, 1.1 % and 8.2%, respectively. GDP growth was low at 3.7%, but the economy was on the upturn. For the 2018 elections, 2017-18 is the transition fiscal year. The source of information for the year is the latest press release of the IMF, an organisation concerned mainly with the monetary and financial side of the economy. It expects fiscal deficit at 5.5 per cent, current account deficit at 4.8 per cent and GDP growth at 5.8 per cent. As a result, ‘risks to Pakistan’s medium-term capacity to repay the fund have increased’. Remember Ishaq Dar’s refrain that he had to go to the IMF to repay the debt contracted by the previous government. Free of political compulsions, the caretaker government had prepared the ground for it. The deal was to pay back without reform. The signs of slowly increasing growth were ignored.

Are we heading for a repeat of the script? The deputy head of the IMF has already made it clear that the possible grey-listing by the FATF does not disqualify a member to access its lending. The upturn in the real economy continues. CPEC investment will boost it further. The country has the ability to grow out of the present financial strife. Reform must be undertaken, but without repeating the mistake of the anti-growth IMF support.

Riaz Haq said...

Pakistan's foreign exchange position stable: spokesman


Clarifying a news item titled “Pakistan’s net reserves stand a minus $724 million” published in a section of press, the spokesman said the story was based on the recently published Post Programme Monitoring (PPM) report by the International Monetary Fund (IMF).

He said,” The Net International Reserves (NIR) position reflects foreign currency assets of the Central Bank as against its liabilities.” The story was comparing spot position of foreign exchange reserves with long term liabilities of the State Bank, which was not a good comparison as liabilities were to be retired gradually over a period of five to ten years time and not immediately in one instalment, he added.

He said the IMF loan for instance was to be repaid by the year 2026 meaning approximately $800 million repayment a year starting from 2018.

It was also pertinent to mention that when present government took charge in 2013, Pakistan’s NIR was negative $ 2.5 billion, he added.

He said the decrease in foreign exchange reserves were mainly due to current account deficit of which imports were the main component. Imports had shown unprecedented increase during 2016-17, while exports were declined.

The spokesman further said the negative trend in exports had bottomed out and the government initiatives had shown positive result as exports had increased by about 12 percent workers’ remittances improved by 3.4 percent during July-February, 2017-18 and the Foreign Direct Investment (FDI) also posted strong growth of 15.6 percent during July-Feb, FY2018 over last year.

He said while the current account deficit which had seen expansion above 210 percent in July of current fiscal year had now been started contracted as during Jul-Jan FY2018 it had been contained at 48 percent. With these positive trends strengthening, incoming months the current account deficit will improve in FY18, the spokesman said.

He added that the writers, in fact, had ignored the positive side of Fund’s assessment and had focused only on interpreting the potential challenges to the economy highlighted by the Fund.

He said the IMF had also endorsed the positive and favourable outlook for economic growth, with real GDP estimated to grow at 5.6 percent in 2017/18 within favourable inflation environment. The Fund had mentioned that the economic growth had continued to strengthen supported by improved energy supply, investment related to the China-Pakistan Economic Corridor, strong credit growth, and continued investor and consumer confidence.

The spokesman said it was important to share some positive trend of the economy during the current fiscal year. The government had been able to achieve fiscal consolidation without compromising development expenditures as fiscal deficit had been contained at 2.2 percent of GDP during first half of current fiscal year against 2.5 percent in the same period of FY2017.

He said PSDP expenditures increased to Rs.733 billion during FY2017 over last year and this year the allocation was Rs.1 trillion. FBR tax collection continued to show impressive growth above 17 percent during July- February, FY2018 while inflation had been contained at 3.84 percent during July-Feb, FY2018 against 3.90 percent in the same period of FY2017. LSM had shown impressive broad-based growth of 6.33 percent during July-Jan,FY2018 compared to 3.59 percent of last year.

FDI after witnessing a subdued growth during last two months of CFY2018 had improved in February 2018 by 235 percent over January 2018, and by 15.6 percent during July-Feb, FY2018, he added.