KARACHI: In a long and detailed rejoinder to his critics, Finance Minister Ishaq Dar says that the country’s debt profile is in fact improving, and “predictions of doomsday scenario for Pakistan” regarding public debt are overblown.
To highlight the point, he provides a comparison in growth of debt between his government and that of his predecessor. “[T]he previous government contracted net debt of around Rs7,833 billion during its term (2008-13),” he says, which averages out to “an annual compounded growth rate of 19.0 per cent.” By contrast, the same figure for the three years of his own government is 9.75pc, he says, providing detailed breakdowns of the figures for each of the periods.
“The Net Debt-to-GDP ratio as at June 2008 was 53.1pc, which had increased to 60.2pc in June 2013 when the present government assumed office. During the period from July 2013 to June 2016, the Net Debt-to-GDP ratio has remained unchanged at 60.2pc, thus showing no further deterioration, which is a clear sign of improved debt sustainability,” the statement goes on to add.
Pakistan will continue adding to its debt stock, he argues, because as a developing country it must run deficits in order to support growth. “Fiscal and current account deficits are inevitable for a developing country,” he points out. “The challenge of good economic management is to keep these two deficits within sustainable limits, so that the former would not lead to unbridled growth in public debt while the latter would not lead to external liabilities that cannot be supported by prospective capital flows.”
The cost of the country’s external debt is greatly exaggerated by alarmist views, he argues. “This is evident from the average cost of the total external debt obtained by the present government, which comes to around 3.1pc excluding grants and 2.9pc including grants. Furthermore, in October 2016, our government issued a $1bn international sukuk at 5.5pc, the lowest ever rate for any bond or sukuk issued in Pakistan’s history,” he says.
“As of today, external debt servicing obligations for Pakistan are not more than an average of $5bn per annum until 2021. Keeping in view the track record of the country, this amount of repayments should not raise any concern,” he assures. “Pakistan has successfully met higher obligations in excess of $6bn per annum in 2012-13 and 2013-14, even with much smaller volume of foreign exchange reserves.”
The stock of total debt under this government may have risen, but “any unbiased financial expert would endorse that instead of reading out the nominal growth of external debt, it must be seen how its volume has grown relative to the country’s foreign exchange resources, foreign exchange earnings and GDP. Similarly, the servicing burden must not be viewed in isolation but relative to foreign exchange earnings.”
Data accompanying the statement shows steep declines in all the ratios mentioned by the minister. For example, the ratio of public external debt servicing as a percentage of foreign exchange earnings goes from 11.1pc in 2013 to 8.4pc in 2016. Likewise, the ratio of public external debt to SBP reserves falls from 8pc to 3.2pc in the same period.
“Some analysts are often misquoting the level of public external debt in media as $73bn. They lump together public debt with private debt, which includes foreign exchange borrowings of banks as well as non-financial private sector. The stock of public external debt as at end June 2016 actually stood at $57.7bn, up from $48.1bn as at end June 2013. This represents a cumulative annual growth rate of only 6.3pc per annum. Certainly, this cannot be termed as an exponential growth, as claimed by a few,” his statement emphasises.
When looking at net external indebtedness, he argues it is necessary to see this figure in relation to total reserves. Net external indebtedness, measured after subtracting total reserves from total external public debt, he argues, was $44.1bn in 2013, which came down to $39.6bn by June 2016. “Therefore, net external indebtedness of the country improved by $4.5bn by end-June 2016 compared with end-June 2013.”
This has happened, according to the minister, despite the fact that “the present government has repaid around $12bn of external debt till end-June 2016, which was mainly related to the borrowings of the previous governments. Despite these heavy repayments, the foreign exchange reserves of the country have risen to more than $23bn, of which SBP reserves were $18.1bn at end June 2016, which is equal to over five months of import cover compared to around one month of import cover in June 2013.”
The statement is unusually long and detailed and comes at a time when soundings about a softening of the country’s external account have been increasing. The minister claims “some inherently sceptical analysts” are misleading the public by presenting “selective information” which they analyse “on the basis of their preconceived notions.”
His aim in releasing the statement, he says, is to reassure foreign stakeholders that “Pakistan is properly managing its debt and to convincingly dispel any notion that the country is at risk with regard to debt obligations in the foreseeable future.”