Review of external debt

International researchers identified that the problem of external borrowing as a strategy to enhance economic growth creates serious debate among policy makers, researchers as well as economists. Currently, external (foreign) debt is a worldwide problem for the present and future development of most countries in the world. Presently the researchers analyzed that Pakistan is among the top 10 states that possess the largest external debt stocks and became eligible for the Debt Service Suspension Initiative (DSSI) in the aftermath of the Covid-19 pandemic. As per the International Debt Statistics in 2022, issued through the World Bank, there was a broad divergence in the rate at which external debt accumulated in individual DSSI-eligible states, counting the group’s largest borrowers. The combined external debt stock of the 10 largest DSSI-eligible borrowers (Angola, Bangladesh, Ethiopia, Ghana, Kenya, Mongolia, Nigeria, Pakistan, Uzbekistan, and Zambia) was recorded $509 billion at end-2020, 12 percent higher than the comparable figure at end-2019 and equivalent to 59 percent of the external debt obligations of all DSSI-eligible states combined. They also accounted for 65 percent of the end-2020 private non-guaranteed external debt of DSSI-eligible states. The rate at which debt accumulated in individual states varied significantly. For Pakistan, statistics showed that 8.0 percent rise in external debt stocks reflected the inflow of budgetary support from official bilateral and multilateral creditors and rollover and new credit lines from commercial banks.

Statistics also showed that net inflows from other private creditors increased 15 percent in 2020 to $14 billion but were highly concentrated and also reflected rollovers and extension of new credits through commercial bank loans to Pakistan in the context of the IMF program. The Foreign Direct Investment (FDI) inflows to Pakistan declined moderately to $1.9 billion, 5 percent below the 2019 level, cushioned through continued investment in power generation and the telecom sector from British and Chinese investors. In South Asia, debt to China has increased, from $4.7 billion in 2011 to $36.3 billion in 2020, and China is now the largest bilateral creditor to the Maldives, Pakistan, and Sri Lanka. No doubt, economic growth is a main goal of most developing countries; hence resources are mobilized from many sources counting external borrowing for investment into viable projects for growth acceleration. According to the World Bank, governments globally responded to the covid-19 pandemic with massive fiscal, monetary, and financial stimulus packages. While these initiatives were aimed at addressing the health emergency, cushioning the impact of the pandemic on the poor and vulnerable and putting states on path to recovery, the resulting debt burden of the world’s low-income states increased 12 percent to a record $860 billion in 2020. Furthermore even prior to the pandemic, various low- and middle-income states were in a vulnerable position, with slowing economic growth and public and external debt at elevated levels. Statistics also showed that external debt stocks of low- and middle-income states combined increased 5.3 percent in 2020 to $8.7 trillion. On the other hand, the deterioration in debt indicators was widespread and impacted states in all regions. Across all low- and middle-income states, the increase in external indebtedness outpaced GNI and export growth. Low- and middle-income countries’ external debt-to-GNI ratio (excluding China) increased to 42 percent in 2020 from 37 percent in 2019 while their debt-to-export ratio rose to 154 percent in 2020 from 126 percent in 2019. Moreover in April 2020, the G20 launched the Debt Service Suspension Initiative (DSSI) to offer temporary liquidity support for low-income states. The G-20 countries agreed to enlarge the deferral period by the end of 2021. In November 2020, the G20 agreed on a Common Framework for Debt Treatments beyond the DSSI. According to the World Bank in 2020, overall net inflows from multilateral creditors to low- and middle-income states increased to $117 billion, the highest level in a decade. Net debt inflows of external public debt to low-income states increased 25 percent to $71 billion, also the highest level in a decade. Multilateral creditors, counting the IMF, offered $42 billion in net inflows while bilateral creditors accounted for an additional $10 billion.

In last I would like to mention here, a strong and wide ranging reform agenda must be implemented by the government to Pakistan as the present government of Pakistan has been trying to introduce various scheme. This agenda will include proper valuation of the rupee, cutback on luxury imports through an enhancement in import margin requirements and imposition of regulatory duties, resort to more progressive taxation, restructure public enterprises, expand targeted programs of social protection for the poor and so on.

Pakistan: External Public Debt (US$ in million)
Details Jun-18 Jun-19 Jun-20 Mar-21
A. External Public Debt (1+2) 70,237 73,449 77,994 81,606
1. Government External Debt (i+ii) 64,142 67,800 70,314 73,972
i) Long term (>1 year) 62,525 66,536 68,773 73,139
Paris Club 11,643 11,235 10,924 10,438
Multilateral 28,102 27,788 30,898 32,721
Other Bilateral 8,674 12,717 13,428 14,722
Euro/Sukuk Global Bonds 7,300 6,300 5,300 5,300
Military Debt
Commercial Loans/Credits 6,806 8,470 8,068 9,161
Local Currency Securities (PIBs) 96 348
Saudi Fund for Development (SFD)
NBP/BOC deposits/PBC* 26 59 68
Naya Pakistan Certificate* 382
ii) Short term (<1 year) 1,617 1,264 1,542 833
Multilateral 961 778 814 451
Local Currency Securities (T-bills) 0 0 586 382
Commercial Loans/Credits 655 486 141
2. From IMF 6,095 5,648 7,680 7,634
i) Federal Government 2,833 3,415
ii) Central Bank 6,095 5,648 4,847 4,219

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