Pakistan Seeks More Funding

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funding

Pakistan’s external debt situation is worsening day by day, as it is almost 91% of GDP (until March 31st, 2019) but this isn’t the first time. Pakistan also had the same debt-to-GDP ratio almost 100% back in the year 1999, before it took its flight off from that plot to the new heights of GDP growth and lessening the dependence on external finances.

It all happened with the great integration of Fiscal and Debt Strategy, which brought macroeconomic stability with resulting an increase in exports and an efficient decrease in current account deficits.

Though the latest slump is highly influenced with the inflow of foreign debt funds starting from year 2007~8 until year 2017~18 unfortunately, the funds were not helpful in changing the arena of low exports in comparison to increasing imports.

Some funds were demanded budgetary support including infrastructure development but some funds were lavishly spent on keeping the PKR parity stable against US$.

This caused the emerging market to showcase fewer exports against the cheap and innovative imports bringing another deficit in the already burgeoning challenges of the budgetary deficit.

A different source of funding was utilized which include printing money against government guarantees, issuing international currency bonds and sukuks, borrowing from the local market including commercial banks and asking the friendly countries for help. All these means were utilized but never had the option of safe deposits in State Bank until recommended by the current Khan’s economic team.

The total influx from contemporary sources of multilateral and bilateral creditors stood at $8.470b (until March 31st, 2019) out of which $6.3b were from China and it added another $2b for the safe deposit back in May 2019 as well.

Saudi Arabia and UAE both also deposited $3b each after their crown prince’s visits and at the latest, Qatar vowed for another $3b (1st tranche of $500m received a couple of days back).

Pakistan is also seeking funds from IMF, ADB and World Bank just to keep fiscal balance. IMF will grant a sum total of $6b (seeking approval in this week) in a 39 months long payout package. ADB will give $3.4b in budgetary support and out of which $2.2b will be received in this fiscal year. World Bank is giving $918m for different development projects and an additional $1.4b for 7 projects.

So, a lot of money is coming and some more will be coming in the shape of FDIs from different Gulf countries, which will add more strength to balance the current account deficit and balance of payment crises.

Pakistan will seek more money from World Bank later this year in the category of Special Policy based Loans (SPBL) which is primarily to avoid default and that money will be equal to $1b. Pakistan also has plans to issue Euro Bonds and Sukuk instruments worth $3b in this financial year. All that effort aims to averse the twin crises.

  

For the common man, all is not well and he is also ignorant of the basic facts and particularly if the talk is of economic issues, its stability through stringent reforms and meeting the challenges with some form of strategy, he is absolutely in dark ages. For his help, a few basic terms (concepts) are explained hereunder which is part of the total effort to give them a little knowledge in the simplest possible words. We will learn about the 3 types of crises which are “Current Account Deficit”, “Budget Deficit” and “Fiscal Deficit”;

 

Current Account Deficit = total value of Imports – the total value of Exports:

Example:

Total Imports = $100

Total Exports = $60

C/A Deficit = (100 – 60) => $40

Budget Deficit = total expenditure – total receipts

Example:

Total Expenditure = $100

Total Receipts = $80

Budget Deficit = (100 – 80) => $20

Fiscal Deficit = budget deficit + borrowings (the amount of borrowing the government has to resort to meet its expenditure)

Example:

Budget Deficit = $10 ($20 – $10 Borrowing)

Borrowings = $10

Fiscal Deficit = (10 + 10) => 20

So, if a country has all three deficits, its government has to find ways to do the needful. Sometimes the projects for which they seek financial support are worthy (like Dams, Airports, Railway Expansion, Motorways, Economic Hubs, Free Trade Zones, etc) and sometimes the projects are not worthy (Lahore Orange Train, Peshawar Metro, Loss-making or subsidized projects, etc).

We must bear in mind that such funding must be used for development purposes not for public consumption.

Let me elaborate my point, Pakistan had been seeking many project financing which proved that the projects are not finished yet or even not started, and that money was used for supporting the Pak Rupee against Dollar for many years; which in-fact not only stalled the growth but also mounted pressure on exports and encouraged imports.

Imports remained cheap for many years in Pakistan which destroyed the local industry and halted the integration between Fiscal and debt strategy.

At the moment Pakistan has more than Rs35 trillion total debt and liabilities, which has increased at an exponential rate since year 2007~8 and its external debt in terms of US dollars has crossed $95b, after all, such huge financing our GDP growth is still meager and there was no chance seen in the recent past and even in the near future that it is going to improve.

Hence, the incumbent government went for novice ways like safe deposits and calling money from friendly counties first before going to conventional sources.

Conclusion:

After all such facts, figures and alarming situation it is our moral responsibility to stand with government, help them in mitigating foreign and local debts at a faster pace, just as they did in last financial year by paying more than $9b and will be paying the same amount in this financial year as well.

Moreover, they are also trying very hard to reduce the balance of payment and current account deficit along with Fiscal and Budget deficit. We can help them when we will pay our fair share of income tax so that they reduce the other tax burdens of indirect taxes on the general masses and overall us.

Good Luck Pakistan!

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