Becoming a fiscal pariah

As external funding drys up, forex reserves are under threat and last quarter of current fiscal year will be critical.


Editorial February 12, 2013
DESIGN: ESSA MALIK

For the first time in the past few years, Pakistan’s external debt and liabilities have come down to $65.8 billion — a decrease of $600 million.

However, the fact is that all is not what it seems to be. We have not suddenly adopted stricter fiscal discipline and started paying off our debts so efficiently that our liabilities are going down.

There are a few other reasons for this. One aspect is the fall of the US dollar against most other currencies. This has resulted in windfall gains — because Pakistan holds debt in about 20 currencies — a lot of which were also wiped out because the rupee was one of the few currencies that did not strengthen against the dollar.

One other reason — and perhaps, one with more far-reaching implications — is the gradual reduction in annual budgetary support by financial institutions like the Asian Development Bank (ADB), following in the footsteps of institutions like the World Bank, which has stopped budgetary disbursements pending a Letter of Assessment about the health of Pakistan’s economy by the IMF. The IMF is not likely to issue this letter.

The ADB has also stopped project disbursements until Pakistan completes the project initiation process.

Simplistically put, the reduction in foreign loans is a good thing. However, a fiscal or monetary system is anything but simple. Pakistan relies on foreign loans for pretty much everything from development spending, to project financing, to bolstering its foreign exchange reserves and most of all, to ensure it can meet its debt servicing requirements. And now, as external funding seems to be drying up — historically lenders have been providing a budgetary cushion of $3-4 billion a year — our forex reserves are under threat and the last quarter of the current fiscal year will be a very critical period. Debt servicing costs will continue to rise as a halt in the slide of the rupee is not expected. It is also expected that interest rates will no longer fall, they might actually increase, which will also increase the cost of debt financing.

Published in The Express Tribune, February 13th, 2013.

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