Debt-bearing capacity

The finance ministry’s debt policy statement for 2017-18 reads like a fact sheet on chronic government failure. It took a lot of courage to face up to the reality of the external debt sinking deeper into the abyss and the ministry made no effort to conceal the fact that the country had nearly exhausted its capacity to bear the debt. That did not stop it from blaming others such as the commerce ministry and the volatile and uncertain situation in the Middle East. In the last fiscal year, debt figures grew at a faster rate than our country’s foreign exchange earnings. In fact, the external debt servicing-to-foreign exchange earnings ratio fell to 12.4% — lower than that recorded during the last year of the PPP government. This shows that the cost of external debt servicing in percentage of foreign exchange earnings rose significantly in this period.

On Tuesday, the finance ministry shared the debt policy statement with the National Assembly as stipulated under the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005. The ministry attributed the increase in these ratios to lower foreign exchange earnings. Of course there were other factors such as stagnation in the exports largely due to global economic conditions, low commodity prices and bottlenecks in the energy and infrastructure sectors of the economy. Oddly there was no mention of adverse impacts of withholding tax refunds, raising the cost of doing business by imposing indirect taxes and enforcing electricity surcharges on exports.

The good news, however, is the slight improvement in the external debt-to-gross domestic product ratio — the sole external indicator that showed an upturn.

Ultimately, the sustainability of the external debt can be assessed though proper financing of the outstanding debt repayment without falling back on foreign exchange reserves. From the current external debt position and other indicators, we can see that Pakistan is facing a whirlpool of woes. The best way to navigate out of this crisis is to focus on sustainable measures to boost exports and bring down imports.

Published in The Express Tribune, February 1^st, 2018.

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