Reserves fall as external debt service rises

KARACHI: Pakistan could face a serious problem as its foreign exchange reserves quickly deplete amid rising external debt servicing.

The country’s external debt service reached $10.886 billion in the first three quarters of 2021-22, compared to $13.38 billion for the whole of FY21.

It was just $1.653 billion in 1QFY22 compared to $3.51 billion in the first quarter of 2020-21. However, debt service jumped to $4.357 billion in 2QFY22 and $4.875 billion in 3QFY22.

The country faced a serious threat from its external front as the State Bank of Pakistan’s foreign exchange reserves fell into single digits despite an inflow of $2.3 billion from China at the end of the last month.

The increasing size of external debt service each quarter indicates that the government has borrowed dollars at higher commercial rates to meet its external debt repayment obligations.

The PML-N-led coalition did not disclose the rate at which it borrowed $2.3 billion from China. Initially, Beijing had agreed to roll over the syndicated loans before the ousting of the PTI government. However, the Shehbaz administration had to wait two months to obtain the Chinese loan.

The financial sector and other players in the economy are still not satisfied with the hidden cost of the Chinese loan. The market is full of speculation that Chinese loans were taken at a very high rate.

Finance Minister Miftah Ismail assured Pakistanis that the release of the $1 billion tranche is expected within days, but three months have passed without a satisfactory response from the IMF. Bankers believe the fund is telling governments like Washington to do more.

Since the IMF stopped financing, the country no longer receives project financing from the World Bank and the Asian Development Bank.

A senior analyst said the Chinese knew Pakistan was unable to re-enter the international debt market and the IMF was in no rush to help Islamabad. This was the reason why the Chinese lent money at a very high rate.

Pakistan has paid debt service through commercial borrowing, meaning more external debt service in the next fiscal year. In FY22, the two governments could not control the influx of huge imports totaling $80 billion, creating a large current account deficit (CAD).

So far, the CAD of 11MFY22 has reached $15.199 billion, compared to only $1.183 billion during the same period last year. The huge CAD alone is enough to understand the external weakness of the economy.

Despite record remittances and exports, the country is unable to raise dollars from the international debt market.

Posted in Dawn, July 13, 2022

Shirlene J. Manley