Trapped in Debt: A Review of Pakistan’s External Debt

Despite growth of 6 percent in exports and 23 percent in home remittances during the first eight months of 2011-12, the current account deficit has widened to $3.0 billion as compared to $0.2 billion in the corresponding period of last year. 

Author: Institute of Public Policy, Beaconhouse National University, Lahore, Pakistan
Country: Pakistan
Category: Human Development and Poverty

Pakistan, in recent years, has witnessed mounting levels of both external debt and domestic debt. The position with respect to external debt servicing depends upon the growth of exports and home remittances and containment of the current account deficits in the balance of payments. Despite growth of 6 percent in exports and 23 percent in home remittances during the first eight months of 2011-12, the current account deficit has widened to $3.0 billion as compared to $0.2 billion in the corresponding period of last year. On top of this the financial account of the balance of payments has turned negative due to the drying up of foreign direct investment and gross aid inflows in the presence of fixed debt repayments. Consequently, the overall balance of payments position has worsened sharply, leading to a depletion of foreign exchange reserves of the State bank by almost $2.7 billion from the level on June 30, 2011.

Beyond this, there is the prospect of increased pressure on foreign exchange reserves in a medium run setting with commencement of large debt repayments to the IMF. These are projected at $2.4 billion in 2012, $3.8 billion in 2013, $2.2 billion in 2014 and $0.5 billion in 2015. Overall, given even conservative projections, foreign exchange reserves of SBP which stood at close to $15 billion at the start of 2011-12 could fall below $11 billion by the end of the year. They could then decline to critically low levels in 2012-13, such that the foreign exchange cover of imports slips to below two months.

Given this state of affairs, government needs to implement strong policies for promoting macroeconomic stabilization, in particular, the foreign exchange position. However, the fear is that while the reform process has a gestation time and will bear fruit with a time lag, the masses of Pakistan may be overburdened and be denied of even the basics in life. As such, Pakistan will eventually need a measure of debt relief if an extremely painful process of adjustment is to be avoided with severely negative impact on living conditions of the people, especially the poor.

The objective of this study is to explore the case for, and the options of, relief of the external debt of Pakistan.

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