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Large projects to increase external debt: MoF

By Sajid Chaudhry

ISLAMABAD: Ministry of Finance has warned that large infrastructure projects envisaged in the next decade (including big dams) would increase the external debt burden if sufficient revenues are not generated from within the country.

The first quarter of FY08 saw an increase of External Debt Liabilities (EDLs) by 3.7 percent to $41.67 billion.

Debt Policy Statement 2007-08 issued by the Ministry of Finance has highlighted that although public debt is now on a solid downward footing, sustaining the momentum will be a continuing challenge.

The coming years will see an increase in borrowing particularly in the foreign currency component to finance the infrastructural development programs. Pakistan need substantial amount of resources for major overhaul of existing human and physical infrastructure.

This report has been produced by the Debt Policy Coordination Office (DPCO) to fulfill the requirement laid out under Section 7 of the Fiscal Responsibility and Debt Limitation (FRDL) Act 2005.

External debt and liabilities (EDL) at the end of FY07 were $40.17 billion. This shows an increase of $2.93 billion which represents a 7.8 percent increase over the stock at the end of FY06. Majority of the EDLs are in the form of medium and long term borrowing from multilateral and bilateral lenders which accounts for more than 80 percent of outstanding debt. The share of short-term debt is extremely low at 0.1 percent. Pakistan has taken advantage of an earlier Paris Club rescheduling to re-profile its debt at more favourable terms.

The growth of EDLs that had slowed earlier in the decade has started to pick-up pace again partly on account of borrowing for earthquake-related spending. EDLs grew by 4 percent in FY06 while they grew by 7.8 percent in FY07. But because of faster growth in GDP the EDLs as a percentage of GDP have been on a decline. EDLs as percentage of GDP have declined from 29.4 percent in FY06 to 28.0 percent in FY07. During the first quarter of FY08, the EDLs have further declined to 25.7 percent of the projected GDP for the year.

The largest increase in stock was for debt to multilateral donors with a change in stock of $2.16 billion. The foreign exchange liabilities showed a decline of $110 million (7.1 percent), but this was more than compensated for by fresh borrowing from multilateral lenders and Foreign Currency Bonds (including Euro bonds). Interest payments on EDLs were $1.11 billion and the amortization payments stood at $1.87 billion.

The first quarter of FY08 saw an increase of EDLs by 3.7 percent to $41.67 billion. Public and publicly guaranteed debt increased by $1.5 billion (4.2 percent) mainly on account of borrowing from multilateral lenders while the external liabilities continued on their downward trend, declining by $ 0.13 billion (8.8 percent).

The external debt and liabilities (EDL) declined from 51.0 percent of GDP in FY02 to 25.7 percent of the projected GDP for FY08 by end-September 2007. The EDLs were 297.2 percent of foreign exchange earnings at the end of FY00 but declined to 122.5 percent by end FY07. The EDLs were over 19 times of foreign exchange reserves in FY00 but declined to 2.5 times by end 2007. Interest payments on external debt were 11.9 percent of current account receipts but declined to 3.1 percent during the same period. The maturity profile improved significantly as is evident from the fact that short-term debt was 3.2 percent of EDL at the end of FY00 but has declined to 0.07 percent of EDL by FY07.

Total external debt servicing on external debt and liabilities was $2.98 billion of which $1.87 billion was for principal payments while $1.11 billion was against interest payments.

During the first four years (2000-04), the appreciation of Rupee along-with low domestic inflation contributed to lowering of interest rates but in the next four years (2004-08), the depreciation of rupee along-with higher inflation contributed to negative incidence of real cost of borrowing.

At the end of FY07 total domestic debt stood at Rs 2610.2 billion which is 29 percent of GDP. The net increase in domestic debt was Rs 298.6 billion from end of FY06 where domestic debt was Rs 2311.6 billion. This represents a growth rate of 12.9 percent, which is higher than the average growth rate since FY00 of 6.6 percent but still lower than the pace of growth in domestic debt observed in the 1980's and the 1990's, which were 20 percent and 16 percent, respectively.

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