Volume 23 Issue 3, March 2019


By Dr. Aadil Nakhoda

In recent years, there has been a surge in Pakistan’s external debt. According to statistics obtained from the World Development Indicators (WDI), Pakistan undertook a borrowing spree from 2005 onwards, which saw its stock of external debts increase from $34 billion to $84.5 billion in 2017. External debt increased to $64.5 billion in 2011, a rise of approximately 90% between 2005 and 2011. Although, there was a slight decline to $58 billion in 2013, the stock regained its upward trajectory. The situation has resulted in chronic issues in the balance of payments. The creditworthiness of Pakistan has deteriorated, while the increasing pressure on foreign exchange reserves has been a major factor in the volatility of exchange rate today.

Although countries do accumulate external debt in order to finance various projects that require funds far greater than available domestically, the debt also has to be serviced through interest payments and principal repayments. The debt servicing on external debt for Pakistan was at $6.92 billion in 2013 and $6.74 billion in 2017. The figures include the principal and the interest payments. With exports at $21.9 billion in 2017, external debt servicing exceeded 30% of Pakistan’s total exports.

The total external debt position as reported by the State Bank of Pakistan (considering slight differences with WDI data) was $96.7 billion on September 30, 2018, an increase from the position of $89.4 billion in December, 2017. Therefore, Pakistan had accumulated a debt of $7.3 billion in the nine months between December 2017 and September 2018. Once the recent financial instruments offered to Pakistan are accounted for, the amount of the country’s gross external debt is likely to surpass the $100 billion mark. On the other hand, external debt servicing amounted to $4.48 billion (excluding short-term debt) in the first nine months of 2018. However, $5.52 billion was serviced in the first nine months of 2017. The difference was primarily due to the $1.6 billion more worth of principal paid in the first nine months of 2017.

The export receipts reported by the SBP in the first nine months of 2018 were approximately 10.7% higher than the export receipts for the same period in 2017. The cumulative import payments in FY18 were $7.3 billion more than the cumulative import payments in FY17. The trade deficit was $4.5 billion higher. Hence, the rise in import payments negated the increase in exports. The current account deficit in FY18 was approximately 50% greater than the current account deficit in FY17.
However, in the first six months of FY19, the current account deficit has partially improved as remittances to Pakistan increased by approximately $1 billion over the same period in the first six months of FY18. Although, imports have declined in recent months, these are believed to be sensitive not only to global prices but also to the local demand of fuel and capital goods such as machinery, plant and equipment as well as transportation vehicles.

The biggest challenge that Pakistan faces is of its low exports. With less than $22 billion exported from Pakistan (approximately 8 percent of the GDP) in 2017, the country will most likely continue to struggle in terms of its current account. Although, remittances are able to cover the shortfall to an extent, increase in exports must be prioritized to tackle the current account deficit.

The change in the current tax regime, which is restricting business growth and creating an unfavourable business environment in Pakistan, is the need of the hour. The government has introduced the Finance Supplementary (Second Amendment) Bill 2019. Some of the incentives in the Finance Supplementary Bill 2019 were much needed. Incentives include reduction and removal of duties imposed on industrial inputs and smuggling-prone items. It also facilitates exporters by easing liquidity constraints and is likely to attract Greenfield investment by exempting sales tax on plant and equipment imported into the country.

The low value of exports from Pakistan results not only from the lack of diversification, even within the major sectors, but also due to the inability of the exporters to innovate and participate in production networks. In order to increase exports, a multi-pronged approach by the government and the exporters will be required.

First, the range of products within the more established exporting industries must be diversified. For instance, the textile industry has tremendous potential by diversifying its exports towards value added products, such as readymade garments and knitwear rather than exporting cotton yarn and fabric.

Second, the government must ensure that not only are tariffs lowered, the dependence of the FBR on custom duties to generate tax revenue is reduced as well. Tariffs tend to distort not only the costs of imported inputs that must be acquired to produce different varieties, reducing their overall competitiveness in the global market, but also increase prices in the output market. It is crucial that the ‘Make in Pakistan’ campaign is designed in favour of increasing exports rather than promoting import substitution.

Third, the Least Developed Countries Report 2018: Entrepreneurship for Structural Transformation by the United Nations Conference on Trade and Development (UNCTAD) points out that entrepreneurial activity in developing countries is typically limited to imitation of low-value added products instead of innovation and creation of new products. Imitation of low-value-added products reduces the ability of small and medium enterprises (SMEs) to export. The government must not only provide a viable business environment by easing the costs of doing business in Pakistan but also increase the knowledge of entrepreneurs regarding exporting activities. Therefore, export training programs for entrepreneurs should be promoted through universities, the HEC and relevant government institutions.

The increasing debt and its implications on debt servicing will require the government to undertake policies that are export-oriented. An optimistic 10% growth in exports each year for the next five years will propel exports past $35 billion in 2022. The debt burden can eventually be lowered by focusing on investment that is export-oriented.

The writer is an Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration (IBA), Karachi. He can be reached at anakhoda@iba.edu.pk


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