Living off the debt

[SunilM]

Living off the debt

The external scorecard is getting red with every passing quarter; and now the weekly numbers are becoming crucial. The reserves are falling at a steady pace of $200-250 million per week for last six weeks and at this pace, without additional external debt, the IMF programme is three months away, assuming the Fund intervention is inevitable once the SBP reserves are below 2 months of import cover.

On the flip, the growth momentum continues. The LSM despite some dip in last two months is growing at a decent pace. The consumer and construction boom continues as auto sales and cement dispatches are still showing promising growth. And inflation is still subdued, even after rounds of depreciation in the first half of the fiscal year as domestic commodity prices are already higher than international counterpart.

The only issue, a big one though, is financing the growth momentum? The domestic economy jewels are real and resilient, but the country does not have ample external resources to fuel the growth which is taking imports to unprecedented levels. Monthly imports in January were $5.6 billion. Highest ever by far (previous high was $5.1 billion in May 2017).

The problem does not appear out of the blue as imports started moving north sharply as the economic growth started gaining momentum. The PMLN government in the eighteen quarters of its regime so far has relied on external debt to sustain the growth momentum by not letting the reserves fall and not letting the currency depreciate to its supposedly real value, based on REER computation done by the IMF and published by the SBP.

From Jun13 to Dec17, the country’s foreign reserves increased by $9.1 billion to $20.1 billion while the total net external debt increased by massive $27.9 billion to reach $88.9 billion (27.3% of GDP). In case of public debt, the net increase stood at $19.3 billion in the same time to reach $70.5 billion (21.7% of GDP), while SBP foreign reserves are up by $8.1 billion.

Pakistan, in simple words, has consumed $18.9 billion of debt (increase in debt minus hike in reserves) in thin air – out of which $11.2 billion is eaten by the government while the private sector (including PSEs) has swallowed $7.7 billion of debt. In relative terms, the private sector debt increase is unprecedented and its utilization efficiency probably would be higher than government’s fiscal use.

This debt may be partially used in future consumption as the expansion in energy, auto, steel and cement, and other sectors may help the country grow in years to come. However, the major chunk is consumed for better today at the cost of bitter tomorrow. That is the fate of an economy where national savings rates are persistently below 15 percent and every investment/ high consumption cycle is financed by foreign savings.

The trend is simply not sustainable; and it is matter of time before the growth momentum becomes a casualty to external woes. This has happened before in the economy and history may be repeating itself. The situation has become precarious in the last few months – in 2QFY18, the net public external debt increased by $3.5 billion while the reserves remained virtually unchanged during that period.

And the situation is becoming more worrisome in the third quarter as the reserves are falling fast while raising further external debt, without IMF nod, is becoming increasingly difficult. According to news items, the government has raised $6.6 billion in gross debt so far in this fiscal year, out of which $1.6 billion is from China. Mind you, in FY17, China supported the economy with around $5 billion of debt as well.

Out of $6.6 billion gross debt in 7MFY18, $1.6 billion from China, $2.5 billion from Euro bond/Sukuk, $1.6 billion from multilaterals, and $722 million short term borrowing from commercial banks (minus China). The reliance of debt is increasingly falling on short term expensive borrowing which is not good.

Anyhow, the gross public external debt this year so far is $6.6 billion while the SBP reserves fell by $3.3 billion, to make the gross financing requirement equal to $9.9 billion for 7MFY18. At this pace, another $6-7 billion financing is required for remaining fiscal year; and it is critical to see how much China pours in to avert an IMF programme. What next? Who cares? It is the responsibility of next government!

https://www.brecorder.com/2018/02/20/400060/living-off-the-debt/

 

[salarsikander]

Can India loan us ?

 

[ziaulislam]

Living off the debt

The external scorecard is getting red with every passing quarter; and now the weekly numbers are becoming crucial. The reserves are falling at a steady pace of $200-250 million per week for last six weeks and at this pace, without additional external debt, the IMF programme is three months away, assuming the Fund intervention is inevitable once the SBP reserves are below 2 months of import cover.

On the flip, the growth momentum continues. The LSM despite some dip in last two months is growing at a decent pace. The consumer and construction boom continues as auto sales and cement dispatches are still showing promising growth. And inflation is still subdued, even after rounds of depreciation in the first half of the fiscal year as domestic commodity prices are already higher than international counterpart.

The only issue, a big one though, is financing the growth momentum? The domestic economy jewels are real and resilient, but the country does not have ample external resources to fuel the growth which is taking imports to unprecedented levels. Monthly imports in January were $5.6 billion. Highest ever by far (previous high was $5.1 billion in May 2017).

The problem does not appear out of the blue as imports started moving north sharply as the economic growth started gaining momentum. The PMLN government in the eighteen quarters of its regime so far has relied on external debt to sustain the growth momentum by not letting the reserves fall and not letting the currency depreciate to its supposedly real value, based on REER computation done by the IMF and published by the SBP.

From Jun13 to Dec17, the country’s foreign reserves increased by $9.1 billion to $20.1 billion while the total net external debt increased by massive $27.9 billion to reach $88.9 billion (27.3% of GDP). In case of public debt, the net increase stood at $19.3 billion in the same time to reach $70.5 billion (21.7% of GDP), while SBP foreign reserves are up by $8.1 billion.

Pakistan, in simple words, has consumed $18.9 billion of debt (increase in debt minus hike in reserves) in thin air – out of which $11.2 billion is eaten by the government while the private sector (including PSEs) has swallowed $7.7 billion of debt. In relative terms, the private sector debt increase is unprecedented and its utilization efficiency probably would be higher than government’s fiscal use.

This debt may be partially used in future consumption as the expansion in energy, auto, steel and cement, and other sectors may help the country grow in years to come. However, the major chunk is consumed for better today at the cost of bitter tomorrow. That is the fate of an economy where national savings rates are persistently below 15 percent and every investment/ high consumption cycle is financed by foreign savings.

The trend is simply not sustainable; and it is matter of time before the growth momentum becomes a casualty to external woes. This has happened before in the economy and history may be repeating itself. The situation has become precarious in the last few months – in 2QFY18, the net public external debt increased by $3.5 billion while the reserves remained virtually unchanged during that period.

And the situation is becoming more worrisome in the third quarter as the reserves are falling fast while raising further external debt, without IMF nod, is becoming increasingly difficult. According to news items, the government has raised $6.6 billion in gross debt so far in this fiscal year, out of which $1.6 billion is from China. Mind you, in FY17, China supported the economy with around $5 billion of debt as well.

Out of $6.6 billion gross debt in 7MFY18, $1.6 billion from China, $2.5 billion from Euro bond/Sukuk, $1.6 billion from multilaterals, and $722 million short term borrowing from commercial banks (minus China). The reliance of debt is increasingly falling on short term expensive borrowing which is not good.

Anyhow, the gross public external debt this year so far is $6.6 billion while the SBP reserves fell by $3.3 billion, to make the gross financing requirement equal to $9.9 billion for 7MFY18. At this pace, another $6-7 billion financing is required for remaining fiscal year; and it is critical to see how much China pours in to avert an IMF programme. What next? Who cares? It is the responsibility of next government!

https://www.brecorder.com/2018/02/20/400060/living-off-the-debt/

as you are an economic expert, let me ask you how much has external debt increased as % of GDP? every one knows you should measure things in % of GDP right?

to summarize is that Pakistan took 18 billion in debt which improved foreign reserves to 20 billion dollars (from 9 billion dollars) where they have remained stable (despite glooming look for 2 years by doomsday people), in total however, the GDP to debt ratio decreased which are promising sign..so whats negative news here..?

probably current account deficit, BUT all emerging markets are in high -tive CAD , just look at india CAD in 2005-2011 it was higher than ours

yes things could have managed better if ishaq Dar wasnt there, probably by giving more incentives to exporters and not defending a unrealistic rupee(while indian ruppe lost 15% in 2013-2018, Pakistan gained)

 

[BannuTorkham]

as you are an economic expert, let me ask you how much has external debt increased as % of GDP? every one knows you should measure things in % of GDP right?

to summarize is that Pakistan took 18 billion in debt which improved foreign reserves to 20 billion dollars (from 9 billion dollars) where they have remained stable (despite glooming look for 2 years by doomsday people), in total however, the GDP to debt ratio decreased which are promising sign..so whats negative news here..?

probably current account deficit, BUT all emerging markets are in high -tive CAD , just look at india CAD in 2005-2011 it was higher than ours

yes things could have managed better if ishaq Dar wasnt there, probably by giving more incentives to exporters and not defending a unrealistic rupee(while indian ruppe lost 15% in 2013-2018, Pakistan gained)

Dudes you have been passing off Pakistan's external debt as foreign RESERVE which are supposed to be your assets
offcourse your foreign reserves are bound to spiral down because they are unsustainable.

 

[salarsikander]

Now days only china can

Then why are gangoos bitching about it ?

certainly are not an economist.

You seem to be more worried about pakiatan than Pakistani themselves. Typical dehati aurat mentality. Its not like Hindustan is another Switzerland

 

[SunilM]

Rise in external borrowing

According to the data released by the Economic Affairs Division (EAD), the Abbasi-led administration procured 3.8 billion dollars in loans between September and December 2017. This raised the country's reliance on total loans and liabilities from 83 billion dollars by end June 2017 to 88.89 billion dollars by December 2017. This implies that while during the first quarter of the current fiscal year total loans and liabilities were 2.09 billion dollars by the second quarter reliance on loans and liabilities increased to 3.80 billion dollars - a disturbing trend.

This is all the more disturbing when one considers that the government's borrowing of 1.16 billion dollars from the external commercial banking sector is at high rates of return with low amortization period. This effectively implies that payment of interest on these loans as well as repayment as and when due would increase the budgeted current expenditure significantly; which, in turn, would generate a greater need to procure loans before the end of the current fiscal year.

A credit rating agency gauges an entity or a country's creditworthiness and in this context, it is relevant to note that Standard and Poor's credit rating for Pakistan is B with stable outlook (dated 31 October 2016), Moody's last set our rating at B3 with stable outlook (dated 11 June 2015); however, in 25 January 2018 Fitch reported a rating of B with a negative outlook. Fitch acknowledged a growth rate of 5.5 percent in the current year, sustained on the back of recent CPEC investments, improvement in electricity generation, though it added that energy costs were higher, that would address capacity constraints and help manufacturing and export sectors - claims that the PML-N administration has repeatedly made as proof of its astute handling of the economy.

However, Fitch justifies its negative outlook by noting that, "Pakistan has been unable to sustain the gains made under the three-year IMF Extended Fund Facility which ended in September 2016. The credit rating cited a fall in foreign exchange reserves coupled by widening fiscal deficit as a major indicator of reversals made after the IMF's programme ended in Sep 2016." The rating agency warned that reserves may decline to as low as 16.8 billion dollars by the end of the current fiscal year unless "currency flexibility wasn't followed and tightening of macro policies to restrain domestic demand wasn't enforced," though State Bank's decision to loosen its grip over the exchange rate in the aftermath of Ishaq Dar's departure from the country was lauded. The report further noted that current account deficit is attributable to increase in China Pakistan Economic Corridor-based imports, stagnant exports and weak macroeconomic position while predicting a widening of the current account deficit to 4.7 percent of Gross Domestic Product by the end of June 2018. And most disturbingly, Fitch highlighted structural weaknesses linked to poor governance with losses in state-owned entities accumulating, particularly in distribution companies (Discos). And then there is the looming political uncertainty due to the forthcoming elections which would fuel uncertainty in the economic arena.

To conclude, the rising reliance on borrowing is raising the budgeted debt servicing costs to unsustainable levels which, in turn, accounts for the negative outlook by Fitch. It is imperative for the government to begin to revisit this reliance by prioritizing economic as opposed to political considerations. Unfortunately, however, there is no precedence in our history when administrations place economic considerations above political considerations.

https://fp.brecorder.com/2018/02/20180220345549/

 

[ziaulislam]

Now days only china can.



Well, One must face the facts. Every day one (Pakistani) expert after another warns of debt trap. Fact, forex reserves are at a precarious level. Fact, forex reserves are built on loans and not investment. Fact, Current account deficit is out of control. Fact fiscal deficit is out of control. Fact, forex reserves are depleting continuously.Fact, Pakistani economist are warning of the debt trap everyday. Fact, you certainly are not an economist.

you didnt answer my question...
what change occurred in loan to GDP ratio and total reserves in last 5 years? isnt that the objective way to measure this?
i have to admit, i am doctor not an economist, my father was a economist and i am deeply interested in this field

you also did answer the fact about CAD of other similar economies
fiscal deficit is well within reasonable levels(even for an election year)

point of contention is not whther this could have been handled well or not but pakistan is in debt trap and looming trouble..

will we go to IMF, or support the CAD with loans simply depends which one will be the better and cheaper source,
total requirements of foreign needs is around 15-16 billion dollars, half of it is going to be met via investment and investment loans by Chinese the other 1/3 needs via AB, WB and 1/3 via bonds, though PMLN might opt the cheaper IMF route

this is not the first time i have having similar discussion with indians, go back and search this forum, everything has proven wrong in last 3-4 years

 

[The Diplomat]

Our debt to GDP isn't far of India and compared to some countries like UK, US, China, Japan, etc we are much much better. Indian propaganda is all it is...

 

[SunilM]

what change occurred in loan to GDP ratio and total reserves in last 5 years? isnt that the objective way to measure this?

OMG. You are exactly where you were five years ago. In a debt trap approaching IMF again. And dont try to justify going to IMF ( the lender of last resort). All Pakistani economist having any self respect and not wanting to go begging with 'kushkol' in their hands, write these articles. And then we have you. Do your research on why IMF is called the lender of last resort. Don't try to pass it off as something done in the normal course of business. Also, there is something called import cover through forex reserves, look at Pakistan's!.

Also give figures of chinese investment ( bringing in forex/FDI )to be made in the coming months to fund the twin deficits.Give Figures of the total Chinese FDI in the previous Financial year and this financial year.

Also why do you think the next sukuk tranche for 1.5 billion dollars has been stalled using the TAP option? Cause, US fed is raising interest rates. So no easy liquid dollars are available. Now you will get bonds at 7-8 % interest. So that option is closed. And World Bank has stopped disbursing loans to Pakistan cause of your dwindling forex reserves. Till IMF gives Pakistan a letter of comfort, no money for budgetary support is coming from them.

Now, the only option is IMF and for that You need to make Uncle Sam happy. But then you can have no qualms about that, since according to you, approaching IMF is a routine affair.

And stop with the comparisons, non of the large economies approach IMF. You know why? Research on forex reserves vis a vis import cover and debt payment capacity .

btw, look how Mifta iImail is begging in the US not to put Pakistan in FATF. I quote the New York Times.

"
But his optimistic tone faded as he recalled a meeting with United States Treasury officials this month. The Pakistani delegation walked away with the impression that “they are still going to put us on the gray list,” he said, calling the Trump administration’s foreign policy inconsistent.

That would undermine moderates in the country, he said.

“We’ll have egg on our faces,” Mr. Ismail added. “We pushed for these reforms, although many thought we wouldn’t be successful changing Washington’s behavior.”
https://www.nytimes.com/2018/02/14/world/asia/pakistan-terror-list.html

No nation with some self respect goes and pleads/beg like this in a foreign Nation. For that the economy need to be strong. Going to the IMF and becoming America's lackey will lead to only to more grovelling and begging.

 

[BannuTorkham]

Our debt to GDP isn't far of India and compared to some countries like UK, US, China, Japan, etc we are much much better. Indian propaganda is all it is...

one of the most touted argument which is false at many fronts..

having high debts is not a problem a priori, but pakistan is slowly losing its ability to service the debts.

iqbal's Shaheens are nt at all ready to accept it. their usual response

1. ppl had said same thing about pak being an atomic power
2. cpec will be game changer
3.why are bharatis crying

 

[salarsikander]

why are bharatis crying

What have you been doing so far ?

Isn't it good forindia, that pak cannot service its debt? I mean make up your MIMD dehai aurat mentality people, do u want us to be finished or you want to bitch and whine about how only Indians can give us advises.

 

[Thanatos]

one of the most touted argument which is false at many fronts..

having high debts is not a problem a priori, but pakistan is slowly losing its ability to service the debts.

iqbal's Shaheens are nt at all ready to accept it. their usual response

1. ppl had said same thing about pak being an atomic power
2. cpec will be game changer
3.why are bharatis crying

Forget about Iqbal's shaheens. Why does it even bother India?? Why dont you go and help your government in dealing with 8000 farmers death only in last year only?? What about 79 % of indian wealth going to just 1 percent of population? What about massive corruption scams that we here every day??

I dont understand indians coming here lecturing Pakistan, not realizing they themselves a poor third world country and host to largest population of people living below the poverty line.

 

[SunilM]

Pakistan’s budget deficit widens to Rs796.3b


Amount is 2.2% of GDP; gap higher despite development spending being reduced by Rs152b PHOTO: FILE

ISLAMABAD: The budget deficit during the first half of the current fiscal year widened to Rs796.3 billion, which is more than half of the annual target despite the government sanctioning development spending for only a few dozen priority schemes.

Overall gap between expenditure and income during July-December period of this fiscal year was equal to 2.2% of gross domestic product (GDP), said a summary of Consolidated Federal and Provincial Budgetary Operations. The finance ministry released the provisional summary on Tuesday.

SBP proposes changes in rules for foreign currency account holders

The deficit ballooned to over Rs796 billion despite authorities restricting development spending by about Rs152 billion against the limits approved by the National Economic Council (NEC). It was, however, equal to last year’s level in absolute terms.

Overall, total expenditures increased to Rs3.161 trillion during the first half, equal to 62% of the annual budget, giving a clear indication of slippages in election year. The current expenditures increased to Rs2.54 trillion, two-thirds of the annual target.

In comparison, total revenues including those of the provinces stood at Rs2.384 trillion in the first half, which were equal to 50.5% of the annual target. The tax revenues in the first half amounted to Rs2.02 trillion, only 46.7% of the annual target.

The government got a boost in its ‘other taxes’ collection, which stood at Rs287 billion, and were equal to 90% of the annual target. This was because of Rs93.2 billion as sales tax on services collection by the provinces and a gain of Rs93.8 billion from the petroleum levy in the first half, according to the finance ministry summary.

Non-tax revenues stood at only Rs357.7 billion or 36.4% of the annual target due to the United States’ decision to withhold Coalition Support Fund (CSF) disbursements. The State Bank of Pakistan (SBP) transferred Rs125 billion in profits to the federal government, almost 48% of the annual target.

The overall budget deficit widened to Rs796.3 billion despite the fact that the four federating units showed Rs150 billion as cash surplus during the first six months. Excluding provincial savings, the federal budget deficit jumped over Rs927 billion or 2.6% of GDP in the first half.

The trend suggests that the annual budget deficit target of 4.1% of GDP or Rs1.480 trillion, which the parliament had approved in June last year, has already become unrealistic in the first half. The Rs796-billion budget deficit was equal to 54% of the annual target. It should have been close to Rs600 billion, as the pace of expenditures in the second half significantly increases.

During the last round of talks, the International Monetary Fund (IMF) had informed the finance ministry that the budget deficit would swell to 5.4% of GDP or over Rs1.9 trillion.

One of the key reasons for the increasing budget deficit from July through December was roughly Rs751.5 billion cost of domestic and foreign debt servicing, according to a Ministry of Finance summary. The debt servicing is 55% of the annual budget earmarked for this purpose. For the current fiscal year 2017-18 (FY18), the federal government has earmarked Rs1.363 trillion for domestic and foreign debt servicing.

The defence sector consumed Rs393.4 billion in the first half, which was largely in line with its annual budget of Rs920 billion.

PAC accuses PM of sabotaging parliament’s business

The budget deficit and the current account deficit remain the two biggest challenges for Pakistan’s economy that overshadow the government’s economic performance in other areas. Because of these twin deficits, there are apprehensions that Pakistan may go back to the IMF for yet another bailout package. But the outgoing government is reluctant to take this decision due to upcoming general elections. Federal development spending in the first six months amounted to Rs248 billion or about one-fourth of the annual budget. This is significantly lower than the limit set by the NEC.

The federal development spending should have been close to Rs400 billion. The federal government borrowed net Rs384 billion from foreign lenders and Rs412 billion from domestic sources to finance the budget deficit. The gross foreign borrowings in the first half stood at Rs612 billion but the federal government returned Rs228.2 billion in external debt.

Published in The Express Tribune, February 21st, 2018.

https://tribune.com.pk/story/1640221/1-pakistans-budget-deficit-widens-rs796-3b/