Pakistan’s external debt likely to swell to $110b in four years

[Nilgiri]

2/3rd of CPEC financing has to do with power generation projects
the ROI promised to the investors in the power generation projects are secret
It is not clear how they will play out

Thats what I mean.

Having China as Pakistan's main creditor is not a burden at all; on the contrary: it is a very big advantage in this case, which India simply hasn't. Traditional investors only see the financial aspects and profits, China also considers geopolitical implications, which means Pakistan is more important than financial benefits in case of doubt. I hope you understand my point. My English isn't very well.

India would much prefer free market based investment from multiples sources and methods (esp FDI), since:

a) that generally passes a given threshold of viability/feasbility
b) the risk lies with the investor, not the recipient for FDI

The long term investment by the Soviet Union for example for what effectively was geopolitical reasons, into places like Cuba and even within their own country it can be said (given market sentiments were completely ignored in most cases)....definitely were a net financial negative for its people....and a sobering reminder of why market-based economics ultimately cannot be ignored.

Of course CPEC is not that extreme (I believe) but its long term financial viability is not based on market economics overall, but rather somewhat fanciful projections of such....which always benefits the loan provider (in this case China)...and rarely the loan receiver (Pakistan)....unless a large threshold of the projections come to pass. But the risk is shouldered entirely by the receiver while we wait, and the worldwide results of this doctrine are generally stacked against it overall.

 

[DJ_Viper]

Not sure if it got posted anywhere else.

http://tribune.com.pk/story/1229155...s-external-debt-likely-swell-110b-four-years/

Pakistan’s external debt likely to swell to $110b in four years

ISLAMABAD: Pakistan’s external debt is projected to grow to a whopping $110 billion within four years and it will need over $22 billion a year just to meet external payment requirements, posing a serious threat to the country’s solvency.

@farhan_9909 @LA se Karachi @Khan_21 @Areesh @WAJsal @Devil Soul @madokafc @Bilal9 et al.

Sir, there was a time when the US was under serious debt too, in fact, we borrowed a trillion from China to get out of our situation just a few years ago. India is still under heavy debt, about 5-7 years ago, it was probably worst. When any nation tries to grow, unless they have magic, they have to get resources, and today, that kind of resources come as loans.

With the GDP forecasts going up and billions getting ready to go to Pakistan (i have read many of those articles and assessments on here and otherwise), the debt is a temporary thing. Within a couple of years, Pakistani economy will be running full speed and she can start to pay back the loans. Pakistan's GDP (real one after reforms and end of real estate black market) should be around 500-600 billion. So based on that, adding growth, you can easily make the payments and more. I read somewhere that Pakistan's Forex reserves will hit $ 50 billion by the end of 2018. So it doesn't look like such a scary pictures compared to what you are showing us?

 

[wiseone2]

Thats what I mean.


India would much prefer free market based investment from multiples sources and methods (esp FDI), since:

a) that generally passes a given threshold of viability/feasbility
b) the risk lies with the investor, not the recipient for FDI

The long term investment by the Soviet Union for example for what effectively was geopolitical reasons, into places like Cuba and even within their own country it can be said (given market sentiments were completely ignored in most cases)....definitely were a net financial negative for its people....and a sobering reminder of why market-based economics ultimately cannot be ignored.

Of course CPEC is not that extreme (I believe) but its long term financial viability is not based on market economics overall, but rather somewhat fanciful projections of such....which always benefits the loan provider (in this case China)...and rarely the loan receiver (Pakistan)....unless a large threshold of the projections come to pass. But the risk is shouldered entirely by the receiver while we wait, and the worldwide results of this doctrine are generally stacked against it overall.

power generation projects are a red flag. the investors make a killing at the expense of the rate payers or they get screwed. it is difficult to get a middle ground

 

[jha]

This....

Sir, there was a time when the US was under serious debt too, in fact, we borrowed a trillion from China to get out of our situation just a few years ago. India is still under heavy debt, about 5-7 years ago, it was probably worst. When any nation tries to grow, unless they have magic, they have to get resources, and today, that kind of resources come as loans.

With the GDP forecasts going up and billions getting ready to go to Pakistan (i have read many of those articles and assessments on here and otherwise), the debt is a temporary thing. Within a couple of years, Pakistani economy will be running full speed and she can start to pay back the loans. Pakistan's GDP (real one after reforms and end of real estate black market) should be around 500-600 billion. So based on that, adding growth, you can easily make the payments and more. I read somewhere that Pakistan's Forex reserves will hit $ 50 billion by the end of 2018. So it doesn't look like such a scary pictures compared to what you are showing us?

Pakistan has got it covered. With growing economy,they can easily handle this debt.

 

[Bilal Khan (Quwa)]

Imagining of corruption was not a factor, would it have been prudent for Pakistan to take the entirety of CPEC as a loan and use it to broaden the national power supplier (or re-nationalize in some areas)? My rationale is that by nationalizing energy and having people depend only on the government, the public exchequer will be able to profit (with proceeds repaying CPEC initially). Above that, energy could serve as a form of taxation in that a person isn't going to get electricity unless they pay the state for that service. Is that a thing?

 

[Nilgiri]

Sir, there was a time when the US was under serious debt too, in fact, we borrowed a trillion from China to get out of our situation just a few years ago.

You don't get to use past tense here. The debt situation in the US is horrible in both public and private terms...and its not getting better, although you are nowhere near the precipice yet (thats another topic).

But the US has massive seigniorage factor for its currency and number one absolute access to credit world over....not to mention the world's largest economy and wealth accumulation, all these cannot be applied for Pakistan.

India is still under heavy debt, about 5-7 years ago, it was probably worst.

The thing is this debt is not expected to balloon by a whopping 50% in just 4 years time by even the worst of our domestic naysayers.

Its the rate of debt accumulation in relative terms that these Pakistani economists have every right to bring into light.

Overall debt level is another topic, I mean japan is leveraged to the tune of more than 2.4 times its GDP as far as public debt goes....is anyone going to call it being over-leveraged or insolvent compared to India at around 40% of GDP?

Its the same reason why people worry about China's debt and bubbles (esp earlier this year). Its not the debt level per se, but the rate of which it was accumulated over a short period of time.

With the GDP forecasts going up and billions getting ready to go to Pakistan (i have read many of those articles and assessments on here and otherwise), the debt is a temporary thing.

Keyword is forecasts. That will determine how "temporary" this debt is. With the vast majority of CPEC being power production (with some pretty awful repayment/operating terms based on almost zero loan competition for Pakistan) and logistics based on competing/hedging with established cheap sea routes...I really doubt the returns will be anywhere near what is being forecasted. That means a debt trap could very well be on the cards.

The only way to mitigate are through structural reforms and multi-prong approach to attract multiple investment streams. Both do not seem to be happening. Over-relying on CPEC is not a prudent decision. Its welcome if it can be hedged and is thus selectively implemented....instead a desperate "loan us whatever you want, we are desperate" strategy has taken root. It certainly helps the existing power structures in Pakistan immensely, but will probably not improve the country's economy as a whole compared to the investment (i.e transfer efficiency).

Within a couple of years, Pakistani economy will be running full speed and she can start to pay back the loans.

According to whom?

Pakistan's GDP (real one after reforms and end of real estate black market) should be around 500-600 billion. So based on that, adding growth, you can easily make the payments and more.

The "black market/economy" is not taxed. We can only discuss the taxable economy in Pakistan as far as loan repayment/servicing goes. That is ridiculously small size and there are precisely zero reforms on this structurally so far and that does not look to change as the people benefitting from this are in power (not just at the top, but in the centre and base).

I read somewhere that Pakistan's Forex reserves will hit $ 50 billion by the end of 2018.

Again thats a forecast. Please post the link. Also forex reserves pale in comparison to tax revenues and liability leverage (esp under a monolithic military/feudal power class in existence compared to pro technocrat/business) in the importance w.r.t foreign loans.

So it doesn't look like such a scary pictures compared to what you are showing us?

These are Pakistani economists in the article bringing to light some serious issues with this model of development and the choices the Pakistan ruling elite have made w.r.t CPEC. Rather than the title itself, it would be prudent to read the details of that post and the conversation details posted so far.

Its not about "scaring" anyone. Its about trying to figure out where the reality is and how to address (or at least hedge against) the potentially massive shortfalls before it's too late.

 

[Nike]

US is special case, so better left them out of question.

Meanwhile developing countries usually will continuesly increasing their external debts to fill the gap between states budget incomes and spending. The differences is lies on how they manage to increasing their internal yearly incomes and the burden of debts payments. International finance institution doesn't care on how much your debts is piling up as long as you can paid their money all along with the payments interest on time according to the contract both of you had signed.

So what the matter the most is how much increasing level of yearly Pakistan gov. revenue budget projected vis a vis the projected external debts growth. Plus, how much cushion the Pakistan gov. had to facing the most dire situation (like how much foreign exchange reserve the Pakistan gov. had).

with prudent fiscal policy, limiting the upper ceilling state budget deficits (like put 3 % deficits rate as the most higher your country deficit budget can take care), slashing sinkholes subsidies and other public spending (like energy and military spending although i am must sure military spending is can't be touched in Pakistan case so i will left it out). The recents IMF proposal and GOP works is actually bring Pakistan fiscal conditions into a much more manageable level, compared to say three or four years ago.

 

[DJ_Viper]

You don't get to use past tense here. The debt situation in the US is horrible in both public and private terms...and its not getting better, although you are nowhere near the precipice yet (thats another topic).

But the US has massive seigniorage factor for its currency and number one absolute access to credit world over....not to mention the world's largest economy and wealth accumulation, all these cannot be applied for Pakistan.

The thing is this debt is not expected to balloon by a whopping 50% in just 4 years time by even the worst of our domestic naysayers.

Its the rate of debt accumulation in relative terms that these Pakistani economists have every right to bring into light.

Overall debt level is another topic, I mean japan is leveraged to the tune of more than 2.4 times its GDP as far as public debt goes....is anyone going to call it being over-leveraged or insolvent compared to India at around 40% of GDP?

Its the same reason why people worry about China's debt and bubbles (esp earlier this year). Its not the debt level per se, but the rate of which it was accumulated over a short period of time.


Keyword is forecasts. That will determine how "temporary" this debt is. With the vast majority of CPEC being power production (with some pretty awful repayment/operating terms based on almost zero loan competition for Pakistan) and logistics based on competing/hedging with established cheap sea routes...I really doubt the returns will be anywhere near what is being forecasted. That means a debt trap could very well be on the cards.

The only way to mitigate are through structural reforms and multi-prong approach to attract multiple investment streams. Both do not seem to be happening. Over-relying on CPEC is not a prudent decision. Its welcome if it can be hedged and is thus selectively implemented....instead a desperate "loan us whatever you want, we are desperate" strategy has taken root. It certainly helps the existing power structures in Pakistan immensely, but will probably not improve the country's economy as a whole compared to the investment (i.e transfer efficiency).

According to whom?

The "black market/economy" is not taxed. We can only discuss the taxable economy in Pakistan as far as loan repayment/servicing goes. That is ridiculously small size and there are precisely zero reforms on this structurally so far and that does not look to change as the people benefitting from this are in power (not just at the top, but in the centre and base).

Again thats a forecast. Please post the link. Also forex reserves pale in comparison to tax revenues and liability leverage (esp under a monolithic military/feudal power class in existence compared to pro technocrat/business) in the importance w.r.t foreign loans.

These are Pakistani economists in the article bringing to light some serious issues with this model of development and the choices the Pakistan ruling elite have made w.r.t CPEC. Rather than the title itself, it would be prudent to read the details of that post and the conversation details posted so far.

Its not about "scaring" anyone. Its about trying to figure out where the reality is and how to address (or at least hedge against) the potentially massive shortfalls before it's too late.

I see what happened here. I think I've stepped onto that Indian-Pakistani thing people talk about and its always contentious between the two. So, I will step back and relax. No time for this. I posted what I mind said, and sorry if it caused some heartburn. You can never make everyone happy!

 

[Jacob Martin]

Of course CPEC is not that extreme (I believe) but its long term financial viability is not based on market economics overall, but rather somewhat fanciful projections of such

Hello @Nilgiri ...touching base after a long time. Excellent thread as always.

What they are hoping for is that the investment multiplier will kick in. Basically, a more than proportionate positive impact on aggregate income and the overall economy. Ports will need workers, who will need housing. Transport network will need vehicles which will need drivers. Power plants will need transmission equipment, and so on.

Except that currently most of the work is being done under heavy security. Investment multiplier usually detests a garrison town.

and the worldwide results of this doctrine are generally stacked against it overall.

Anything specific you had in mind? The Chinese experiment is still on-going, as we know. The Turkish member posted some info I don't entirely agree with - as in the effect of the debt that Erdogan has piled up. But I would rather not step on toes unless you lead the conversation.

When any nation tries to grow, unless they have magic, they have to get resources, and today, that kind of resources come as loans.

Correct. However, the debt composition varies. A country where the government can rely on a thriving manufacturing sector (China) can pile on internal debt and needs much less of external debt. A country like Pakistan needs to pile on both. India is somewhere in between, strong service sector but not-so-much in manufacturing. So our debt is spread quite proportionately.

The US is in the unique position of having its debt in the reserve currency of the world, which gives it options others don't have.

 

[Nilgiri]

Anything specific you had in mind? The Chinese experiment is still on-going, as we know. The Turkish member posted some info I don't entirely agree with - as in the effect of the debt that Erdogan has piled up. But I would rather not step on toes unless you lead the conversation.

I would look at Mexico and much of Latin America during the 70s and 80s for numerous examples....or the overall phenomenon known as the "Latin American Debt Crisis".

One can argue that it was not a sole provider (rather many western nations supplied the loans)....but I feel there are apt comparisons given the fact that much of Asia (past the tigers) was effectively locked out of debt markets and Africa was just too poor and risky at that time....so Latin America in a way became a sole recipient and the west was a sole provider....both with few peers to provide competition. One external shock and massive underlying weaknesses spiralled in one fell swoop because they were effectively a pack of cards with little firewall and little hedging....because denying one creditor, means more come to your door asking for theirs. When you have one big creditor, the problem does not exactly go away per se, it just becomes even more chasmed like a dirac delta function where one does not entirely know where the function exists....till the problem actually occurs.

So thats the situation in Pakistan to a large degree now. China is the sole provider, no one else wants to commit and provide competition....and thus everything has to go right more than a multi-source environment. Its success relies heavily on what you described as investment multipliers kicking in.

The problem there is as you mention...there is little open bidding and free market competition and as far as I know the private credit market in Pakistan is quite small (which is really what needs to be there to take on the mantle of this past the CPEC China loan base....rather than going for more of the same or leveraging other instruments and collateral that may put real assets at risk down the road).

Thus as a result of this dynamic, almost everything seems to be done with some collusion etc....that prompts inefficiencies...and they are sheltered by the unitary monolithic loan sourcing and the same kind of monolithic power structures within Pakistan. This is actually the bigger problem I see overall that will need many more years of data and results to project (it may not necessarily be bad, we have to wait and see). But from the Latin American crisis and others, I err on the side of pessimism rather than optimism.....the tipping point for me is Pakistan's human capital development and very low tax base.

 

[New World]

@KediKesenFare bro, no matter how much give facts, figures and examples, you won't be able to convince our eastern neighbor... ignorance is in their DNA when it comes to Pakistan..

Have a Good Day.

 

[Jacob Martin]

I would look at Mexico and much of Latin America during the 70s and 80s for numerous examples....or the overall phenomenon known as the "Latin American Debt Crisis".

One can argue that it was not a sole provider (rather many western nations supplied the loans)....but I feel there are apt comparisons given the fact that much of Asia (past the tigers) was effectively locked out of debt markets and Africa was just too poor and risky at that time....so Latin America in a way became a sole recipient and the west was a sole provider....both with few peers to provide competition. One external shock and massive underlying weaknesses spiralled in one fell swoop because they were effectively a pack of cards with little firewall and little hedging....because denying one creditor, means more come to your door asking for theirs. When you have one big creditor, the problem does not exactly go away per se, it just becomes even more chasmed like a dirac delta function where one does not entirely know where the function exists....till the problem actually occurs.

So thats the situation in Pakistan to a large degree now. China is the sole provider, no one else wants to commit and provide competition....and thus everything has to go right more than a multi-source environment. Its success relies heavily on what you described as investment multipliers kicking in.

The problem there is as you mention...there is little open bidding and free market competition and as far as I know the private credit market in Pakistan is quite small (which is really what needs to be there to take on the mantle of this past the CPEC China loan base....rather than going for more of the same or leveraging other instruments and collateral that may put real assets at risk down the road).

Thus as a result of this dynamic, almost everything seems to be done with some collusion etc....that prompts inefficiencies...and they are sheltered by the unitary monolithic loan sourcing and the same kind of monolithic power structures within Pakistan. This is actually the bigger problem I see overall that will need many more years of data and results to project (it may not necessarily be bad, we have to wait and see). But from the Latin American crisis and others, I err on the side of pessimism rather than optimism.....the tipping point for me is Pakistan's human capital development and very low tax base.

Extensive borrowing for infrastructure projects may or may not have long-term benefits. Synergies are required - skilled workers, ability to set up large/small businesses that provide services and feed off the income that can be potentially generated, security and rule of law, effective regulatory framework. A port is only for transit unless one needs it to export and import. I find it strange that Pakistanis are quite happy with simply providing transit to Chinese exports and imports. What is the rate of fees they will be paid for transit and transportation? Apart from energy, port, roads and railways, I also find a mention of agriculture and scientific development in the CPEC list, but rather obscure. IMO, these are as significant if not more to the success of CPEC as the aforementioned.

The effect of Chinese debt is difficult to foresee. Maybe it is correct to say that China has geopolitical goals qua Pakistan so normal rumes don't apply. But Pakistan was already neck-deep in debt before the Chinese came knocking. Will the Chinese bail them out of those debts as well, to protect their investments? Throwing good money after bad?

Or maybe, if the Chinese don't, then IMF will prescribe and enforce "structural adjustment". I wouldn't mind discussing what bitter medicines Pakistan would then need and in what dosage!!

 

[Nilgiri]

Extensive borrowing for infrastructure projects may or may not have long-term benefits. Synergies are required - skilled workers, ability to set up large/small businesses that provide services and feed off the income that can be potentially generated, security and rule of law, effective regulatory framework. A port is only for transit unless one needs it to export and import. I find it strange that Pakistanis are quite happy with simply providing transit to Chinese exports and imports. What is the rate of fees they will be paid for transit and transportation? Apart from energy, port, roads and railways, I also find a mention of agriculture and scientific development in the CPEC list, but rather obscure. IMO, these are as significant if not more to the success of CPEC as the aforementioned.

The effect of Chinese debt is difficult to foresee. Maybe it is correct to say that China has geopolitical goals qua Pakistan so normal rumes don't apply. But Pakistan was already neck-deep in debt before the Chinese came knocking. Will the Chinese bail them out of those debts as well, to protect their investments? Throwing good money after bad?

Or maybe, if the Chinese don't, then IMF will prescribe and enforce "structural adjustment". I wouldn't mind discussing what bitter medicines Pakistan would then need and in what dosage!!

Yep a lot remains in the "let's see" column compared to "sure win" column.

The "factories" will come later apparently.

As far as transit goes, I'm pretty sure its cheaper for made in China goods to get shipped out of their ports as quickly as possible onto ships (cheapest mode of transport worldwide by far) even with cheap transit land fees (which I am not sure what they will be/are)....rather than going overland just to use another country's port. This applies for natural resources and energy China wants to import too. Is there something I am missing here? I can see that in times of conflict its useful to have alternate routes available especially if there is a major chokepoint in your current cheap route (malacca straits)....but the world is generally not at world war conflict time, and probably wont be for a very long time to come if ever.

Thus the Chinese surplus liquidity does strike some parallels with Latin America. In that instance it arose out of the energy crisis (and the surplus liquidity that was created in the Middle East that western banks then circumvented to Latin America). In this case its the overcapacity China finds itself in and plenty of liquidity to recycle outside its borders and create revenue streams for the future. Whether thats a a win-win econmically for China does not win, all that matters is they win....and its definitely a better option to go for such things rather than letting the liquidity sit around domestically or worse spend to create even more overcapacity and bubbles at home (esp when you are trying to coax domestic consumption).

As for Chinese strategy with this model w.r.t Pakistan, again we will have to wait and see how they deal with any potential defaulting or insolvency. A lot depends on the geopolitical situation and the situation back home in China at that point too and where and what exactly causes the issue within CPEC.

 

[Finer]

Pakistanis shouldn't be concerned about external debt. With great difficulty Pakistan has got out of the situation which is already miracle, and the increasing debt is due to the invested resources aka assets that will yield the fruits for stabilizing the economy in the future. The future is bright since Pakistan finally found a leader who decided to use loan wisely by investing on the energy sectors, economical projects and several others to stabilize the economy. With growing economy in the future, the debt will seem like small thing comparatively. Just be patient and watch the money rolling in. Problem is Anarchist aka Imran Khan.

Under Imran Khan leadership in KPK, many investors have defected from KPK recently as the result of poor policy of Imran Khan. Despite several efforts of Imran Khan to sabotage CPEC failed miserably, but that doesn't mean he will not stop sabotaging more economical projects for the future of Pakistan's economy. Something needs to be done about Imran Khan. Imran Khan is not fit to be leader never mind his anarchism that threatens the stability of Pakistan's economy should be arrested under the charge of treason.

 

[Thəorətic Muslim]

The problem is when $22 Billion, of government collections, is used to just service the existing debt.

I can't recall if Pakistan spent 20% of it's 2014 budget for debt.

As for the 2016 Budget is 32% deficit from collection on the $42Billion. (Don't give me the Japan's 31.5% decifit bs).

India would much prefer free market based investment from multiples sources and methods (esp FDI), since:

India is a 1.2? Billion person market. If I was a corporation I would bend over backwards just to get entry. As do many corporations since the 1990's liberalization.

Is that a thing?

Government + No Corruption?

It's not really a thing to tie the ability to receive electricity with paying your taxes. At least not in the US/Canada/Netherlands/Turkey. Most countries haven't tied a National ID number with anything other than Passport, Bank Account, or Credit History.

The problem Pakistan faces is lack of efficient electricity production, transmission line loss, and collection loss. So even if the new CPEC power plants can produce X units of electricity it will only translate to X(price/unit)-Y(Transmission)-Z(Nonpayment)=Revenue. Since it's a national utility company everything is averaged.