Rising debt burden

[Neo]

Rising debt burden

ACCORDING to a Debt Policy Statement, the total public debt increased from less than three trillion rupees in 1999 to over Rs4.4 trillion in 2006. While the total debt has increased in absolute terms, the debt-to-GDP ratio has declined. During 2000-2006, the debt grew at 6.15 per cent per annum against the nominal GDP growth of 12.4 per cent, rising to 6.7 per cent against the real GDP growth of 6.6 per cent in 2006. But, simultaneously, debt-to-GDP ratio has declined sharply over the year to 56 per cent. The success of the official debt strategy has been substantially contributed by a one-time huge debt relief and rescheduling by the Paris Club and replacement of expensive domestic and foreign loans by cheaper credit facilitated by the recent record low interest rates. Apart from an average GDP growth of seven per cent per annum for the past few years, the size of the economy has also enlarged by the updating of national accounts.

As GDP growth is not export-oriented but driven by domestic demand, the impact of the rising debt stock needs to be seen, more appropriately, against the background of the widening fiscal and current account deficits. In 2006, the domestic debt servicing cost was Rs191.4 billion. Nearly $3.1 billion was repaid to foreign lenders against aid of $2.26 billion and $800 million raised from international financial markets. The outstanding foreign debt as on June 30, 2006, was $37.26 billion. Over one year, the fiscal deficit rose from 3.5 per cent to 4.2 per cent and the current account deficit went up from 1.4 per cent to 3.9 per cent. The trend is continuing as export earnings from merchandise are expected to plummet to four per cent this year and the overall balance of payments is worsening. Foreign debt is expected go up much faster as upgrading and expansion of the national transport corridor picks up pace and the construction of mega dams is undertaken. Besides, there are risks in raising loans at the floating interest rates. New foreign loans amounting to over three billion dollars were contracted in 2006. About a quarter of the debt stock by end June 2006 was at floating interest rates which can raise the cost of debt servicing when interest rates rise or the exchange rate depreciates. A devaluation of one rupee against the dollar would raise the debt servicing cost by Rs36 billion. The impact of devaluation on the debt servicing cost of foreign loans can be assessed from the exchange rate of the rupee falling from Rs51.6 in 1999 to Rs60.5 in the first quarter of 2007. The bulk of the loans are coming from multilateral lending agencies for which it is vital that major shareholders are on board - which is not always the case.

The government, however, is placing more reliance on domestic debts which has raised its share to 53.2 per cent of the total public debt, reducing dependence on external borrowings. Domestic debts are rising much faster at 7.5 per cent against the overall public debt increase of 6.7 per cent. These debts are immune from foreign exchange risks but debt servicing rises when interest rates increase. But the government needs to reduce its inflationary borrowings. More important, the government needs to ensure that public debt policy does not lead to a debt trap as in the past.

http://www.dawn.com/2007/03/07/ed.htm#1

 

[Cheetah786]

Robing peter to pay pal.
they have to smarten up.its time to not only service the debt but start to pay it down.investment in infrastructure is always good for the economy.but usually most of the investment in Pakistan is done by private companies.so why are they borrowing for that iam confused.

 

[Neo]

March 12, 2007
External debt: a false sense of achievement

By Yousuf Nazar

PAKISTAN’s official external debt has not gone down since 1999 although it has received record aid, investments, and remittances flows. It has gone up to $36.9 billion from $33.6 billion in 1999 despite receiving at least $10 billion in economic, military and development aid from the United States, over $6 billion in privatisation proceeds, and a relief of $1.6 billion in loan write-offs by foreign governments during the last seven years.

The rescheduling of Paris Club debts provided an additional relief of $ 1.2 to $1.5 billion annually in terms of debt service payments. Is the government’s debt management policy as sound and successful as it claims or a historic opportunity to restructure country’s high debt levels has fallen victim to political expediency or a false sense of achievement?

Even after having received such generous assistance, Pakistan external debt to GDP ratio is 28 per cent - slightly worse than Africa’s 26.2 per cent, which also happens to be the average for all the developing countries. The average external debt to GDP ratio of all emerging markets declined from 42.1 in 1999 to 26.2 per cent in 2006, underpinned by strong growth in the global economy and record investment flows into the developing countries.

It is argued that the former Prime Minister Nawaz Sahrif left a heavy external debt burden at 53 per cent of the GDP and the current levels represent a substantial improvement. The net debt flows (disbursements minus repayments) into Pakistan during 1990-1999 aggregated $5.4 billion compared to $1.1 billion during 2000-2006.

Hence, the growth in the debt slowed down during the last seven years. However, post-9/11, Pakistan received generous foreign aid as well as much higher levels of foreign direct investment. Remittances averaged around $4 billion a year during 2003-2006 compared to an average of $1.5 billion in the 1990s.

Nevertheless, Pakistan’s liquid foreign exchange reserves, after jumping to $10 billion-level in 2002-03, have more or less stayed around that level on average. The foreign exchange reserves of even Sub-Saharan countries (excluding South Africa and Nigeria) doubled to $50 billion during the same period. Brazil and Argentina repaid all of their $25 billion debt - by utilising their foreign exchange reserves - to the IMF in early 2006 to rid their countries of its influence.

In contrast, Pakistan has not able to reduce the external debt burden in absolute terms or build up its foreign exchange reserves. In fact, it has become the fourth largest borrower of the World Bank and the fifth-largest recipient of American aid to foreign nations. This shows its continued reliance on foreign governments and multilateral institutions - despite declarations of economic sovereignty - and a failure to mobilise domestic resources to pay for the development expenditure. Leaving aside all the technicalities and vague statements, there has been no convincing explanation for not having used the privatisation proceeds to reduce the external debt in a completely transparent manner.

Some policy makers argue that it is acceptable to borrow if the borrowing is for productive purposes. That is theoretically correct. However, if the borrowing record is littered with corruption and wasteful spending, and major sectors of the economy (large agriculturists, stock brokers, property barons, etc.) do not pay any tax at all, the proposition becomes quite debateable and the motives questionable.

This is a critical issue for Pakistan’s political economy because the subject of external debt has been a highly political one for most of Pakistan’s history since it has relied heavily on the US and institutions under the US influence for its external financing needs. So have many other developing countries - though not necessarily to Pakistan’s extent - in the past but most no longer do. This type of aid has been associated with corruption, waste and increasing debt burdens. It has even been viewed as a payoff to the third world dictatorships for their support and aid in helping the US in achieving its foreign policy objectives that have often clashed with the national interests of the borrower countries.

For example, the recently proposed US law, aimed at punishing oil companies that deal with Iran, will make it even more difficult to construct the Iran-Pakistan-India gas pipeline. Pakistan must import natural gas from Iran to meet an imminent shortage during the next few years. On the other hand, recent moves in the US congress threaten to cut military aid to Pakistan if it fails to “do more” and stop the Taliban insurgency from its tribal areas.

The government claims that it no longer borrows from the IMF and does not carry around a begging bowl. This is quite misleading because it has been borrowing more and more from other multilateral institutions like the World Bank (WB) and the Asian Development Bank (ADB). The borrowing from multilaterals has outpaced the borrowing from the Paris Club since 1999-2000. Its share in total public and publicly guaranteed debt has increased from 37.5 to 50.2 per cent in 2006.

Consequently, whilst the government has made progress in raising money from the international capital markets – a welcome and positive development - official sources still account for 90 per cent of Pakistan’s external debt, including the WB/ADB [48 per cent] and foreign governments [38 per cent]. IMF’s loans rarely exceeded 5-6 per cent of total external debt as it normally provided the balance of payments support and not long-term loans that constitute the bulk of our external debt.

The present government has criticised the previous governments for the accumulation of almost $18 billion debt in the 1990s and increasing Pakistan’s debt burden. While it is true that the debt accumulation in the 1990s was large, critics of the civilian governments conveniently overlook a key statistic: 77.2 per cent of the gross disbursements during 1990-1999 were utilised to repay the old debts. The debt-service to gross disbursement ratio jumped to 82.8 per cent during 2005-2006. The continuing increase in this key ratio throughout the 1990s and even during 2000-2006 indicates that more and more of new loan disbursements were used to repay the past debts; a significant percentage relating to the borrowings during the previous military regime of General Zia-ul-Haq.

Pakistan's total external debt that stood at $8.7 billion in 1978, reached about $22 billion (50 per cent of the GDP) by the end of the 1980s. That Pakistan had to borrow more later in the 1990s just to service some of the old debts indicates that the loans were not properly utilised as they did not contribute to the development and therefore to the debt servicing capacity. This raises serious questions about the whole wisdom of politically motivated borrowings from the foreign governments and the institutions under their control.

It is therefore fair to ask whether any cut in aid from the foreign governments would be of real significance from a development perspective and particularly in a global economic environment when the private capital flows (through foreign direct investments and international capital markets) have become the dominant source of financing to the developing countries. As a group, they reduced their total external debt to the foreign governments and multilateral institutions (WB, IMF, ADB, etc.) through net repayments of $48 billion in 2006 whilst attracting a staggering $502 billion in net private capital flows.

Pakistan’s vicious cycle of borrowings from foreign governments and multilateral institutions, graft, waste, and accumulation of more debt to repay the old debts leads one to believe that the rulers have been putting excessive burden on the people and mortgaging their future by borrowing more and more while indulging in wasteful and unproductive spending while the ‘big fish’ get away with not only benefiting from the “development projects” financed by external borrowings but also with paying no taxes.

Pakistan’s foreign (or hard currency) debt to total debt (that is, including domestic debt) ratio of 47 per cent is high compared to an average of 28 per cent for emerging economies. Given our long-term track record of using foreign debt to indulge in wasteful expenditure, it would be in the best national interest to set up a special fund (in a hard currency, be it dollar or euro) to accumulate all the privatisation proceeds and use that for the early retirement of our external debt. Some countries, like Russia, have set up hard currency stabilization funds to provide for the rainy days.

However, this would be just one among a series of measures needed to reduce dependence on foreign debt. We must cut imports and reduce the rapidly deteriorating current account deficit that has prevented a build-up of foreign exchange reserves since 2003. We must also strive to increase the tax- to- GDP ratio from 10 per cent (one of the lowest) to 17 per cent within the next five years instead of making far-fetched 10-year plans.

The world today is experiencing unprecedented economic growth with huge pools of liquidity seeking investment opportunities. If Pakistan can reduce its macro imbalances by reducing foreign debt and mobilising domestic resources, it can attract a much greater level of foreign direct investment and achieve greater economic freedom. Shall we rise to the challenge or we will once again squander away a historic opportunity?

The writer is a former head of Emerging Markets Equity Investments, Citigroup.

http://www.dawn.com/2007/03/12/ebr2.htm

 

[Neo]

Seeking loans for development

By Sultan Ahmed

TOTAL public debt of Pakistan which was equal to 100 per cent of its GDP in 1999 came down to 50 per cent of the GDP in the first quarter of this year. Debt equal to 70 per cent of the GDP is universally regarded as a safe margin. And yet the total public debt went up to Rs1.46 trillion in the seven years of military rule which is a large sum.

The public debt was equal to 629 per cent of the federal taxes in 1999 and has come down to 336 per cent by now and the debt burden has become less heavy. The paradox is explained by the fact that as the GDP growth increased particularly in recent years, the share of the debt burden in terms of the GDP went down — more so during the last three years.

And as along with that the tax revenues increased the total debt in terms of the tax income went down to almost a half of 629 per cent from 1999. That means that the ultimate solution to the debt problem, particularly of the rising domestic debt, lies in higher economic growth and larger tax income, along with, of course, “distributive justice”.

The higher the debt, the larger the resources diverted to reducing the debt burden and heavier the interest rates and the options to choose less costly debt also become less.

And the major lenders tend to dictate their own terms, at times arbitrarily. Hence the minimum of loans should be taken and at the lowest possible rates of interest and with a long grace period.

The foreign debt is not coming down substantially as new loans are taken when the old loans are repaid. In the fiscal year 2006, foreign debt of $3.1 billion was repaid, but new loans of $3.05 billion were taken.

The Debt Policy Statement issued by the finance ministry says that if new loans are not taken, the present external loans will take about 30 years to be repaid at a rate not exceeding $1.6 billion per annum –- a total of $48 billion.

But large new loans will have to be taken for building the five large dams and rebuilding the infrastructure for industrial and commercial development particularly from the World Bank and the Asian Development Bank. But they should be negotiated at low rates of interest, as on IDA terms of a half to two-third per cent and with a maximum grace period and they should be utilised in time as committed as otherwise Pakistan has to pay heavy committal fee as it had been doing wastefully for long earlier.

Even now the World Bank and the ADB are urging Pakistan to make proper preparations for building the dams that it needs instead of indulging in a great deal of prevarication or foot dragging for political or other reasons.

Although the dams are urgently needed for providing water, the government is taking long time in making the necessary arrangements. Anyway, once the finances are committed by the donors, construction of the projects should not be delayed. It is equally necessary to complete the projects in time as delay can mean spending far larger funds as in the case of Ghazi Barotha dam.

Foreign loans carry an extra risk. If the rupee is devalued or is floated down or if the dollar becomes stronger in the international market, the rupee cost of the foreign debt goes up and the government has to mobilise more rupees to repay the old loans. At the moment, the government is buying dollars at almost Rs 61 to service foreign loans obtained at Rs 9.90 for a dollar or a little more in the 1970s and 1980s.

Another dimension of foreign loans is political riders they come with particularly when they are large. We have to accept the political terms of such loans which can infringe on our sovereignty.

That is more so when it is defence aid or strategic assistance. In the case of the US, which is a major donor in the military as well economic spheres, the political riders are too heavy and their leaders even threaten to cut the aid if their demands are not fully met.

But when it is aid from Sweden, Norway, Denmark or the Netherlands which is rather small but is very valuable, there are few political conditionalities.

Foreign aid also becomes expensive when it is tied aid as sometimes it is.

If we have to accept very costly consultants and pay them heavily out of the loans, the net loans get reduced. And if the machinery for the project has to come from the lender states, that can be more costly than the one we can get from other sources. It was said in the past that almost 85 per cent of the US aid goes back to the US. Things have changed considerably now and the tied aid has become less frequent.

Since domestic debt is free from such encumbrances, the government has opted for that on a massive scale. So the country’s outstanding domestic debt reached Rs 2.422 trillion by the end of 2006, showing an increase of 36.5 per cent since the year 2002 when it stood at Rs1.744 trillion.

There is no critical non-payment or repayment problem in the domestic debt as the permanent debt which includes prize bonds, other government bonds, treasury bills and Pakistan Investment Bonds and the unfunded debt mostly from National Savings are refloated when the old loans are replaced.

So, the government has a nonchalant attitude to domestic loans but the government has to pay interest on the domestic loans which it tries to keep low. The National Savings Organisation has been paying interest rates on deposits less than what it should be paying normally. Unlike the foreign creditors, the domestic lenders exert no pressure on the government and give much of the money that it needs.

Had they done so, the government would have borrowed less from the public and tried to mobilise more from tax revenues. The domestic debt jumped by Rs 957 billion to Rs 2.364 trillion in the first quarter of 2007 from Rs1.398 trillion in 1999 — a 69 per cent increase.

The State Bank of Pakistan urges the government and the commercial banks through treasury bills and PIBs rather than asking the State Bank to print more currency notes for it and using the National savings funds. That is part of its tight monetary policy to reduce the money in circulation and fight inflation.

The domestic debt, unlike foreign debt may not seem to have a political dimension, but the fact remains that year after year, the debt servicing cost is going up. It rose to Rs301 billion last year from Rs247.7 billion the year before. The interest payments on domestic debt amounted to Rs190 billion.

And with interest rates in Pakistan rising, a larger part of the taxes paid is bound to go for debt servicing each year. It was 25.5 per cent of the national expenditure incurred last year and will be 23.6 per cent this year which is a large part of the revenues collected. If instead more of the revenues collected goes into development and infrastructure, the rate of development will be far higher.

All this is happening at a time when very large funds — as much as over $ 20 billion are needed for the construction of the five dams and we have to borrow heavily from the World Bank and other mega lenders.

There is nothing wrong with borrowing in the modern world, individuals and states do that. What matters is what you do with that money, whether you invest it judiciously and create safe avenues to service the loans and eventually repay that in full in time and the country eventually benefits from such large borrowing.

When as much as 25 per cent of the official expenditure goes towards debt servicing and the tax revenues are not very elastic, we have to be careful when generating new debt.

To begin with, the project should be ready as we obtain loans because the project should not get bogged down in political squabbles or in disputes between the provinces or between the centre and the province as has been the case with the Kalabagh dam.

Anyway we should avoid keeping borrowed funds in the pipeline and paying a penalty of half to three-forth per cent out of the unused money.

The schedule for building the aided project should be adhered to strictly unlike what happened to the Ghazi Barotha dam. Delay in the construction of the project is as fatal as an excess of corruption in such schemes and. And too many consultants should not be eating much of the construction money.

The project should be completed in time. All this may sound idealistic but when we have to raise as much as $20 billion for the five major dams, any slackness in the approach to such projects is impermissible.

Great alert is imperative in handling the new projects funded from external loans. The debt watch by the finance ministry under Dr. Ashfaq Hasan Khan is good, but there should be a total approach to the whole spectrum beginning with the aid seeking to completion of the projects and their utilisation.

Fifty per cent of the GDP as public debt and 25 per cent of the public expenditure for debt servicing are large enough figures. And we have to show greater efficacy in the aid utilisation in getting the projects ready to help the people who have been making great sacrifices in the name of development.

http://www.dawn.com/2007/03/15/ed.htm#4

 

[Neo]

Foreign debts burden
Friday March 30, 2007

In seven-and-half-years of the sitting government, Pakistan’s total public debt increased by Rs1.465 trillion to Rs4.411 trillion, showing a rise of almost 50 per cent from Rs2.946 trillion in 1999. And, it is still bad performer in global competitiveness when compared with India in 40 areas including business sophistication, technology application and market access abroad. Pakistan, however, is better ranked than India in government efficiency having less red-tape and influence of the powerful in policy making.
In other words, Pakistan’s official external debt has not gone down since 1999 although it has received record aid, investments, and remittances flows. It has gone up to $36.9 billion from $33.6 billion in 1999 despite receiving at least $10 billion in economic, military and development aid from the United States, over $6 billion in privatisation proceeds, and a relief of $1.6 billion in loan write-offs by foreign governments during the last seven years.

A ‘Debt Policy Statement’ issued by the finance ministry reveals that total domestic currency debt also jumped by Rs957 billion to Rs2.346 trillion in the first quarter of 2007 from Rs1.389 trillion in 1999, registering an increase of about 69 per cent. Likewise, the foreign currency debt went up by Rs508 billion to Rs2.065 trillion in the first quarter of 2007 from Rs1.557 trillion in 1999, up by 32.6 per cent in seven years.

The report says total public debt increased by 165 per cent since 1995 when it stood at Rs1.662 trillion. Its two components, domestic currency and foreign currency debt surged by 197 per cent and 136.5 per cent, respectively, since 1995.

"The coming years will see an increase in borrowing particularly in foreign currency component to finance the infrastructural development programme. The large infrastructure projects envisaged in the next decade will increase the debt burden if sufficient revenues are not generated from within the country," says the report. The country’s total outstanding domestic debt reached Rs2.422 trillion by the end of November 2006, showing an increase of 36.5 per cent (Rs648 billion) since fiscal year 2002 when it stood at Rs1.774 trillion.

The report said the total external debt and liabilities increased by more than six per cent to $37.72 billion in the first quarter of 2007 from $35.47 billion in fiscal year 2003. Of this, public and publicly guaranteed debt rose by 13.4 per cent to $33.15 billion this year, compared with $29.23 billion in 2003. The external debt and liabilities at the end of fiscal 2006 were $37.26 billion.

Pakistan’s official external debt has not gone down since 1999 although it has received record aid, investments, and remittances flows. It has gone up to $36.9 billion from $33.6 billion in 1999 despite receiving at least $10 billion in economic, military and development aid from foriegn countries for last seven years

This is an increase of $1.43 billion which represents a four per cent increase over the stock at the end of fiscal 2005.

The report, however, maintains that such a massive increase in overall stock of public debt should be seen in the context of gross domestic product and revenues because "the capacity of carry debt is dependent on the size of the economy as well as resources available to the government to service that debt".

On the basis of these parameters, the public debt at the end of fiscal year 1999 was about 629 per cent of total revenue and came down to 356 per cent of total revenue. Similarly, the total public debt was 100 per cent of GDP in 1999 and has come down to 50 per cent in the first quarter of 2007.

Pakistan’s liquid foreign exchange reserves, after jumping to $10 billion-level in 2002-03, have more or less stayed around that level on average. The foreign exchange reserves of even Sub-Saharan countries (excluding South Africa and Nigeria) doubled to $50 billion during the same period. Brazil and Argentina repaid all of their $25 billion debt - by utilising their foreign exchange reserves - to the IMF in early 2006 to rid their countries of its influence.

The Competitive Support Fund (CSF) – a joint initiative of Pakistan’s finance ministry and the United States Agency for International Development (USAID) based in the finance ministry, said that India showed better performance in willingness to delegate authority, staff training, reliance on professional management, incentive compensation, regional sales, research & development and capacity for innovation.

India also outperformed Pakistan in efficiency of corporate boards, staff training, technology transfer, quality of management schools, local competition, buyer sophistication, supplier quantity, venture capital availability and degree of customer orientation. India also has better basic requirements for institutions, infrastructure, macroeconomic and health and primary education.

The areas wherein Pakistan has shown improvement include public trust in government, ethics and corruption, favouritism of government officials, efficiency, undue influence and interest rates. Pakistan also outperformed India in other areas such as hiring and firing practices, time required to start business, interest rate spread, real effective exchange rate, macro economy, quality of electricity supply, malaria prevalence and government surplus/deficit.

Pakistan's current account and trade deficits are "unsustainable" in the long run and will require adjustments in monetary or exchange rate policies, the CSF said. "Currently the deficits are being financed through one-off investment flows - this is unsustainable in the long run".

It also said that despite recent improvements in the poverty picture, nearly one-quarter of Pakistan's population continued to live below the poverty line, and reducing this figure constitutes the foremost challenge for the authorities.

It further said that the weak points in the private sector are related to corporate governance and modern management and motivation of the workforce.

Pakistan's energy supplies were highly dependent on oil imports, the cost of which accounted for a large share of the country's total import bill. In addition, national power demand is outstripping supply. This is a trend likely for some time, given that Pakistan's productivity capacity needs are projected to reach a level of 162,590 megawatts by 2030, from a level of 15,500 MW in 2005.

Only 55 per cent of Pakistan's population has access to electricity from the national grid.

"In fact, Pakistan has one of the lowest per capita consumption of energy in the world," the report added.

While the debt stock has increased significantly, Pakistan’s capacity to service it has also improved more significantly as size of the economy expanded. As such, total public debt of Pakistan which was equal to 100 per cent of its GDP in 1999 came down to 50 per cent of the GDP in the first quarter of this year.

Debt equal to 70 per cent of the GDP is universally regarded as a safe margin.

The public debt was equal to 629 per cent of the federal taxes in 1999 and has come down to 336 per cent by now and the debt burden has become less heavy. The paradox is explained by the fact that as the GDP growth increased particularly in recent years, the share of the debt burden in terms of the GDP went down — more so during the last three years.

But the underlying problem that global competitiveness should have increased Pakistan’s exports to service debts and result in higher revenues could not be resolved. The foreign direct investment described by CSF as one-off source could not be relied upon in the long run, reverting back reliance on debt seeking. The higher the debt, the larger the resources diverted to reducing the debt burden and heavier the interest rates and the options to choose less costly debt also become less.

And the major lenders tend to dictate their own terms, at times arbitrarily. Hence the minimum of loans should be taken and at the lowest possible rates of interest and with a long grace period. The foreign debt is not coming down substantially as new loans are taken when the old loans are repaid. In the fiscal year 2006, foreign debt of $3.1 billion was repaid, but new loans of $3.05 billion were taken.

The Debt Policy Statement issued by the finance ministry says that if new loans are not taken, the present external loans will take about 30 years to be repaid at a rate not exceeding $1.6 billion per annum –- a total of $48 billion. But large new loans will have to be taken for building the five large dams and rebuilding the infrastructure for industrial and commercial development particularly from the World Bank and the Asian Development Bank.

Although the dams are urgently needed for providing water, the government is taking long time in making the necessary arrangements. Anyway, once the finances are committed by the donors, construction of the projects should not be delayed.

It is equally necessary to complete the projects in time as delay can mean spending far larger funds.

Foreign loans carry an extra risk. If the rupee is devalued or is floated down or if the dollar becomes stronger in the international market, the rupee cost of the foreign debt goes up and the government has to mobilise more rupees to repay the old loans. At the moment, the government is buying dollars at almost Rs61 to service foreign loans obtained at Rs 9.90 for a dollar or a little more in the 1970s and 1980s.

Another dimension of foreign loans is political riders they come with particularly when they are large. We have to accept the political terms of such loans which can infringe on our sovereignty. That is more so when it is defence aid or strategic assistance. In the case of the US, which is a major donor in the military as well economic spheres, the political riders are too heavy and their leaders even threaten to cut the aid if their demands are not fully met.

If we have to accept very costly consultants and pay them heavily out of the loans, the net loans get reduced. And if the machinery for the project has to come from the lender states, that can be more costly than the one we can get from other sources. It was said in the past that almost 85 per cent of the US aid goes back to the US.

The domestic debt, unlike foreign debt may not seem to have a political dimension, but the fact remains that year after year, the debt servicing cost is going up. It rose to Rs301 billion last year from Rs247.7 billion the year before. The interest payments on domestic debt amounted to Rs190 billion.

There is nothing wrong with borrowing in the modern world, individuals and states do that. What matters is what you do with that money, whether you invest it judiciously and create safe avenues to service the loans and eventually repay that in full in time and the country eventually benefits from such large borrowing. One can only hope that this money is not going in the hands of few – contractors, civil and military bureaucrats and politicians.

http://www.paktribune.com/news/index.shtml?173595

 

[Neo]

Will Pakistan slip into debt trap?

By Sajid Aziz

KARACHI: Will Pakistan slip into the debt trap? This is a haunting question that has kept economic experts racking their brains for months. In this context, it was more surprising for them when they read State Bank Governor’s recent statement in which she claimed that swelling external debt is not worrisome as it does not block the GDP growth.

The experts, however, rejected the SBP Governor’s claim, saying that continued reliance on loans and foreign assistance and mounting debt maturity are extremely worrisome and if appropriate measures are not taken with immediate effect to check the current trend, it may become difficult to avoid facing a sovereign debt default and its adverse consequences for the nation’s economy.

The present government has never been able to reduce foreign debt since it assumed office in 1999 although it received record inflows of foreign aid, investment and remittances post-9/11.

Pakistan’s external debt has climbed to $36.9 billion from $33.6 billion in 1999 despite the fact the country received at least $10 billion in economic, military and development aid from the United States, over $6 billion in privatization proceeds, and a relief of $1.6 billion in loan write-offs by foreign governments over the last seven years, the experts say.

The rescheduling of Paris Club debts provided an additional relief of $1.2 to $1.5 billion annually in terms of debt service payments. Is the government’s debt management policy as sound and successful as it claims it is, or a historic opportunity to restructure the country’s high debt levels has fallen victim to political expediency or a false sense of achievement, the economists question.

Even after having received such generous assistance, Pakistan’s external debt to GDP ratio is 28 per cent - slightly worse than Africa’s 26.2 per cent, which also happens to be the average for all the developing countries. The average external debt to GDP ratio of all emerging markets declined from 42.1 in 1999 to 26.2 per cent in 2006.

Hence, the growth in debt slowed down during the last seven years. However,

Pakistan received generous foreign aid as well as much higher levels of foreign direct investment (FDI) in the post-9/11 period. Remittances averaged around $4 billion a year during 2003-2006 compared to an average of $1.5 billion in the 1990s.

The government’s claim of having broken the begging bowl has also proved wrong as its share in total public and publicly-guaranteed debt has increased from 37.5 per cent to 50.2 per cent in 2006.

The economic experts have already refuted the tall claims of economic growth by the power corridors and warned that the GDP growth rate could not be maintained in the current fiscal.

“Unrealistic claims of economic growth in recent days by the power corridors have made economy’s future bleak as they, instead of taking appropriate measures to arrest the negative indicators, are only making paper-claims,” said Dr Shahid Hasan Siddiqui.

At present, the trade deficit, current account deficit, budgetary deficits, internal and external debts and the pace of throwing away national assets through privatization is the highest in the history of Pakistan, Dr Shahid noted.

Pakistan has paid a very heavy price in its ongoing war against so-called terrorism. It’s time now such practices were stopped and focus directed on the nation’s economy, he advised.

http://www.thenews.com.pk/daily_detail.asp?id=49492

 

[Neo]

Saturday, April 21, 2007

Total domestic debt up by 5.7% in 8 months

By Arshad Hussain

KARACHI: Owing to higher inflows in Bahbood Saving Certificates and Pakistan Investment Bonds (PIBs), the country’s domestic debt soared up by 5.7 percent or Rs 140.66 billion in July-Feb 2006-07 period.

The data issued by the State Bank of Pakistan (SBP) here on Friday said total domestic debt of the country stood at Rs 2.43 billion trillion in July-February in this fiscal, as compared with Rs 2.299 trillion on June 30, 2006.

The data of the State Bank said major inflows of Rs 35.04 billion has been received in Bahbood Saving Certificates and Rs 17.422 billion Pakistan Investment Bonds (PIBs), and Rs 8.61 billion in pensioners’ benefit accounts.

The permanent debt of the country, during the said period, increased by Rs 15.13 billion to Rs 514.9 billion in this fiscal compared to Rs 499.7 billion on June 30, 2006.

Floating debt of the country soared up by Rs 93.24 billion or 9.02 percent to Rs 1.03 trillion in this fiscal from Rs 940.2 billion on June 30, 2006.

The un-funded debt also enhanced to Rs 891.446 up by Rs 32.28 billion or 3.6 percent in July-Feb 2006 compared to Rs 859.16 billion of June 30, 2006.

“The rising interest rates of the National Saving Schemes (NSS) supported the inflows in unfounded debts,” an analyst said. However, the finance division has also raised three auctions of the Pakistan Investment Bonds (PIBs), he added.

The analyst said the lower interest rates of the banks also discouraging the bank deposits, while the corporate sectors and others are investing their money in Bahbood Saving Certificates, Pensioners’ benefit accounts and others.

Major outflows were recorded in Regular Income Certificates, which declined by Rs 10.787 billion to Rs 58.871 billion in last eight months. Meanwhile, Federal Investment Bonds (TAP) also went down by Rs 3.219 billion during the said period to Rs 3.426 billion.

Other outflows recorded in Special Government Bonds for SLIC (capitalization) of Rs 914 million, Defence Savings Certificates Rs 4.234 billion and GP fund Rs 1.228 billion.

Meanwhile the saving accounts went up by Rs 43.9 million and the Prize Bonds up by Rs 1.875 billion to Rs 167.3 billion.

http://www.dailytimes.com.pk/default.asp?page=2007\04\21\story_21-4-2007_pg5_1

 

[Neo]

Pakistan's public debt rises to Rs4.41 trillion

28 April 2007

ISLAMABAD — Pakistan's public debt has increased by Rs1.465 trillion to Rs4.411 trillion in last seven years, showing an increase of almost 50 per cent from Rs2.946 trillion in 1999.

A 'debt policy statement' issued by the finance ministry also reveals that total domestic currency debt also jumped by Rs957 billion to Rs2.346 trillion in the first quarter of 2007 from Rs1.389 trillion in 1999, registering an increase of about 69 per cent.

Likewise, the foreign currency debt also went up by Rs508 billion to Rs2.065 trillion in the first quarter of 2007, from Rs1.557 trillion in 1999, up by 32.6 per cent in seven years.

The report said the total public debt increased by 165 per cent since 1995 when it stood at Rs1.662 trillion. Its two components, domestic currency and foreign currency debt surged by 197 per cent and 136.5 per cent respectively since 1995.

"The coming years will see an increase in borrowing particularly in foreign currency component to finance the infrastructural development programme. The large infrastructure projects envisaged in the next decade will increase the debt burden if sufficient revenues are not generated from within the country", the report says released by director-general debt Dr Ashfaq Hassan Khan.

The report further explained that the country's total outstanding domestic debt reached Rs2.422 trillion by end of November 2006, showing an increase of 36.5 per cent (Rs648 billion) since fiscal year 2002 when it stood at Rs1.774 trillion. Of this, the permanent debt (prize bonds and other government bonds) increased by 20 per cent to Rs509 billion in November 2006 from Rs424 billion in 2002.

Similarly, floating debt (in the shape of treasury bills) increased by 86 per cent to Rs1.035 trillion in November 2006 from Rs558 billion in 2002. The unfunded debt (mostly from saving schemes) went up by about 11 per cent or Rs86 billion to Rs877 billion from Rs792 billion in 2002.

The report said that at the end of fiscal year 2006 total domestic debt stood at Rs2.312 billion which was 30 per cent of GDP. The net increase in domestic debt was Rs1.53 billion from end of fiscal year 2005 where domestic debt was Rs2.158 billion. "This represents a growth rate of 7.1 per cent which is slightly higher than the average growth rate since fiscal year 2000 of 6.6 per cent but still lower than the pace of growth in domestic debt observed in 1980s and 1990s which were 20 per cent and 16 per cent respectively".

The report said the total external debt and liabilities increased by more than six per cent to $37.72 billion in the first quarter of 2007 from $35.47 billion in fiscal year 2003. Of this, public and publicly guaranteed debt rose by 13.4 per cent to $33.15 billion this year compared with $29.23 billion in 2003.

The external debt and liabilities at the end of fiscal 2006 were $37.26 billion. This is an increase of $1.43 billion which represents a four per cent increase over the stock at the end of fiscal 2005.

The report, however, urged that such a massive increase in overall stock of public debt should be seen in the context of gross domestic product (GDP) and revenues because "the capacity of carry debt is dependent on the size of the economy as well as resources available to the government to service that debt".

On the basis of these parameters, the public debt at the end of fiscal year 1999 was about 629 per cent of total revenue and came down to 356 per cent of total revenue. Similarly, the total public debt was 100 per cent of GDP in 1999 and has reduced to 50 per cent in the first quarter of 2007.

The ministry assumes that if no new loans are taken the existing external loans would take about 30 years to be repaid at a rate not exceeding $1.6 billion per annum, although $3.1 billion was paid out in fiscal year 2006 as debt servicing and $3.05 billion worth of new loans were signed in 2006.

http://www.khaleejtimes.com/Display...l/business_April682.xml&section=business&col=

 

[Neo]

May 07, 2007
Sindh’s discomfort with surging foreign debts

By Sabihuddin Ghausi

Mounting foreign loan burden has started telling on the nerves of Sindh’s economic managers. Officials at the Sindh Secretariat at Karachi complain of inflated cost of foreign funded projects that are thrust on them. “ All projects are virtually designed by the donors but are attributed to us without the consent of provincial political leadership and the concerned officials,” confided an official.

Foreign loans came initially as a blessing to the provinces from the year 1999-00 onwards when the federal government stopped providing Cash Development Loans.(CDLs). Sindh and Punjab used some of these foreign loans to adjust their expensive CDLs with Islamabad. It helped them reduce debt liability and create space for more development spending in their budgets. But for last three years, the inflow of foreign loans for mega projects is straining the provincial budgets.

Officials in Sindh complain as to how their province was singled out to be declared as a badly governed province, afflicted with law and order, corruption and a weak public service delivery system in a World Bank report. This report criticised the financial management, education system and other service delivery mode of Sindh. The World Bank estimated Sindh’s GDP at 28 per cent of the national GDP as against 32 being estimated by the provincial economists. It was all done because Sindh government was reluctant to accept World Bank and ADB offers of assistance. The World Bank report on Sindh economy has yet to receive official approval from the provincial government. In fact an official rejoinder questions the finding of the World Bank team.

For the last three years or so, there have been about a dozen mega projects in Sindh, more than 18 in Punjab and 15--16 in Balochistan in which both the provincial and federal governments are involved. Almost all the big projects in which provincial finances are involved are still in the early stages of implementation and planners in Karachi fear a massive cost over runs because of ``the painfully slow release of funds’. They fear a further push up of project costs which they believe , is already inflated. The projects will need more funds, fresh negotiations for additional loan amount and more burden on the provincial economies.

A cursory glance of the 2006-07 budget of the four provinces reveals that there is a total burden of more than Rs190 billion foreign loans and about Rs145 billion cash development loans. Sindh’s liability for payment of cash development loans (CDL) amounts to Rs28 billion while the foreign loan burden has increased to Rs71 billion. Punjab now carries a total debt burden of Rs143 billion that includes Rs73.61 billion CDLs and Rs69.78 billion foreign loans. The NWFP shows Rs22.26 billion CDL liabilities and more than Rs49 billion foreign loans. Balochistan carries more than Rs51 billion loans but no figures are available of a break-down of foreign and domestic loans.

“The foreign loan burden on Sindh will increase to Rs79 billion by the end June next. More than $2 billion loan (Rs120 billion) is being negotiated with the Asian Development Bank (ADB) and other donors. The government is negotiating $500 million to $800 million for Mega City project. Officials are also exploring possibility of acquiring a big loan for education.

Diamond city and Sugar town are the other projects being marketed for development of Karachi beach for which there are expectation of foreign investment and funds from the international agencies.

In the current fiscal year, Sindh will repay more than Rs3 billion against foreign loans and interests while more than Rs8 billion will go for paying the interest and principal amount of CDL to Islamabad. .

‘The CDLs carry interest rate from 14-18 per cent and the mode of debt servicing payment is such that bulk of the amount goes towards interest while only a small amount adjusts the principal amount. Officials explained that Islamabad provided about Rs60 billion CDLs to Sindh from 1973 to 1999-00. Against this total loan amount, the Sindh government has paid back about Rs130 billion which adjusted only Rs30 billion principal sum and Rs100 billion went to payment of interest. . The federal government works out the monthly instalment of annual debt servicing of each province and deducts the amount from its share of federal tax pool. ``We have still to pay Rs28 billion’’, the official said who estimated outflow of nearly Rs130 billion in next 20 years to clear the Rs28 billion unpaid loan.

In last four years, the Sindh government used part of the loans obtained from World Bank’s Structural Adjustment and Asian Development Bank Devolved Social Services Programme to adjust

Rs15.58 billion CDL and market loans. “We managed to save Rs1 billion annual debt servicing from our budget’’, a senior official said.

In the years 2001, 2002 and even in 2003 when interest rates on commercial loans of banks were quite low, the provinces including Sindh made repeated pleas with Islamabad to allow them to seek loans from the banks to clear CDL loans. Even now when interest rate is in double digit, the Sindh government has sought permission to adjust remaining outstanding loan from bank credit because there is still a difference of 6-7 per cent on interest rates.

But officials in Sindh government got panicky in the year 2004-05 when foreign loans liability swelled to Rs74.50 billion from Rs62.12 billion in 2003-04. A jump of Rs12 billion or $200 million in debt liability without any tangible asset was something that could attract a lot of criticism.

There are also other reasons to be sceptical about the international donors’ assistance. The Social Action Programme (SAP) was taken up with Rs86 billion assistance over a period of more than eight years during the 80’s and the 90’s. It has proved to be a colossal disappointment. What remains of this project are a few dilapidated buildings constructed for schools and dispensaries. There has not been any improvement in healthcare or children enrolment in schools.

Retired General Moeenuddin Haider who was Governor of Sindh during 1997 to 1999 disapproved of Korangi Sewerage Project that involved $75 million assistance by the World Bank. ``I found it too cost inflated’’, he told this correspondent. He asked the planners as why Pakistani engineers cannot take up this project with local technology. Ishaq Dar, the then Finance Minister informed him that the project has some foreign policy dimension. This is also applicable to other projects.

Then there is the much talked about Left and Right Outfall Drainage Project with a massive financial outlay. Poor project design and faulty implementation uprooted the people in Delta region of Sindh.. A World Bank team itself found how badly the project was designed and executed. However, no one was held responsible for the mistake for so much human suffering.

The available information reveals that there are 39 IDA funded projects with an outlay of Rs39.46 billion. Officials are convinced that none of these projects need foreign funding or technology. These projects pertain to primary education, agricultural research, flood drainage, ground water, Karachi water supply and farm water management. There are 27 ADB funded projects with outlay of Rs25.62 billion, six US AID funded, two IFAD funded, and six projects being funded by foreign countries’ grants and other donors.

Most of these projects can also be designed and implemented by Pakistan where dams and barrages have been built, canal network constructed, education and health programmes have been executed over several decades. Although no official word is available from Lahore, officials in Karachi say that Punjab government’s financial position is also not sound. A traditionally cash surplus province is said to be under pressure of low cash flow as its resources are stuck up in massive foreign funded projects. The NWFP is far from happy and Balochistan is virtually a pauper.

http://www.dawn.com/2007/05/07/ebr1.htm

 

[Neo]

Saturday, May 12, 2007

Total domestic debt goes up 9.22% in 9 month

By Arshad Hussain

KARACHI: Total domestic debt of the country has been persistently soaring during the current fiscal year and increased to Rs 2.511 trillion or 9.22 percent in July-March period.

The debt went up owing to the higher inflows in Bahbood Savings Certificates, and Pakistan Investment Bonds (PIBs).

The data issued by the State Bank of Pakistan (SBP) here on Friday said the permanent debt of the country stood at Rs 528.8 billion up by 5.82 percent on March 2007 from Rs 499.7 billion on June 30, 2006.

The data of the State Bank said the major inflows of Rs 38.793 billion have been received in Bahbood Savings Certificates and Rs 28.666 billion in Pakistan Investment Bonds (PIBs), and Rs 9.403 billion in pensioners’ benefit accounts.

Floating debt of the country soared up by Rs 146.29 billion or 15.5 percent in July-March to Rs 1.086 trillion in this fiscal from Rs 940.2 billion on June 30, 2006.

Unfunded debt also enhanced to Rs 896.6 billion up by Rs 37.281 billion or 4.36 percent in July-March 2007 compared to Rs 859.16 billion of June 30, 2006.

The finance division raised Rs 28.66 billion through the four auctions of the Pakistan Investment Bonds (PIBs) in this fiscal, while the inflows of Rs 38.79 billion received in Bahbood Savings Certificates. “Such inflows are supporting the domestic debt,” said Mohammad Imran, research head at First Capital and Securities, a local brokerage house.

The interest rate, which the government increased in January this year, is also supporting the inflows in National Savings Schemes (NSS), the analyst said.

The lower interest rates of the banks are also discouraging the bank deposits, the analyst said, while the corporate sector and others are investing their money in Bahbood Saving Certificates, Pensioners’ benefit accounts and others.

Major outflows were recorded in Regular Income Certificates, which declined by Rs 12.435 billion to Rs 57.223 billion in last nine-month. Meanwhile, Federal Investment Bonds (TAP) also went down by Rs 3.314 billion during the said period to Rs 3.331 billion.

Other outflows were recorded in Special Government Bonds for SLIC (capitalisation) of Rs 914 million, Defence Savings Certificates Rs 4.528 billion and GP fund Rs 1.228 billion.

Meanwhile the saving accounts went up by Rs 499.9 million and the Prize Bonds up by Rs 2.688 billion to Rs 170.12 billion.

http://www.dailytimes.com.pk/default.asp?page=2007\05\12\story_12-5-2007_pg5_1

 

[Neo]

Saturday, May 12, 2007

Debt restructuring: IMF reviews experiences of eight countries

ISLAMABAD: A recent International Monetary Fund (IMF) Occasional Paper has pointed out that higher debt paired with reduced market access typically generated debt servicing difficulties, ultimately culminating in either default or the urgent need for a preemptive restructuring to avoid a default.

IMF paper reviews the experiences of eight countries that restructured their debt to private creditors between 1998 and 2005: Argentina, the Dominican Republic, Ecuador, Moldova, Pakistan, Russia, Ukraine, and Uruguay. It examines the initial conditions that gave rise to the debt operations, discusses the results of the restructurings, and asks whether sustainability was actually restored.

A number of emerging market economies has experienced sovereign debt distress in recent years. The reasons were manifold and complex and often included over borrowing, prolonged recessions, banking or political crises, and exchange rate misalignments. As a result, the countries needed to restructure their sovereign debt obligations to restore sustainability, the paper states.

Although countries had quite different public debt-to-GDP ratios before the crises, these ratios tended to increase rapidly as economic and financial conditions worsened. The deterioration was largely because of the effects of rapid currency depreciation on foreign currency-denominated debt, declining economic activity, increasing interest obligations, and the fiscal cost of supporting a distressed financial sector.

Ultimately, all eight countries reached agreement on debt restructuring terms that were acceptable to creditors (though, among the cases considered, significant holdouts remain in Argentina). The scope of debt restructuring generally depended on the share of debt owed to private creditors, and the degree of debt relief varied widely across countries. The amount of debt relief should, in principle, be tailored to ensure a return to debt sustainability.

Because economic and financial conditions varied so much from country to country, it is not surprising that debt relief was quite varied. A key question is, however, whether the relief helped restore sustainability in the various cases. This is a difficult question to answer, because debt operations, in practice, took place in the context of contemporaneous changes in the economic environment and in domestic policies. However, it is possible to examine whether the debt operations, combined with supporting economic policies, contributed to a return to sustainability.

The Occasional Paper applies a number of economic criteria to assess the restoration of sustainability, taking into consideration both the solvency and liquidity aspects that the concept of sustainability encompasses (without, however, attempting an evaluation of other factors, such as political risks, that may also affect crisis probabilities). Given that these concepts are inherently forward looking, any assessment is necessarily subject to judgments, including on the probability of future debt distress.

Debt crises have occurred at a very large range of debt ratios, and there are no obvious cutoff points for the debt ratio that would allow a clear distinction between sustainable and unsustainable debt levels. However, over the past 30 years, 60 percent of sovereign debt crises occurred when debt levels in the year preceding the crisis had been higher than 39 percent of GDP.

Moreover, a 50 percent probability of being in a debt crisis is associated with a debt-to-GDP ratio of 80 percent. In addition, with the help of an early warning system model, the paper gauges debt-related vulnerabilities based on the historical experience of a large sample of countries.

Key findings of the Paper were that based on the battery of criteria and indicators considered, as of late 2005, relatively low debt vulnerabilities were found in Pakistan, Russia, and Ukraine; medium-range debt vulnerabilities in Argentina, the Dominican Republic, Ecuador, and Moldova; and somewhat higher, though declining, vulnerabilities in Uruguay.

All countries that restructured after defaulting exhibited clear symptoms of solvency problems and received substantial debt relief. The indicators presented in the paper no longer point to high debt-related vulnerabilities. Ecuador, Russia, and Argentina after its 2005 restructuring were all found to have low- or medium-range debt-related vulnerabilities. In Argentina’s case, resolving arrears with creditors not participating in the debt exchange remains key to ensuring sustained access to international capital markets.

Countries that restructured preemptively had quite diverse experiences. In Moldova and Pakistan, the scope of restructuring of private sector held claims was too limited to have a significant impact on sustainability.

Although the limited sample of restructuring cases implies that broad conclusions are highly tentative, the difference between the preemptive and post-default cases is rather striking. The preemptive group achieved considerably smaller debt reductions and, in cases that pointed to solvency problems, did not fare well in reducing debt vulnerabilities.

The causes of this observation are not fully explained, but incentives may have played a role. In a preemptive restructuring, with mounting pressures on resources available to service debt obligations, a failure to reach agreement could subject the debtor to significant reputational, political, and economic costs because the country could be pushed into default.

http://www.dailytimes.com.pk/default.asp?page=2007\05\12\story_12-5-2007_pg5_12

Intersting read...

 

[Neo]

May 14, 2007

Grappling with debts and fiscal deficits

By Syed Fazl-e-Haider

LAST year, on the eve of provincial budget 2007, Balochistan’s loans with the State Bank stood at Rs15 billion after payment of interest of over Rs262.7 million. Today, on the eve of Balochistan budget for the next fiscal, the province has paid almost 75 per cent of the federal government’s highest interest loan by obtaining soft loan from the Asian Development Bank (ADB).

Balochistan obtained overdraft of Rs16 billion from the State Bank of Pakistan up to June 30, 2006 but in the last seven months of the current year no further overdraft was taken. It was paying 22 per cent interest annually on cash development loan (CDL) while it has obtained soft loan at 3.7 per cent from the ADP to get rid of the hard loans pending against it. After paying the CDL, Balochistan has saved Rs1.5 billion annually.

The provincial government is implementing an estimated Rs10.82 billion public sector development projects. It prepared Rs6.3 billion ADP, expecting to get Rs700 million under the Poverty Alleviation Programme, which the federal government did not grant. Only a sum of Rs3.76 billion was available for foreign-funded projects. The provincial finance minister claims that despite the shortfall he managed and released Rs7.8 billion for this year’s development spending. The official sources claimed that about 68 per cent of the uplift work stood completed at the end of the third quarter. The province would receive around Rs33.8 billion from the centre as its share in the federal resources.

Loan strategy: The government planned to repay Rs9 billion Cash Development Loan (CDL) to Islamabad after receiving funds under the Balochistan Devolved Social Services Programme (BDSSP) and second instalment of the Balochistan Resources Management Programme (BRMP) from the Asian Development Bank.

The province received $135 million (Rs8.1 billion) from the ADB (BDSSP), out of which $110 million (Rs6.5 billion) have been used to retire CDL.. Another amount of $45 million (Rs2.7 billion) was received under the BRMP , out of which Rs2.5 billion was paid against the CDL. Over Rs9 billion were repaid. The SDL will be cleared after receiving second instalment under the BRMP. Now the CDL outstanding is at Rs3.5 billion.

The loan strategy has changed the Rs9.3 billion overdraft into soft-term loan. The federal government bears the currency fluctuation of ADB loan. The provincial government was able to contain the bank overdraft in the vicinity of Rs16 billion by prudent fiscal policies, better management and tightly controlled expenditure, officials claim. The overdraft of the State Bank on July 1, 2004 was Rs10.3 billion that had increased to Rs17.26 billion in July 2006.

During first six months of the current fiscal year, Balochistan’s interest repayments had exceeded Rs250 million per month taking its overdraft to the highest ever Rs16 billion. The provincial government was forced to freeze its current expenditure and development programme almost last year’s level. During this critical period, the province was forced to spend Rs3 billion per year in the shape of interest payments.

Law and Order: During the current fiscal year, Balochistan’s higher share under the interim NFC award was eaten up by additional expenditure on law and order, reduction in oil and gas production and higher pay and pension bill imposed by the federal government. After six months, the province was forced to seek a capital injection from the federal government— either through special grants or advanced proceeds of natural resources — as an increase of Rs4 billion in its federal divisible pool share had been offset by the law and order in the province.

There had been a loss of Rs1.7 billion in the royalty and gas development surcharge proceeds owing mainly to much lower gas production as a result of law and order problems and supply disruptions. The Sui, Loti and Pirkoh gas fields have faced severe interruptions . A number of additional security posts were built and related infrastructure provided to protect gas installations. By December last, Rs700-Rs800 million had been spent on direct enforcement of law and order, while another Rs1.6 billion burden came as a result of an increase in salaries and pensions announced by the federal government.

The provincial government had to incur substantial sums of money to maintain law and order in the province particularly in Sui, Loti and Pirkoh areas of Dera Bugti districts because many transmission lines came under rocket attacks during the year. The military operation is a huge burden on the provincial exchequer.

Resource Management: During the first nine months, the provincial government has been engaged in resource arrangement It demanded an increased share from the sale proceeds of the Pakistan Petroleum Limited (PPL). It sought international aid agencies’ intervention to help avert nutrition crisis among 84,000 internally displaced persons in three districts of the province. It has also asked the federal government to reduce the number of federal corporations, utilising more than 33 per cent of the country's total funds, so that the province could get its due share for development. A small Saindak Metals Limited is the only corporation out of total 208 autonomous bodies based in Balochistan.

In January, the provincial government decided to immediately repay Rs9 billion cash development loan of the federal government by arranging ADB funds. The province was paying Rs1.5 billion interest on the cash development loan annually that was provided to the province at 22 per cent interest.

It was conveyed to the centre that the province required additional grants, or other capital receipts in the form of proceeds of land from the Gwadar port where a number of federal and provincial agencies were involved in utilising and disposing of land — a provincial resource — to develop port facilities.

A sum of Rs572.7 million was received from the centre under the head of Bolan Medical Complex in Quetta through the Accountant General of Pakistan. The amount was deducted by the centre from the provincial account although the federal government had initially decided to bear the cost of construction of the complex.

The province also received Rs1.34 billion from the federal government under the head of royalty and gas development cess while the matter of Uch Gas field is pending before the ministry of petroleum. It has also taken up the matter of Rs12 billion on GDS with the federal government as the gas companies had deposited the amount in the account of the centre. The federal government has so far given Rs3.3 billion out of Rs12 billion.

The federal government is expected to double its funding to Rs100 million for every district under the special Khushhal Pakistan Programme. Moreover, the overall financial inflows would be improved so that it could meet its urgent financial liabilities.

Revenue base: It is ironical that a loan has been paid through loan. Loan, say soft or hard, is after all a loan. It is not a solution to the perennial financial problem.. This year, the federal government has opened the mega seaport at Gwadar and announced another port at Sonmiani.. But what the province has gained in terms of its financial health, which is worst-affected with the vicious cycle of debt and interest payments.

The Balochistan exempted the Gwadar port operators from all local and provincial taxes for 20 years . When all taxes stood waived, what would Balochistan get from the Gwadar port project? On revenue generation side, the Gwadar project is not going to strengthen the fiscal base.

On the other hand, the officials claim that provincial government has succeeded in a three-fold increase in its revenue in the current fiscal i.e. from Rs800 million to Rs2,500 million.. The ADP for the current fiscal year is estimated at Rs10.82 billion, while the current expenditure stands at Rs37.45 billion, resulting in a deficit of Rs10.963 billion. Resource transfer to district governments under the revised budget estimate has been increased from Rs12.21 billion to Rs14.76 billion. An amount of Rs600 million has been set aside to strengthen the district government system in the province.

Negotiations continued with the federal government over the outstanding dues of Balochistan pending against it in the account of gas development surcharge (GDS) and other financial matters but without yielding any fruitful results.

There is a pressing need to widen the revenue base of the province, which can be achieved through boosting economic activities. The scarcity of resources demands judicious utilisation of funds from the ruling elite of the province. For strengthening its revenue base, the province needs a major revenue-yielding tax levying authority.

http://www.dawn.com/2007/05/14/ebr6.htm

 

[Neo]

Wednesday, May 16, 2007

$16.5 billion foreign loans since 1999

* Total outstanding external debt stands at $37.3b, Senate told

ISLAMABAD: The Senate was informed on Tuesday that the country had obtained $16.535 billion worth of foreign loans since 1999, while the total outstanding external debt stood at $ 37.362 billion.

In a written reply to the questions by members, Hina Rabbani Khar, Minister of State for Economic Affairs, told the house that the government had received Rs 3.046 billion foreign loan during 2005-06, $2.968 billion during 2004-05, $1.991 billion during 2003-04 and $1.91 billion during 2002-03. She said the total external debt outstanding on March 3, 2007 stood at $ 37.362 billion, adding that the country had paid an amount of $ 4.969 billion as interest during this period.

State Minister for Finance and Revenue Omar Ayub Khan confirmed that during July-March 2006-07 food inflation had increased by 10.3 percent compared with 7.4 percent in the same period last year. The minister was replying to a question of Senator Ilyas Ahmed Bilour who wanted to know the percentage of increase in inflation rate during April 2007 and its impact on economy.

Omar Ayub said that the higher prices of some major imported food items namely edible oil, pulses, milk powder, wheat, wheat flour, onion, potato and tomato had kept food inflation higher. On the other hand, he said, shortage of some domestically produced food items like rice, red chilies and fresh milk had also contributed to the food inflation.

Responding to Senator Talha Mahmood’s question about the current status of forex, the state minister replied that the foreign exchange reserves held by the State Bank of Pakistan and commercial banks as on 10-5-2007 were $13835 million.

Responding to another question of Talha Mahmood about the amount of foreign loans presently outstanding against Pakistan, Hina Rabbani Khar said the total amount of foreign loans outstanding, as on March 31, 2007, was $37.362 billion.

Answering a question of Senator Ilyas Bilour about the steps being taken by the government to check the circulation of fake Pak currency notes in the market, Omar Ayub said that an effective framework was in place with penal provisions under Pakistan Penal Code and Treasury Rules of Federal government to curb counterfeiting and printing of fake currency. He said due to technological flaws in the old banknotes, the federal cabinet had decided to introduce new bills with additional security features.

http://www.dailytimes.com.pk/default.asp?page=2007\05\16\story_16-5-2007_pg7_11

 

[Neo]

Emerging debt-Pakistan weak in broadly steady Asian trade

HONG KONG, May 18 (Reuters) - The cost of insuring Pakistan's sovereign debt rose and its 2036 bonds were quoted lower after a report the South Asian country was planning a two-tranche dollar bond offering.
Pakistan's five-year credit default swaps (CDS) -- insurance-like contracts that protect against default and restructuring -- widened by 1-2 basis points (bps) to 190/195 bps, after a roadshow for the planned bond was reported. [ID:nHKG344811]

Its 2036 bond was quoted at 107.25/108.25 cents to a dollar compared to the last reported quote of 108.125/109.125. No trades were reported on Friday.

The broad market was steady, supported by strength in Latin American emerging markets.

Bonds from the Philippines, considered regional benchmarks because of their high liquidity, hovered around their recent peaks after emerging sovereign debt spreads hit an all-time low of 155 basis points (bps) in overnight New York trade.

Bonds from Manila track the emerging market benchmarks closely because they have the highest weight among Asian sovereigns in the EMBI+ index.

Philippine 2031 bonds were bid at 114.625 and bonds due in 2032 were bid at 98.50.

Philippine five-year CDS were steady at 105 bps.

Newly sold seven-year bonds from China's CITIC Resources Holdings Ltd. traded above par after the company sold the $1 billion offering earlier this week at 99.726 cents to a dollar. The 2014 bonds were quoted at 100.05/100.25.

The primary market is expected to remain busy next week with the launch of the Pakistan sovereign bond roadshow and the likely pricing of a bond offering from Thailand's IRPC PCL .

IRPC is making investor presentations for a 10-year, dollar-denominated bond offering of a benchmark size in Hong Kong on Friday. The roadshow moves to London on Monday.

Overnight, Bank of Baroda priced a 15-year, dollar-denominated bond, not callable for 10 years, at 147 basis points (bps) above mid-swaps, equivalent to 200 basis points over U.S. Treasuries, to raise $300 million.

The offering received orders worth $900 million, with Asia receiving 64 percent of the allocations, Europe taking 31 percent and U.S. offshore accounts 5 percent.

By investor type, asset managers and hedge funds accounted for 63 percent, banks 23 percent, and insurance companies and retail customers 7 percent each.

http://asia.news.yahoo.com/070518/3/321rz.html

 

[amarnath]

What happend to all those Aids Given By USA??? Well well well this really is a serious problem which most of the developing countries are facing today...