Unless the Pakistan government settles an issue of continuous
depreciation of Pakistani rupee, it will be left on the edge of an
unprecedented external debt default. On average 66% of the total
increase in external debt is caused by unfavourable movement of exchange
rate since 2007-08.
Pakistan badly needs fresh foreign money for boosting foreign
exchange reserves and to ease down pressure on Pak rupee. To avoid a
full-blown crisis and a collapse of the currency, the assistance of a
$6.6 billion loan from the IMF may be a ray of hope but at the cost of
crowding out of the private sector, because in order to fulfill the
conditions set by the IMF, the government hiked the interest rates.
The flexible exchange rate that prevails in Pakistan increases
uncertainty for traders both internally and externally and also has a
hash effect on a volume of foreign debt which might eventually lead to
the depression and unwanted inflation.
In Pakistan external loans are contracted in various currencies but
disbursements are effectively converted into Pak Rupee. As Pak Rupee is
not an internationally traded currency, the other currencies are bought
and sold via selling and buying of US Dollar. Hence, currency exposure
of foreign debt originates from two sources: US Dollar/other foreign
currencies and Pak Rupee/US Dollar. This two-pronged exchange rate has
been a major source of increase in the stock of EDL over a period of
time.
Pakistan’s external debt and liabilities (EDL) include all foreign
currency debt contracted by the public and private sector, as well as
foreign exchange liabilities of the State Bank.
According to the data compiled by State Bank of Pakistan: External
Debt in Pakistan decreased to 59.561 USD billion in the second quarter
of 2013 from 60.9 USD billion in the first quarter of 2013. From 2002
until 2013, Pakistan External Debt averaged 47.037 USD billion reaching
an all-time high of 66.451 USD Million in December of 2011 and a record
low of 33.172 USD billion in September of 2004.
Exchange rate is a determinant factor of international transactions. A
comprehensive research on the subject matter showed that highly
indebted nations like Pakistan find it difficult to progress despite
their incessant efforts as a result of fluctuations on the exchange
rates. The depreciation of nation’s exchange rate is a result of its
deficits; however this will increase the debt service payment in
domestic currency.
In current scenario, total foreign debt of the country stood at
dollar 59.5 billion and depreciation of one rupee per dollar would
increase the debt by Rs59.5 billion. Since the Pak rupee had depreciated
between six rupees and seven rupees over the last few weeks, national
debt would have increased by around Rs357 billion and spiked inflation.
As far as composition of External Debt and Liabilities is concerned,
EDL has been dominated by public and Publicly Guaranteed Debt having
share of 73 percent owing to current account deficit which is financed
through loans from multilateral and bilateral donors. Debt obligations
of private sector are fairly limited and have been a minor proportion of
EDL (5 percent). Borrowing from IMF contributed 9 percent in EDL stock
as compared with 11 percent at the end of 2011-12 owing to hefty
repayments during the first nine months of current fiscal year.
The servicing on EDL was recorded at US$ 5.3 billion during first
nine months of current fiscal year. Out of total debt servicing, an
amount of US$ 3.9 billion was repaid, out of which around US$ 2 billion
was against IMF loans. Loan repayments to the IMF has strained the rupee
and drained forex reserves.
According to the IMF, Pakistan’s current level of foreign reserves is
critically low at 5.4 billion US dollars, whereas the IMF’s adequacy
metric suggests a level of 14 billion US dollars for countries with a
floating exchange rate and 23 billion US dollars for countries with a
fixed exchange rate. The low level of reserves leaves the economy
susceptible to a number of triggers that could result in a BoP crisis,
similar to in 2008.
Given the heavy amount of external debt payable, the current
continuous currency depreciation will put heavy burden on the country’s
economy. Therefore, Pakistan should adopt policy of stabilising the
exchange rate, in order to protect the country against the increase in
debt.
If Pakistan could manage to earn current account surplus over a
number of years, the supply of foreign exchange would automatically
increase in the free and interbank markets.
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