Loans pile up

It is a matter of concern that more loans continue to pile up. Like previous years, the government is on a spree of foreign borrowings as it has acquired fresh loans of $5.2 billion in just five months of the current fiscal year. As per figures released by the Ministry of Finance and Economic Affairs, this amount is more than two-thirds of the annual estimate. Excluding $2.5 billion that Pakistan borrowed by floating two sovereign bonds a few weeks ago, the foreign loans amounted to $2.7 billion from July through November of fiscal year 2017-18, Pakistan had floated the sovereign bonds last month. But the money came in the first week of December; therefore, the ministry did not make it part of November disbursements. By including the bond issuance, the total foreign loans the country acquired in five months stood at $5.22 billion.

For FY18, the Ministry of Finance has estimated to receive $7.7 billion in foreign loans. However, like the previous year, it is set to breach the limit as borrowing of $5.2 billion is equal to roughly 68%. The main reason for the rise in borrowings is the government’s inability to ensure non-debt creating inflows. In the first four years of the present government, exports plunged by one-fourth, remittances reached the point of stagnation and foreign direct investment was half of official projections. For the last fiscal year, the government had targeted to receive $8 billion in foreign loans, but it closed the year at a record $10.2 billion. The trend seems to be continuing in the current year.

It is an alarming sign that the current account deficit that had been recorded at $12.4 billion in the last fiscal year has already touched $6.6 billion from July through November FY18. The deficit is about 91% higher than the previous year. For the full year, the finance ministry has projected $8.9 billion of current account deficit, but the five-month gap comprises almost three-fourth of the annual target. It may be added here thatt he ministry had initially projected FY18’s gross external financing requirement at $17 billion, which during recent talks with the International Monetary Fund was revised upwards significantly.

The State Bank estimates that the country’s financing gap for the current fiscal year would be in the range of $11 to $12 billion. The figure is close to what independent economists have forecast due to the widening current account deficit and mounting foreign debt repayments. From July through November, the finance ministry obtained $1.1 billion in short-term loans from foreign commercial banks, which were 109% of the annual projection. In November, Standard Chartered Bank, London, gave $70.37 million in short-term loan for liquefied natural gas imports. The country has already obtained $500 million from the Industrial and Commercial Bank of China, $255 million from Credit Suisse and $267 million from Citibank.

It is now obvious that the government would have to resort to massive short-term and other borrowings to meet the growing external account requirement and maintain foreign currency reserves at a decent level. It is projected that the SBP’s foreign currency reserves would fall to $3 billion by June 2018 excluding $6 billion worth of short-term loans that the central bank has acquired from domestic commercial banks. Inflows from traditional sources remained very low in the first five months of FY18. The Asian Development Bank gave $221.9 million or 18% of the annual projection, the World Bank disbursed $174 million or 16.2% of the annual projection and the Islamic Development Bank disbursed $715 million or 45.7% of the annual projection. China gave $455.3 million or 28.8% of the annual estimate. This means that without further loans, the financing gap cannot be bridged.

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Mian Bilal