Alarming bells: Booming debt servicing in Pakistan

Pakistan’s foreign debt servicing amounted to $8.16 billion in 2016-17, up 53 per cent from the preceding fiscal year. The State Bank of Pakistan (SBP) reported on September 21  that the country paid $6.54bn in principal and $1.62bn in interest during the last fiscal year. Foreign debt servicing amounted to $5.32bn in 2015-16.

In the first, second and third quarters of 2016-17, debt servicing payments were $1.55bn, $1.25bn and $2.43bn, respectively. In the last quarter, the country paid $2.92bn.

Tough time ahead?

The figure can go further up in 2017-18 as the government has been accumulating dollars through commercial borrowing. It borrowed $4.4bn at commercial rates in 2016-17 in an attempt to maintain foreign exchange reserves of the SBP.

Despite commercial borrowing, the government could not contain the drop in reserves. The central bank lost about $4.64bn between October 2016 and Sept 15.

Another SBP report issued on September 21 noted that the SBP’s reserves fell $474 million to $14.28bn during Sept 8 and 15. It showed that commercial borrowing could not increase foreign exchange reserves, although it helped prevent their rapid depletion.

The country has been struggling to meet its increasing trade deficit, which was being bridged largely through remittances that also dropped in 2016-17. The current account deficit also touched the record high of $12.1bn in the last fiscal year. The trade deficit for July-August widened to over $6bn, which is reflective of a poor balance of trade going forward. The exchange rate remained largely stable during 2016-17. Experts believe a sharp increase in debt servicing can destabilise the exchange rate in the future.