According to the recent economic data, Pakistan's economic growth has been good enough (5.7 percent). But its Current account deficit, fiscal deficit and the position of foreign exchange funds remain constant worrying. The continuous decrease of the foreign currency funds has become a matter of concern for the rulers of Pakistan, and in such a condition when general elections are going to take place in a few months, it becomes even more crucial.
Now in such a bizarre situation desperate to boost foreign exchange reserves over the $11-billion mark, Pakistan has received another loan of $1 billion from the China Development Bank. In its revised estimates, Pakistan has budgeted about $2 billion injection from Chinese financial institutions alone. This includes $1.5 billion from the China Development Bank and $500 million from the Industrial and Commercial Bank of China (ICBC).
Role of China
With the fresh injection, Chinese financial institutions have so far given $2.2 billion to Pakistan to help the country steer through difficult times. Earlier, the ICBB gave $1 billion at three-month floating interest rate of London Interbank Offered Rate (Libor) plus 3.02%. Earlier this month, the Bank of China also gave $200 million.
Problems
According to the State Bank of Pakistan (SBP), Pakistan’s external debt and liabilities rose sharply to almost $89 billion at the end of December. Former finance minister of Pakistan, Dr Hafiz Pasha had predicted in December 2015 that by June 2019, Pakistan’s external debt and liabilities would touch $90 billion.
Pakistan’s total external debt and liabilities as of December 2017 stood at $88.9 billion, higher by $5.8 billion or 6.9% over six months ago. There was an increase of $13.2 billion in the amount of external debt and liabilities in just one year. In December 2016, external debt and liabilities amounted to $75.7 billion. At the time, Pakistan’s gross official reserves were $18.6 billion. Out of total external debt, the government’s direct obligations are equal to $70.5 billion, which exclude guaranteed and public sector enterprises’ debt.
The main increase came in the external debt contracted by issuing sovereign bonds and taking expensive commercial loans. In the first half, debt obligated by issuing Sukuk and Eurobonds increased by 52% to $7.3 billion.
Similarly, the debt obtained by taking commercial loans increased to $5.3 billion by December 2017 – a net addition of $503 million or 10.4% in six months. On a yearly basis, debt accumulated through commercial loans increased by 189% or $3.5 billion.
Disbursements of foreign loans remained at $7.53 billion from July through March of this fiscal year.
How to manage: A Pakistani perspective
Due to the widening current account deficit, economists have estimated the gross external financing requirements in the range of $24 billion to $26 billion for the current fiscal year. Meanwhile the Pakistani government’s conservative estimates put the figure at $18 billion. The financing gap is estimated at roughly $6 billion for the remainder period of the current fiscal year, which would either be met through more foreign loans or drawing official foreign currency reserves.
For the outgoing fiscal year, the government had budgeted $8 billion in loans that it has now officially revised upwards to $10.6 billion. However, the Pakistan’s finance ministry’s internal plans talk about $12.5 billion minimum foreign borrowings for this fiscal year, ending June 30.
The public debt to Gross Domestic Product ratio has estimated to peak to 70.1% by the end of fiscal year 2017-18. This is the highest level in the past 15 years and also in violation of the Fiscal Responsibility and Debt Limitation Act of 2005.
For the next fiscal year 2018-19, Pakistan’s finance ministry has budgeted $9.6 billion in external loans, which are $3.4 billion less than the foreign financing plan Pakistan shared this month with Moody’s International, said sources in the finance ministry.
For the next fiscal year, the government has budgeted $3 billion foreign commercial loans and $2 billion worth of Eurobonds, according to Estimates of Foreign Economic Assistance 2018-19 that the government shared with the National Assembly. It also expects slightly over $1 billion from Islamic Development Bank and $1.4 billion from the ADB.
According to a source in Finance ministry in Pakistan the government plans to launch an overseas certificate in U.S. dollars and rupees by June to rise between $500 million and $1 billion a year. Pakistan’s economy is facing many troubles and jolts before elections in July with foreign exchange reserves dropping at the fastest pace in Asia in the past year. The government also announced an amnesty offer this month that allows overseas Pakistanis to repatriate funds after paying 2 percent cash tax.
Pakistan’s economy has come under pressure with external account worries with a widening current account deficit, foreign exchange reserves have slipped below $10.9 billion at the mid of this month. Pakistan’s economy has come under pressure with external account worries remaining the focus of economic managers.
What are the Sukuk bonds?
Islamic law prohibits what's known as "riba," or interest. Therefore, traditional, Western debt instruments cannot be used as investment vehicles. To circumvent this, sukuks were created in order to link the returns and cash flows of debt financing to a specific asset being purchased, effectively distributing the benefits of that asset. This allows investors to work around the prohibition outlined under Sharia and still receive the benefits of debt financing. However, because of the way that sukuks are structured, financing can only be raised for identifiable assets.
Sukuk are defined by the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) as "securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets." The Fiqh academy of the OIC legitimized the use of sukuk in February 1988.