The debt trap, coupled with the prolonged state of stagflation, rising poverty and high unemployment, has become a serious threat for the economic security of Pakistan. Inconsistent policies, uncertainties, high costs of doing business and chronic circular debt have resulted in contraction after 68 years in the country’s Gross Domestic Product (GDP) by $51 billion, bringing down economic gains of the past. Fiscal shocks have ballooned to an alarming level.
The country witnessed highest GDP growth in 11 years of 5.8 percent (provisionally revised by the PTI government to 5.53 percent) in 2018, the last fiscal year of the PML-N government. This was based on impressive growth in agriculture, industrial and services sectors. During the first two years of PTI’s government, economic meltdown has pushed down the GDP to 1.9 percent in fiscal year 2019 and to negative 0.38 percent in fiscal year 2020, having an average growth of 0.76 percent per annum. With the annual population growth of 2.4 percent, the current scenario is dangerous and unsustainable.
On November 14, the prime minister finance advisor publicly released official figures of net external debt, actual Forex reserves with State Bank of Pakistan (SBP), overall liabilities impact and external debt serviced with a comparison of first nine quarters of the PTI government with the last nine quarters of the PML-N government. By presenting such comparisons, the government created a false analogy, contrasting two different periods. Despite this, the finance advisor stated, “The PTI government has incurred 48 percent less external liabilities and 78 percent more debt servicing in its first nine quarters compared to last nine quarters of the PML-N government.” Unfortunately, the figures quoted by the finance advisor are selective, misleading and fudged. They neither reflect the true picture of the economy, nor present a fair comparison.
The following comparison depicts true position of first nine quarters of the PML-N government (June 30, 2013 to September 30, 2015) as opposed to the first nine quarters of the PTI government (June 30, 2018 to September 30, 2020):
Net External Debt (increase)
PML-N government: $5.557 billion
PTI government: $18.566 billion
Increase/Decrease (-) in SBP Forex Reserves
PML-N government: $10.107 billion
PTI government: $-3.420 billion
Overall Liabilities Impact
PML-N government: $-4.550 billion
PTI government: $21.986 billion
Actual SBP Forex Reserves
PML-N government: $13.860 Billion
PTI government: $ -0.620 Billion
The finance advisor misstated SBP Forex Reserves figures to diminish impact of high external liabilities in the PTI government versus PML-N government, which is illogical and ethically wrong.
SBP’s borrowing from commercial banks under SWAPS/forward arrangements have surged to an alarming level of $8.774 billion as of September 30, 2020 which include Chinese currency SWAPS of $3 billion as per SBP Annual Report 2019-20.
The PTI government should have a clear goal to achieve the level of different macroeconomic indicators which were left by the PML-N in 2018
While calculating the actual Forex Reserves figure with SBP as on September 30, 2020, stock of SWAPS amounting to $8.774 billion as well as showcase deposits from Saudi Arabia and U.A.E. which stood at $4 billion have not been taken into account by the finance advisor. Therefore, net of SWAPS and showcase deposits, the actual SBP Forex Reserves stood at negative $620 million, as opposed to the publicly declared figure of $12.154 billion on September 30, 2020. The actual SBP Forex Reserves stood at $2.80 billion, i.e. Gross Reserves $9.765 billion less SWAPS $6.965 billion as on June 30, 2018. Therefore, the PTI government depleted $3.420 billion during its first nine quarters which ended on September 30, 2020 as opposed to an increase of $2.4 billion which has been misstated by the finance advisor in his tweet.
According to SBP, during first the nine quarters of PTI’s government, outstanding external debt grew from $95.23 billion on June 30, 2018 to $113.80 billion on September 30, 2020. Therefore, there was an increase of $18.57 billion in net external debt and when the aforesaid SBP forex reserves depletion of negative $3.42 billion is taken into account, the overall external liabilities impact stood at $21.99 billion. Consequently, the figure $ 16.11 billion of Overall External Liabilities Impact quoted by finance advisor is understated by $5.88 billion.
SBP forex reserves, net of SWAPS, stood at $3.75 billion (SBP Forex Reserves $6.008 billion less SWAPS $ 2.255 billion) on June 30, 2013. Whereas, this figure increased to $13.86 billion on September 30, 2015 (SBP Forex Reserves $15.245 billion less SWAPS $ 1.385 billion). Consequently, there was an increase of $ 10.11 billion in actual SBP forex reserves during first nine quarters of the PML-N government from which when deducted the net increase in the same period of external debt of $5.56 billion (outstanding stock of external debt $66.46 billion on September 30, 2015 less $60.90 billion on June 30, 2013 in first nine quarters of PML-N government), there has been a reduction of $4.550 billion in Overall External Liabilities Impact, as opposed to an increase of $18.56 billion (outstanding stock of 113.80 billion on September 30, 2020 less $95.24 billion on June 30, 2018) in first nine quarters of the PTI government.
It has been proved above with official SBP figures that both increase of $2.4 billion in SBP Forex Reserves as well as Overall Liabilities Impact of $16.1 billion figures have been misquoted by the finance advisor and the correct figures are negative $3.42 billion and $21.99 billion respectively.
Let us examine now the financial advisor’s last celebrative claim of External Debt Serviced figure of $29.7 billion by the PTI government during its first nine quarters to September 30, 2020. It appears that the advisor purposely did not disclose the detail of new external borrowings during the same period. When he has chosen to give only the figure of net increase of $18.5 billion in external debt during first nine quarters of the PTI government, then the External Debt Serviced is automatically taken care of as the PTI government has borrowed new external debt of $48.33 billion out of which repaid external debt of $ 29.77 billion, leaving a net increase $18.57 billion in external debt from $95.23 billion to $113.80 billion. Therefore, the advisor’s claim in this regard is redundant and irrelevant.
The PTI’s economic team seems busy in confusing people as to the true state of economy, including SBP Forex Reserves, instead of focusing on boosting the GDP growth of the country, at least more than the Population Growth Rate of 2.4 percent, reduce inflation (CPI) which has jumped from four percent to above 10 percent, bring down food inflation which has shot up from two percent to around 15 percent and take measures to reduce massive unemployment and abject poverty. In the first phase, the PTI government should have a clear goal to achieve the level of different macroeconomic indicators which were left by PML-N in 2018 when the PTI took over the economy, but sadly grounded it well before the COVID-19 pandemic broke out and it only added salt to the economic injury.
The author, a UK Fellow Chartered Accountant, is former finance minister of Pakistan and former leader of opposition in the Senate of Pakistan. He can be contacted on Twitter @MIshaqDar50