Pakistan External Debt (or Foreign Debt) of a country refers to the total debt or liabilities of a country towards foreign creditors in another country or a number of countries. The creditors of a foreign country can be the government or various institutions. The external debt is a mix of short term and long term loans that a country borrows to meet its needs when domestic loans do not cover them. Pakistan is under burden of foreign debt since 1950s and has been borrowing foreign debt to stabilize its ever turbulent economy.
Pakistan’s Major Foreign Creditors
World Bank, IMF and Asian Development Bank (ADB) are the main fund providers for Pakistan. They have been providing aid in restructuring of the country during wars of 1965, 1971, Afghan War, and 9/11 war on terror. Currently, the issuance of Sukuk bonds , Euro Bonds as well as CPEC projects have brought Pakistan’s external debt to the highest point in history with current external debt standing above $105 billion.
Significance of External Debt for Pakistan
The external debts, on one hand, are providing aid to Pakistan in building the infrastructure of country, improving education standards and dealing with security situation in Pakistan. On the other hand, the sharp rise in these debts (36.7% of GDP in 2019) have significantly affected the solvency risk of Pakistan. An external debt of a country affects a country’s economic growth both positively and negatively. For Pakistan, the excessive foreign liabilities have created a ‘debt overhang’ position for the country where government is overwhelmed to pay off its liabilities with lack of economic growth to support it.
External debt negatively affects a country when the fund borrowed are not efficiently utilized for economic growth, human development and industry development. Moreover, the weak state of economy like Pakistan, runs continuous current account deficits on back of lower exports, higher imports and falling value of domestic currency. The depreciation of currency further reduce foreign exchange reserves to back up foreign liabilities (See Pakistan’s Foreign Reserve history here). In order to meet liabilities, government of Pakistan keeps getting trapped in further foreign liabilities like IMF loans to repay interest on foreign and domestic loans and thus, creates disincentives to make required reforms.
History of External Debt in Pakistan
The chart below shows the external debt of Pakistan from 1971 to 2019.
Pakistan external debt during the PPP regime (2008-2012) rose from $42 billion to $64 billion and that too when international markets had liquidity crunch due to global financial crisis of 2007-2008. It further increased to $86 billion under PMLN regime which included loans by IMF, China Pakistan Economic Corridor (CPEC) and issuance of Euro bonds and Sukuk in international markets. Government of Pakistan since then has continuously been rolling over the IMF loans to make repayments on previous loans.
Current External Debt Position of Pakistan
Currently, Pakistan’s external debt is at its peak with $105 billion plus foreign debt and IMF predicts that Pakistan’s external debt will rise to around $130 billion in coming four years. Current government is focused on increasing its exports and has substantially reduced its imports in an effort to create positive current account balance and more foreign reserves, the need is to strongly adhere to structural reforms by lending bodies. The current shocks in oil prices have proven to be a positive factor for Pakistan’s foreign reserve account and if government can improve its current account position in coming years, the external debt that will be taken in future for repayment of interest on debts can have less harmful effects on the economic decisions.
