Cash-starved According to a media report on Wednesday, Pakistan may face a significant economic dilemma as its foreign exchange reserves deplete rapidly despite mounting external debt service.
External debt servicing in the country increased to USD 10.886 billion in the first three quarters of 2021-22, up from USD 13.38 billion in the full FY21. It was just USD 1.653 billion in 1QFY22, compared to USD 3.51 billion in the same period last year, but it increased to USD 4.357 billion in 2QFY22 and USD 4.875 billion in 3QFY22.
The country has been facing a significant external danger, with the State Bank of Pakistan’s foreign exchange reserves falling to single digits despite a USD 2.3 billion inflow from China late last month, according to the Dawn daily.
According to the study, the growing magnitude of external debt payments in each quarter suggests that the government has been borrowing dollars at higher commercial rates to satisfy its international debt payback commitments.
The present coalition government, led by the Pakistan Muslim League-Nawaz (PML-N), has not revealed the interest rate at which it borrowed USD 2.3 billion from China.
Before the previous PTI administration was deposed, Beijing agreed to roll over the syndicated loans. However, Prime Minister Shehbaz Sharif’s administration had to wait two months for the Chinese loan to be approved.
The banking industry and other economic players are nonetheless dissatisfied with the Chinese loan’s hidden costs. The market is abuzz with suspicion that Chinese loans were obtained at an extremely high rate.
Finance Minister Miftah Ismail has assured Pakistanis that the USD 1 billion tranche will be released in a few days, yet three months have passed with no meaningful response from the IMF. According to the article, bankers believe the fund is ordering the government, such as Washington, to do more.
Since the IMF’s withdrawal, the nation has received no project money from the World Bank or the Asian Development Bank.
According to a top expert, the Chinese were aware that Pakistan was unable to return to the international loan market, and the IMF was not eager to assist Islamabad. This is why the Chinese lent the money at such a hefty interest rate.
Pakistan has been obliged to pay debt servicing through commercial borrowing, which implies that the country would incur greater foreign debt in the coming fiscal year.
The administrations in FY22, which ended on June 30, were unable to restrict the flood of significant imports totaling USD 80 billion, resulting in a big current account deficit (CAD), which alone is enough to explain the economy’s external fragility.
Despite record remittances and exports, the country is unable to get funds from the international debt market, according to the research.
Cash-starved With increasing inflation, dwindling forex reserves, a widening current account deficit, and a weakening currency, Pakistan has faced mounting economic problems.
With a widening current account deficit of USD 13.2 billion in the first nine months and pressing external loan repayment obligations, Pakistan needs financial assistance in the range of USD 9-12 billion till June 2022 in order to avoid further depletion of foreign currency reserves.