Debt servicing: Payment of $2.5bn to hurt forex reserves

ISLAMABAD: Amid the dwindling foreign exchange reserves, Pakistan will have to pay back foreign debt of $2.5 billion on account of principal and mark-up obligations during the ongoing quarter (April-June) period of the current fiscal year 2021-22.

Out of budgeted external debt servicing of $12.4 billion estimated by the Ministry of Economic Affairs Division (EAD), Islamabad, so far, has paid out approximately $10 billion during the first nine months (July-March) period of the current fiscal year. Out of $12.4 billion in external debt servicing, there has been a principal amount of $10.4 billion and interest repayment of $2 billion.

The government paid out $6 billion as debt servicing in the first seven months (July-Jan) period of the current fiscal year. There was a requirement to pay back the remaining $6.4 billion in the remaining five months. In recent months, the government had to pay back major amount of $4 billion after which the foreign reserves held by the SBP sharply reduced.

Keeping in view the slashing down of foreign currency reserves at an accelerated pace, the State Bank of Pakistan (SBP) had now finally moved forward and hiked the discount rate by 250 basis points, jacking up the policy rate from 9.75 per cent to 12.25 per cent in an emergency meeting of Monetary Policy Committee (MPC) held on Thursday this week.

The hiking of policy rare will badly affect the country’s growth prospects and overall economic activities are going to face an impact. The government had envisaged GDP growth target of 4.8 per cent for the current fiscal year. The multilateral creditors especially the ADB have recently lowered the GDP growth projection of 4 per cent for Pakistan for FY22.

There is a quite intriguing aspect on account of external debt servicing as the IMF in its last review report after completion of the 6th review in February 2022 showed in its projection that the external debt servicing was estimated at $18.5 billion for FY2022 against $11.914 billion for the last FY2021. The external debt servicing will now be standing at $17.775 billion in FY2023 and $21.9 billion in FY2024.

The intriguing aspect is that the Economic Affairs Debt (EAD) assessed foreign debt servicing at $12.4 billion for the current fiscal year, while the IMF assessed that it was hovering around $18.5 billion. There has been IMF related outstanding debt repayment that is the responsibility of the State Bank of Pakistan but if its amount was included, even then the difference of $6 billion was quite a huge one. The foreign currency reserves held by the State Bank of Pakistan nosedived massively as it stood at $16.2 billion on March 4, 2022, and reduced to $11.3 billion on April 1, 2022. It indicates that the foreign currency reserves held by the SBP were slashed down by almost $5 billion in less than a month.

According to the SBP, Pakistan’s total liquid foreign reserves held by the country stood at $ 17.47 billion as of 01-April-2022. The break-up of the foreign reserves position shows that the foreign reserves held by the State Bank of Pakistan stand at $11.3 billion and net foreign reserves held by commercial banks are $6.15 billion.

During the week ended on 01-April -2022, SBP reserves decreased by $728 million to $11.3 billion, largely due to debt repayment and government payment pertaining to the settlement of an arbitration award related to a mining project. Pakistani rupee got strengthened on Friday in the aftermath of the historic verdict of the Supreme Court of Pakistan which restored the National Assembly by declaring the ruling of the Deputy Speaker National Assembly unconstitutional.

Now the incoming government, after its success in the no-confidence motion on Saturday (today), will have the uphill task to manage $5 billion on an immediate basis to shore up dwindling foreign currency reserves in the absence of the IMF programme.