Pakistan’s flawed external debt policy

economictimes.indiatimes.com:

Pakistan on policies to be supported by a Stand-By Arrangement (SBA) in providing USD 3 billion, the last minute rescue package for Islamabad’s acute balance of payment crisis. According to major global credit rating agencies Islamabad would be compelled to default on external borrowings without the IMF assistance. Surprisingly, Pak forex reserves are now below USD 3.5 billion, hardly sufficient for less than a month’s requirement for even essential imports.

It is a pertinent question to enquire whether Pakistan's external debt of USD 126.3 billion (by the end of December 2022) is unsustainable against the size of the economy of USD 350 billion. In fact, it is not the quantum of external debt that is a problem, but a flawed debt policy being pursued since long. There are many countries whose external debt to GDP ratio is much higher than Pakistan but are running smoothly.

Islamabad is facing the threat of economic collapse mainly due to external borrowing because it borrowed through short term instruments that too on high interest rates. Islamabad relied on commercial short term borrowings which come with higher interest rates. Some of these loans are benchmarked against LIBOR (London International Bank Offered Rate) and in case of Chinese commercial loans, the rate is backed against SHIBOR (Shanghai International Bank Offered Rate).

These loans are repaid in a year or at the best within three years. It is clear from the fact that the 6-month LIBOR rate approximately doubled to 5.67% from 2.84% a year ago. Therefore, 77% of Pak’s external debt and liabilities (USD 97.5 billion) which is directly owed by the Pak Government to various creditors do not matter as much as short term borrowings as far as the debt crisis is