The Pakistan Tehreek-e-Insaf (PTI) government received another $1.2 billion in foreign loans last month, taking new borrowing to $5.7 billion in the first half of current fiscal year but it again blamed the previous government for some of its own flawed policies.

During July-December of fiscal year 2020-21, the government received $5.7 billion in external loans from multiple financing sources, said the Ministry of Economic Affairs on Wednesday.

It said that total inflows were 46% of the annual budget estimate of $12.2 billion for the current fiscal year. In December, the government received $1.2 billion in foreign loans, including $434 million from commercial banks, which are the most expensive loans. Out of the $5.7 billion, an amount of $2 billion or 36% of the total loans were on account of foreign commercial loans, said the ministry.

Nearly 87% of the foreign loans were for budget financing and building the foreign exchange reserves, which means that these have not been utilised for creating assets. Pakistan received about $5 billion on account of budget financing and balance of payments support, which the country would be paying back after taking new loans as no revenue-generating assets were created by using those loans.

Project financing was a mere $754 million or 13%, which should be a matter of concern for the government. The government is also in the process of floating sovereign bonds to acquire debt from the international capital market.

Pakistan received $434 million in new foreign commercial loans in December, showed the official statistics. Dubai Bank disbursed another $413.5 million, taking its lending to Pakistan to $815 million in the past six months.

Standard Chartered Bank, London gave $20 million, taking its six-month lending to $220 million.

The Industrial and Commercial Bank of China (ICBC) disbursed $500 million in November, taking Beijing’s contribution to $1.52 billion in the current fiscal year.

In the first half, Pakistan also received two loans amounting to $370 million from Emirates NBD bank.

Multilateral development partners disbursed $2.4 billion in foreign economic assistance in the current fiscal year.

Amongst the multilateral development partners, the Asian Development Bank (ADB) provided $1.1 billion and the World Bank disbursed $744 million.

The PTI government was following the debt and fiscal policies which were similar to the policies adopted by the last PML-N government. Like its predecessor, the PTI also heavily relied on foreign commercial loans. It also resorted to building foreign exchange reserves through expensive loans.

Due to these policies, the central government debt jumped 11.5% to Rs35.8 trillion on an annualised basis at the end of November 2020.

“The change in public debt under this government is due to the correction of flawed economic policies of the previous government, especially its overvalued exchange rate and excessive borrowing,” said the Ministry of Finance on Wednesday.

The finance ministry did not mention that due to the SBP’s flawed policy of keeping interest rate at 13.25% in its quest for hot foreign money, debt servicing increased massively in the last one year.

There is a need to conduct forensic audit of the $3.6 billion worth of hot foreign money, according to a government source.

However, the Ministry of Finance said that the “previous government resorted to short-term debt instruments without maintaining adequate cash buffers, and relied heavily on SBP borrowing”. This short-term debt profile has resulted in high interest costs on past debt, it added.

The ministry said that the previous government artificially maintained the exchange rate of rupee much above its market value.

A large increase in public debt has resulted from the abrupt exchange rate depreciation, which was inevitable because the overvalued exchange rate triggered a balance of payments crisis. The only alternative was a default on external liabilities, which was obviously not an option. Public debt increased by Rs3 trillion (25% of the increase) due to this currency devaluation, said the finance ministry.

The finance ministry also said that the unjustified tax cuts by the previous government coupled with the impact of subsequent economic slowdown due to the Covid-19 pandemic resulted in higher-than-estimated primary deficit of Rs2.5 trillion.

Interestingly, the federal cabinet and the ECC in the past couple of days approved tax exemptions for floating Eurobonds, Panda bonds, import of sugar and fire-fighting equipment.

“The increase in debt during the tenure of present government occurred mainly during FY19 as an unavoidable consequence of erroneous policies of the previous government,” said the finance ministry.

Published in The Express Tribune, January 21st, 2021.

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