(Dawn, February 06, 2008)
By Shahid Iqbal KARACHI, Feb 5: How much the government added to the external debt is much more important than the build-up of a heap of new record domestic debt, addinga trillion rupees to the total.
The huge external debt, which witnessed an addition of about $7billion to the total of over $40 billion in just four years, is set to start a vicious cycleof borrowing — servicing — borrowing. The rising bill of external debt-servicing gets more importance in the wake of widening current account deficit.
This deficit curtails the government’s ability to pay external bills, forcing it to borrow to meet the requirement or sell the assets it has for yieldingforeign exchange. The government has been paying about $3 billion each year as debt-servicing despite rescheduling of Paris Club consortium debt which has the largest sharein the total debt.
The latest figures issued by the State Bank showed that the total external debt reached $40.322 billion from $33.352 billion since 2003-04. The addition of about $6.9 billion in just four years showed that the government borrowed massively to meet its external payment. This has increased the cost of debt-servicing.
The future government is bound to borrow more to keep itself able to make external payments. This could bethe second biggest task of the future government after de-freezing the petroleum prices. The future government will have to carry out another task to launch Global Depository Receipts (GDRs) to raise dollars for its increasing demand.
The dollar demand has multiplied after record oil prices which hit $100 per barrel. The slow export growth and high import growth is another difficult area which demands more dollars. The country’s foreign exchange reserves have stared depleting but still these are about $15 billion. This will be the toughest task for the future government to maintain reserves and keep the payment system smooth.
The foreign exchange reserves have been a trade mark of success of the previous government. Both the Prime Minister and President referred the forex reserves as one of the biggest successes in numerous speeches they made in last couple of years. The SBP’s data showed that the government of Shaukat Aziz went beyond all records of increasing domestic debt which rose by almost one trillion rupees infive year to make the total as Rs2.7 trillion.
According to the report, the previous government which completed its five-year tenure increased the domestic debt by 58 per cent in five years. The government broke all records of previous governments to add such huge debt on the back of the weak economy. The previous government added both the external and domestic debt on such a scale which never happened before.
The caretaker government has followed the same path and has been borrowing at the fastest speed. The State Bank in its monetary policy criticised huge borrowing from the State Bank. The SBP accused the government of accelerating inflation through huge borrowing and destroying all efforts of the SBP to control inflation. The governmentborrowed about Rs237 billion from SBP in six months.