In the debt riddled Pakistan’s economy the pendulum has swung towards non-productive mode of financing with high interest bearing loans, mostly acquired from China and floating of Euro and Sukuk bonds. Five years ago, in PPP government two-third of loans used to be taken for productive project with built-in capacity of pay back. The projects added to the increase in gross domestic product (GDP) in real terms. But in the PML-N government around 75 percent foreign loans were obtained for budgetary support, caused by extravagance in current expenditure, and building foreign currency reserves because of sagging exports and rising imports.
The burden of foreign debt has reached $ 92 billion, showing an increase of $ 45 billion over the last five years. Pakistan has received nearly $ 10 billion during the first 11 months of the fiscal year 2017-18 and three fourth of this amount has been utilised for budgetary support and meeting external financing, underscoring that the amount can not be returned without resorting to fresh borrowing. The total loans disbursement from July to May of the fiscal year 2017-18 stood at $ 9.9 billion, according to the report released by Economic Affairs Division. The 11 months disbursements were significantly higher than the budgetary estimate of $ 7.7 billion. During the same period project financing stood at mere 2.8 billion or 28 percent of the total disbursement. But half of this project financing went into only three projects—Orange Line train, Thakot Havelian Highway and Multan Sukkar Motorway.
Overall the government of China and its financial institutions provided $ 3.8 billion or 38 percent of the total loans. A reasonable amount of loans have also been obtained from World Bank, Asian Development Bank and through foreign exchange bearer bonds. The component of Chinese loans consist $ 1.64 billion for project financing and 2.2 billion are commercial loans from Chinese Banks. In addition to $ 3.8 billion of direct disbursement of loans, China has also extended $ 3 billion credit facility that Pakistan has almost utilised to stabalise its nose-diving foreign currency reserves which has now dipped to $ 9.66 billion which is not even sufficient for two months imports.
The PML-N government almost doubled the foreign debt liability in its third stint of government July 2013-May 2018. But the bulk of the loan acquired have not been spent on expanding the productive capacity of the economy by constructing water storage dams, introduction and indigenization of new technologies to make the industry competitive for boosting exports, setting up industries of producing industrial raw materials and intermediate and imports substitution industries. Their main objective was to convert Pakistan into a trading nation. Incentives were not given to facilitate the exploitation of available export potential of $ 12 billion with value addition and diversifying the export market instead of relying the existing market.
The public debt-to-GDP ratio peaked to 70.1 percent as against 63 percent of PPP tenure. This ratio is higher than the sustainable levels of a country like Pakistan. High debt level is consuming over 30 percent of the federal budget on account of debt servicing. It will necessitate drastic cut in development expenditure and will fall on social sector development. The economic situation left by PML-N government after completing its term of five years is much worse than that of its second stint of government of two and a half year that ended on 12th October, 1999. General Musharraf military led government of technocrats succeeded in foreign debt rescheduling with freeze interest and loans waiver. The economy was turned around in three years. This time such a free lunch can not be made available by international lending agencies because of strained relation with the United States and Pakistan’s placement on grey-list by FATF.