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Pakistan facing acute solvency crisis

Abdul Khaliq

Publishing Date: September 6th 2008

Pakistan’s sovereign debt is going to be the riskiest. For the week ending Aug 29 2008, Government of Pakistan bonds overtook Argentina’s to be the unsafe for investment, say London financial market indicators.

In London, where Credit Default Swaps (CDS) are traded, the price for insuring $10 million worth of Argentina’s debt stood at $788,000 while the price to insure the Government of Pakistan-guaranteed debt skyrocketed to $950,000 — something that has never happened before — Pakistan’s debt is now the priciest to insure (read: the London market is contemplating a default-like scenario).

Pakistan’s total foreign debt and liabilities have now crossed the $45 billion mark. A recent report by Citibank, “Pakistan: Could the Political Chaos Lead to Sovereign Default?’ asserts, “if Pakistan opted to default, it would have to reschedule all of its debts, which amounts to $2.6 billion in self-issued bonds and $13.9 billion in bilateral debt”.

Pakistan is teetering on the brink of default, the report further claims. Since the taking over by new government Pak rupee has lost some 23 per cent of its value over the past quarter. The report urges that Pakistan cannot do without the IMF, the Asian Development Bank (ADB), the Islamic Development Bank and another Saudi oil facility.

The appalling economic situation has forced the country to actively consider the option of withdrawing over $2 billion foreign currency reserves parked in US Treasury and its capital market. During the previous regime of Gen. Musharraf, the government hired fund managers for management of the reserves, who parked money in capital markets, bonds as well as US Treasury.

The foreign exchange reserves are depleting rapidly in the range of $250 to $330 million weekly. As total reserves held by the central bank now stand at just $4 billion, which can fulfill requirements of one month of imports, the situation has put Pakistan in the ‘danger zone’ regarding its external obligations. In case of non-availability of Saudi oil facility worth $5 to $6 billion, Pakistan may face the threat of default.

Unskilled handling of foreign reserves is quite apparent as Pakistan is getting a meager 1 to 1.5 per cent return on its parked money in US Treasury while on the other side it has floated eurobonds on which it is paying a much higher rate in the range of 7 to 10 per cent. “Pakistan is a net loser in this forex game,”

On the internal front, things are even more critical. By the end of August 08, inter-corporate circular debt had soared to a colossal Rs.400 billion. Most of this amount comprises arrears of different power producing companies. The government owes oil-marketing companies Rs.84 billion on account of Price Differential Claims (PDC).

The Pakistan Electric Power Company (Pepco) is owed Rs. 150 billion. The Federally Administered Tribal Areas (Fata) owe Pepco Rs.75 billion. The Karachi Electric Supply Company (KESC) is holding back the payment of Rs.56 billion. Several Independent Power Producers (IPPs) have threatened to encash the government guarantees.

Hubco (1,200 MW), Kapco (1,600 MW) and Uch (586 MW) have stopped power production because of stuck payments with the government. Hubco and Uch, producing 1,786 MW, have put the government on a 30-day notice to pay their arrears of Rs.66 billion or they would turn their plants off. It economic indicators show Pakistan, is facing an acute solvency crisis.

As a result of above-mentioned facts there is severe power shortage in the country. Under power load management people have to face 10-to 16 hours electricity shedding daily. The energy crisis coupled with recent political crisis has made economic activity much slow in the country. Like other countries of the South, debt has become a core issue and straightjacket for Pakistan. The World Bank has been lending to Pakistan since 1952. During this span of 56 years it has sanctioned over 100 loans and 145 credits. The World Bank’s highest borrowers are also the most corrupt according to Transparency International Index. Pakistan is a favorite debtor country of the World Bank (among the top 12).

There has been severe lack of effective use of WB and other creditors money by the ruling clique in Pakistan. Squandering of funds on projects was in the interest of the ruling elite, as the interested parties used or deposited a large portion of these funds in their personal accounts. According to international law this is responsibility of the creditor to ensure that given funds should be spent for the specific purpose. But in case of World Bank it did not fulfill its responsibility and let the ruling classes of Pakistan plundered the funds. This money was meant for the uplift of the poor people and the economy, but instead it was embezzled and misappropriated by different governments in the country. As a matter of fact the Pakistan’s WB debt is illegitimate.

Pakistan’s ever increasing debt burden and the cost of servicing this debt is perhaps the single most important economic issue in the country today. Economic policies of the governments have failed completely to fill the gap in the trade balance, balance of payments, budget deficit, or resource gap over the many decades. Poverty has grown in the country during the last ten years.

Historically speaking, in the 1950’s and the 1960’s approximately 70 percent of the Pakistan’s foreign aid package was non-returnable grants and only approximately 30 percent were loans and credits. Of this, about 80 percent were spent on development expenditures and only 20 per cent were spent on non-development purposes.

Somewhere in the 1980’s and the 1990’s the situation had reversed. Approximately 80 per cent of the foreign aid package for Pakistan was being spent on armed forces and other non-development expenditures; almost all of the foreign resources for the country were in the form of loans, credits and direct investments at quite harsh conditionalities and heavy interest rates. In the 1990’s and the year 2000 all of the foreign assistance has been spent on debt servicing. At the cost as high as in Pakistan, foreign aid has become a burden, rather than a blessing.

On account of creditors bad intentions, poor economic policies, and misappropriation of funds by ruling elite, Pakistan could not benefit from international lending. The purpose of funding never ever fulfilled. As a result Pakistan today is ranking at bottom with regard to social indicators.

Today we are among the most illiterate countries of the world; school going children are out of school and working on road side workshops or restaurants; women participation in economic growth and decision making is very low. Child mortality rate as well as women mortality in childbirth is one of the highest in the world. General health conditions of the population are very poor, so is the income generating capacity of a large number of the population.

In this backdrop the ever-increasing national debt and poor economic policies are a perfect recipe of disaster for the country’s future, which seems unsustainable under the circumstances.

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