Unprecedented surge in Pakistan’s national debt during last 5 years

By Usman Ahmed

Pakistan’s Public debt-to-GDP ratio mounted to 62.6 percent during Financial Year 2012 (FY12) and country’s total public debt now stands at Rs 12.9 trillion, according to annual report issued by the State Bank of Pakistan (SBP), which is more than double of the total national debt recorded in 2008 .

As of June 30, 2008, Pakistan’s total public debt stood at slightly over Rs 6 trillion, but, during its five-year tenure, the Pakistan Peoples Party (PPP)-led government has added Rs 6.9 trillion to the total debt stock, which means the incumbent government’s five-year borrowings are more than double of the country’s 61 years borrowings.

According to the Fiscal Responsibility and Debt Limitation Act of 2005, total debt should not exceed 60% of country’s Gross Domestic Product (GDP). The International Monetary Fund (IMF), However, believes even this threshold is too high. It suggests that developing countries like Pakistan must take their debt much below 60% of GDP to overcome hurdles standing in the way of venturing into world capital markets.

According to state bank, surge in public debt was due to a large fiscal deficit, increased government borrowings and exchange losses stemming from the depreciation of the Pak Rupee.

“Most of the increase in public debt was contributed by domestic debt: its share has increased from 54.7 percent in FY11, to 59.1 percent in FY12.  On the other hand, the stock of public external debt has declined by US$ 2 billion due to repayments to the IMF and currency revaluation impact.  However, in Rupee terms, this stock has increased due to the depreciation of Pak Rupee against US Dollar in FY12,” the central bank said in its annual report. “These debt dynamics indicate that Pakistan could move into a debt trap”

Stepping back, Pakistan’s external debt vulnerability has also increased during FY12; as in the absence of sufficient external inflows, the repayment burden of external debt (along with the financing of current account deficit) fell on the country’s foreign reserves. This resulted in downgrading of Pakistan’s sovereign credit rating to its lowest level, Caa1, by Moody’s in July 2012.

Furthermore, a regional comparison of Pakistan’s external debt also highlights the same dismal situation. According to the Global Development Finance 2012, Pakistan’s external debt is higher than the average South Asian and developing economies.

The state bank warns that a country cannot continue increasing its debt stock without a commensurate increase in its repayment capacity. Global experience shows that failing to adhere to this simple principle, has led to several episodes of defaults, on both external and domestic debts. To overcome the ongoing challenges to the macroeconomic stability of the country, SBP emphasizes the need for fiscal consolidation.

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Beijing’s control on Pakistan’s strategic Gwadar port irks US, India

By Usman Ahmed

The Prime Minister of Pakistan, Raja Pervaiz Ashraf, during the cabinet meeting on Wednesday, gave formal approval to a deal transferring the management of strategically located Gwadar port on the Arabian Sea, from Singapore to China.

The Gwadar Port in Pakistan’s southwestern Balochistan province is situated between South Asia, Central Asia and the Middle East. It is near the Pak-Iran border and strategic Strait of Hormuz, the gateway for about 20 percent of the world’s oil. It is also the nearest warm-water deep-sea port to the landlocked but energy-rich Central Asian republics as well as Afghanistan.

China, which has long been seeking an alternative to the Strait of Malacca, through which over 80 percent of China’s imported oil passes, financed 75 percent of the initial development cost of $248 million for Gwadar Port. To China, the port could be a conduit for energy flows into northwestern China, by transporting oil and gas from the port through pipelines that traverse Balochistan and the federal agencies to feed into China’s Xinjiang province. As China’s oil imports increase, it would prefer to insulate its energy flows from the turbulent waters of the Straits of Malacca and the South China Sea. Indian ships among others patrol the former as an anti-piracy measure. In the latter, China is involved in a territorial dispute with Vietnam and Philippines among others. In a conflict, it would be easy to shut off China’s energy supplies. But not if they can be routed through Gwadar where Pakistan Navy can also add to the security.

According to recent figures, over 60% of China’s imported oil travels through the Straits of Hormuz. Having Gwadar under its command would change the security dynamics for China. As China moves into the Indian Ocean, Gwadar port would be ideal as a staging ground for Chinese ships. China already has a steady presence in Sri Lanka’s Hambantota port, it is wooing Maldives, though no port presence is planned yet. China is also building a port in Chittagong, Bangladesh, as well as Sonadiya, near Cox’s Bazar.

The Gwadar port is currently being operated by Singapore’s PSA International, but needs further development work to become fully operational. According to PSA’s Gwadar website, there has been no ship in the port since November.

Pakistan’s Information Minister Qamar Zaman Kaira said Singapore’s PSA International could not develop or operate Gwadar “as desired” and hoped that under the new management the strategically located deep-sea port would soon contribute to Pakistan’s flagging economy. “The Chinese will make more investment to make the project operational,” Kaira said.

Responding to this major development, Chinese foreign ministry spokesman Hong Lei said on Thursday that Chinese companies have been actively involved in Pakistan’s foreign cooperation projects and China will always support projects conducive to China-Pakistan bilateral friendship and Pakistan’s development and prosperity.

Taking over Gwadar operations means that Beijing would be undertaking the biggest infrastructure project in Pakistan after it Karakorram Highway road project connecting the two countries in 1976.  China will be stepping into the port located at the entrance of the Persian Gulf about 75 km east of Pakistan’s border with Iran. It also evoked apprehensions among the Indian strategic community in India as it is in the proximity of Mumbai’s port.  China recently said it would construct another 20 berths at Gwadar if it was given the rights to operate the port. Beijing has been working to develop a string of harbours in the Indian Ocean and Arabian Sea, a region traditionally considered an Indian backyard.

Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, said he believed that the injection of Chinese investment could soon vitalize the port with strategic importance.

“The Singapore company put more value in the commercial benefits in operating the port, but for China, its strategic values is greater than the commercial significance,” Lin said. “I do believe China will build the port at the astonishing ‘Chinese speed’ to materialize the port’s strategic values.”

Wang Weihua, a researcher on South Asia at the Shanghai Institutes for International Studies, said the Gwadar project as a port, and not as a naval base, may provide supplies for Chinese merchant ships and escort vessels, as well as serving China’s energy interests in the Middle East. He said that the transfer of the port management does not represent a threat to any country. Meanwhile, Chinese investment can help Islamabad to better develop the Baluchistan province and help boost Islamabad’s influence in the Muslim world, said Wang.

Liu Xiaoxue, a researcher on South Asia at the Chinese Academy of Social Sciences, said the port can stimulate the development of the bilateral free trade agreement, which was signed in 2006 but has not achieved as much as Islamabad expected.

“Still, it’s a little early to talk about the energy corridor as the cost of land energy transportation and risk of insecurity is still higher than maritime transportation,” Liu said.

According to defence and strategic analysts, China wants to use the port for commercial and defence purposes, which will undermine US influence in the Arabian Sea, who is already concerned about Beijing’s expanding regional influence.

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