Mountains of debt weaken the rupee – Business
During the week ending July 29, the rupee lost 4.8% more of its value against the US dollar. This brings to 27.2% the total loss suffered by the rupiah since the end of Imran Khan’s government on April 7.
Meanwhile, foreign exchange reserves held by the State Bank of Pakistan (SBP), which stood at $11.425 billion at the end of March, have gradually declined to $8.575 billion as of July 22.
Falling reserves and falling rupiah are hot topics of heated political debate, with some blaming post-IK political chaos for the debacle and some claiming the current PML-N-led coalition government inherited mountains external debt and weak external sector fundamentals.
Finance Minister Miftah Ismail said better days are not far off. He expects that after the approval of the International Monetary Fund (IMF) loan tranche of about $1.2 billion in mid-August, many foreign currencies will flow into the country from multiple sources, that reserves increase and that the rupee stabilizes. . The SBP also reassured the nation that the country is not at all on the brink of default and that the exchange rate and reserve issues should be corrected after the IMF loan.
Pakistan has long solved its balance of payments problems with borrowed foreign funds, increasing debt service requirements year after year
In the nine months of the last fiscal year, between July 2021 and March 2022, Pakistan spent $10.885 billion on servicing external debt, according to the State Bank of Pakistan. On average, the country’s quarterly external debt service was about $3.628 billion.
More recent external debt service data has yet to be released, but even if we assume it was equal to the average of the previous three quarters, at least another $3.628 billion left our market. exchange rates from April to June 2022. ( The actual external debt service need from April to June this year must have been much larger. Even in the January to March quarter, the country had to spend 4.875 billion dollars in this regard.) This is one of the main reasons for the continued depreciation of the rupee and the dollar. decrease in precious foreign exchange reserves.
Total expenditure on external debt service in 2021-22 can be safely estimated at around $15 billion.
When we talk about the health of the rupee, we must keep two important things in mind. First, the fact that imports have become too important now that even the combined foreign exchange earnings from exports of goods and services and remittances are not enough to finance imports of goods alone. In 2021-2022, services exports reached $39.418 billion and remittances reached $31.238 billion. On the other hand, imports of goods (FOB value) totaled 72.048 billion dollars.
Second, we spend more than double the amount of our total exports of services or about half the amount of our total exports of goods to service our external debt. In 2021-2022, exports of goods (FOB value) totaled $32.45 billion and exports of services totaled $6.986 billion.
This shows the seriousness of the Rupee’s structural weakness. Short-term factors such as domestic political instability and one-off external shocks such as the historic rise of the US dollar on the global foreign exchange market or high international fuel and food prices also weigh on the local currency. But they too have a more pronounced impact on the exchange rate only in the presence of structural reasons for the imbalance of our country’s external account.
Pakistan has long solved its balance of payments problems with borrowed foreign funds. As a result, mountains of external debt continue to grow, increasing debt servicing needs year by year.
Pakistan’s overall public external debt, which stood at $75.357 billion at the end of June 2018, has gradually ballooned to $100.296 billion at the end of March 2022, according to the SBP. The external debts of the federal government alone rose from $64.142 billion to $81.294 billion during this period.
Growing external debts continue to increasingly hit the external sector in two ways: first, they directly increase the cost of servicing external debt—and thus, the additional need for external borrowing. And secondly, the allocation of the counterpart in rupees of the service of the foreign debt increases each year with the growing need.
This, together with the allocation for domestic debt servicing, defense and current government spending, reduces the fiscal space for development spending. And then, lower development spending is clouding the prospects for long-term export growth and also affecting potential earnings through remittances. (Lower development expenditure produces better professionals/managers and skilled workers who can earn more wages per person overseas).
The structural problems of our external sector are serious. It would be naive to expect the rupiah to make big gains after the IMF loan tranche is released. The government has already lifted the ban on imports of luxury items, with some exceptions. And, after the release of IMF funds, the SBP would not ration foreign exchange for importers either.
The first factor would increase the monthly import bill and the second would increase the intraday demand for dollars. The two factors combined would keep the rupiah under pressure. It is also naïve to expect SBP forex to rise anytime soon to three months of goods import bills – a level considered the bare minimum for countries.
Given the fundamentals of our external sector, it could take longer than a quarter, if at all possible. It could remain a dream if exchange rates become too volatile amid growing political polarization in the country, forcing the SBP to intervene in the foreign exchange market and start selling dollars to defend the rupee even for a while. small moment.
Posted in Dawn, The Business and Finance Weekly, August 1, 2022