Foreign debt increases by Rs 403.06bn
Public and publicly guaranteed foreign debt including that of International Monetary Fund (IMF) has increased by Rs 403.064 billion as a result of depreciation of the rupee during the present government’s tenure, revealed official details submitted to the National Assembly on Saturday.
The rupee and dollar parity was around Rs 98 against dollar and during the first few months of the present government the rupee even touched Rs 110 against the dollar in open market, however, with slight improvement in foreign inflows it has now come down to Rs 107 per dollar.
Foreign investors are of the view that the main reason behind the decrease in foreign direct investment (FDI) in the country is the depreciation of the rupee against the dollar especially during the last five-year tenure of the Pakistan People’s Party government and during the first few months when it remained unmanaged right at the start of the present government’s tenure.
According to the official details, the main objective of the foreign borrowing is to supplement the domestic and external resources required to accelerate the pace of economic development and make positive contribution towards developing the country’s infrastructure base. Loans from IMF are mostly obtained for Balance of Payments support. These loans are reflected in foreign exchange reserves of the country. The foreign loans would be required until the foreign inflows are higher than the foreign outflows.
The government financed its fiscal debt through loans. Fiscal deficit has been on average around 7.0 percent of the gross domestic product in the past five years, which resulted in high level of debt. The government is committed to reduce the financing gap, which ultimately will help reduce the dependence on debt in future. The major steps include reduction of fiscal deficit, improving Balance of Payments position through revenue expansion, tax reforms focusing on broadening income tax base, austerity measures through reducing other than obligatory expenditures, reducing untargeted subsidies, reforming public sector corporations, resolving energy crises, attracting non-debt creating flows like remittances.
Some steps have been taken by government to control the illegal transaction of money particularly through hundi and hawala: Pakistan Remittance Initiative (PRI), a joint venture of Ministry of Finance, State Bank of Pakistan (SBP) and Ministry of Overseas Pakistanis was launched with the objective of facilitating, supporting, faster, cheaper, convenient and efficient flow of remittances. Under PRI: The network of banks dealing in home remittances has expanded from five to 22 commercial banks.
The banks in Pakistan are being encouraged to enhance their outreach worldwide through new remittance – specific related arrangements including focus on bilateral arrangements and Global Money Transfer Operator (MTOs) like Western Union and Money Gram.
The commercial banks are marketing their remittance products through TV, radio and print media in Pakistan and overseas. New home remittance products like automated delivery into beneficiary bank accounts (within 24 hours), instant Cash-Over-Counter (COC) payments from banks, (iii) Instant account credit facility for remitters through various banks in Pakistan and online settlement through Real Time Gross Settlement (RTGS) platform for home remittance payments have been introduced.
To enhance foreign remittances through banking system, the government of Pakistan has introduced TT charges scheme under which the government pays to commercial banks on account of remittances.
SBP follows a flexible exchange rate regime where the value of Pakistani rupee vis-à-vis other currencies is determined in the foreign exchange market through the forces of supply and demand in both domestic and international markets. Devaluation is a term used for fixed exchange regimes where the central bank or government decides the value of exchange rate from time to time, thus the concept of devaluation does not arise. In the budget for FY14, the government has planned substantial official foreign exchange inflows including 3G licence fee, PTCL privatisation proceeds, and loans from multilateral and bilateral sources. The timely and full realisation of planned official financial inflows will help the buildup of foreign exchange reserves and in turn the stability in exchange rate. IMF programme has already started. First tranche of $544 million has already been received. The programme will not only result in buildup of foreign exchange reserves directly but will also facilitate in revival of other financial inflows from other financial institutions like World Bank, ADB etc.
The government borrows funds from the domestic and foreign banks from time to time to build the foreign exchange reserves and strengthen budgetary position of the country. The government has been able to obtain financing of $100 million for balance of payment and budgetary support. As already mentioned, banks have provided a financing facility of $100 million to the government. Another amount of $65 million is expected to be provided shortly. According to details of banks wise amount, Credit Suisse is $50 million, Standard Chartered Bank $20 million and United Bank Limited $30 million.