8 Domestic and External Debt

8.1 Overview
The persistent rise in the total debt over the last decades saw a notable reversal in trend during FY02,
as the total debt stock edged down by Rs 105.5 billion; the year also witnessed an important shift in
the term structures of both domestic and external debt towards longer tenors. The achievements
reflect the country’s adherence to the Debt Reduction and Management Strategy (DRMS)1, as well as
a one-off stock adjustment of domestic debt, enabling Pakistan to make concrete progress towards a
sound and sustainable debt path.

On the external front, the successful completion of an IMF Stand-By Arrangement (SBA) restored
Pakistan’s credibility with International Financial Institutions (IFIs), and led to successful
negotiations for a medium-term IMF assistance program, PRGF, as well as increased aid from other
IFIs. Moreover, the decision to join the international war against terrorism revived the previously
strained relations with bilateral creditors. This paved the way for the stock re-profiling of Pakistan’s
bilateral debt by the Paris Club creditors, on very generous terms. As a result, the net present value of
Pakistan’s external debt is expected to decline notably (see Section 8.3 for details).

The domestic debt profile shows similar improvement. A one-time adjustment substantially reduced
the stock of short-term debt (reducing the stream of future interest payments), and together with
increased long-term borrowings, helped lengthen its maturity profile. Furthermore, improved
exchange rate management and the spillover impact of external developments helped SBP to reduce
the market-driven interest rates to all-time lows, fostering a sharp reduction in the cost of domestic
debt.

While the above FY02 developments are quite commendable, it is necessary to emphasize that
Pakistan still has a long way to go; an exit from the debt problems will require sustained
macroeconomic discipline over a number of years.

At the close of FY02, total debt stood at Rs 3,760.5 billion and the total debt to GDP ratio declined
from 113.2 percent to 102.0 percent (see Table 8.1). Of the three categories of Pakistan’s total debt,
the highest reduction was visible in external debt (Rs 53.9 billion) followed by explicit liabilities (Rs
34.6 billion), while domestic debt registered a smaller decline of Rs 17.0 billion during FY02.

In Rupee terms, the decline in external debt is entirely due to the appreciation of the Rupee, as the
stock has actually increased in Dollar terms (by US$ 1,276 million). Nonetheless, the profile of the
external debt stock reflects some qualitative improvement due to the re-profiling of bilateral debt, the
retirement of expensive commercial debts, and increased reliance on soft credits from IFIs. As far as
the explicit liabilities are concerned, the reduction of Rs 34.6 billion was mainly driven by the
repayments of maturing 3-year Special US Dollar Bonds.

8.2 Domestic Debt

There is a distinct improvement in Pakistan’s domestic debt profile during FY02, with a pause in the
unremitting annual increase in public domestic debt, a perceptible decline in debt servicing costs, and
an important shift in the term structure of the domestic debt. By end-June 2002 the total outstanding
domestic debt was Rs 1695.5 billion, Rs 17.0 billion lower than the corresponding FY01 figure (see

1
Formulated in March 2001, DRMS envisages a reduction in the stock of external debt through restructuring of bilateral
debt, and for arresting the growth of debt by the retirement of expensive debt and liabilities, and the acquisition of fresh
loans on concessional terms etc.
State Bank of Pakistan Annual Report FY02

Table 8.1: Profile of Domestic and External Debt

billion Rupees
FY98 FY99 FY00 FY01 FY02
Total debt 2,671.9 3,060.4 3,318.0 3,866.0 3,760.5
1. Domestic debt 1,176.2 1,375.9 1,559.9 1,712.5 1,695.5
(44.0 ) (45.0 ) (47.0 ) (44.3 ) (45.1 )
2. External debt 1,483.1 1,614.4 1,682.7 2,059.5 2,005.6
(55.5 ) (52.8 ) (50.7 ) (53.3 ) (53.3 )
3. Explicit liabilities1 12.6 70.1 75.4 94.0 59.4
(0.5 ) (2.3 ) (2.3 ) (2.4 ) (1.6 )
Total debt as % of GDP 99.8 104.2 105.4 113.2 102.0
Domestic debt as % of GDP 43.9 46.8 49.6 50.1 46.0
External debt as % of GDP2 55.4 54.9 53.5 60.3 54.4
Explicit liabilities as % of GDP 0.5 2.4 2.4 2.8 1.6
Total debt servicing 278.3 343.1 353.9 340.3 412.5
Total interest payments 191.6 220.1 256.8 254.4 245.4
i. Domestic 160.1 178.9 206.3 195.4 179.1
ii. Foreign 28.7 38.0 44.9 51.2 60.8
iii. Explicit liabilities 2.8 3.2 5.6 7.8 5.6
Repayment of principal3 86.7 123.0 97.1 85.9 167.1
Ratio of external debt servicing to
Export earnings 55.4 35.3 36.5 37.3 44.1
Foreign exchange earnings 34.9 23.6 23.4 23.3 26.1
Ratio of total debt servicing to
Tax revenues 78.4 87.8 87.2 76.5 86.5
Total revenues 64.8 73.2 65.9 62.3 65.4
Total expenditures 43.9 53.0 47.6 46.8 47.2
Current expenditures 52.5 62.7 55.0 52.3 57.5
1
Explicit liabilities include Special US $ Bonds, FEBCs, FCBCs and DBCs; of which Special US $ Bond is a foreign liability that is
payable in foreign exchange, while FEBCs, FCBCs and DBCs are also foreign liabilities but are payable in Rupees.
2
External debt to GDP ratio is not comparable to ratio calculated in Table 8.8 due to a methodological difference. This ratio is
calculated by converting the external debt into Pak Rupee using end-June exchange rates.
3
Repayment of principal is the sum of repayment of long-term foreign debt and short-term credit.
Note: Figures in parentheses are shares in total debt.
Sources: SBP & Ministry of Finance

Table 8.1). As detailed in Section 8.2.1, this Figure 8.1: Domestic Debt Indicators
was essentially due to a one-off stock Domestic debt to GDP (LHS)
adjustment, though it does have a continuing Domestic debt to tax revenue (RHS)
impact in the form of a lower stream of future 52 400
interest payments. On the other hand, the 50 350
rising share of long-term debt as well as the
48 300
visible fall in the interest cost of domestic debt
percent
percent

46 250
suggests a more definite improvement in the
debt management (see Section 8.2.2). 44 200
42 150
As a result, most domestic debt indicators 40 100
depict substantial improvement in FY02, e.g.
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02

the ratios of domestic debt to GDP, and to tax

revenue, both witnessed sharp declines over
FY01 figures (see Figure 8.1).

134
 Domestic and External Debt

8.2.1 Adjustment in Debt Profile

The FY02 fall in the outstanding domestic debt creates some confusion in the presence of
government’s Rs 136.2 billion domestic borrowings to finance a portion of the budgetary deficit, i.e.
contrary to standard theory, the FY02 change in domestic debt does not equate to the financing of
budget deficit from domestic sources. The answer to this puzzle lies in a one-time adjustment in the
domestic debt stock resulting from the rescheduling of the country’s external debt, that has positive
implications for the composition of the domestic debt stock as well as for the cost of servicing
domestic debt.2 Effectively, therefore, the adjustment acts as a quasi-fiscal surplus.

The roots of this change date back to the May 1998 economic sanctions imposed following Pakistan’s
nuclear test, which forced the government to declare a financial emergency. Trapped by a severe
foreign exchange squeeze, the government decided to meet its external debt servicing obligations in
Rupees instead of foreign currencies, at prevailing exchange rates. Accordingly, two new accounts,
the “Special Account Debt Repayments I & II” were opened in July and December 1998 respectively.

While the government’s fiscal balance reflected steady payments over the years, these notional
external debt repayments only led to rising Rupee balances in the Special Accounts. Thus, by the
time these accounts were eventually terminated in July 2001, these had accumulated to a very
substantial Rs 194.6 billion. It is important to note that these notional payments had no monetary
impact; while the payments were funded via budgetary borrowings from SBP and led to the increase
in the SBP T-bill holdings (i.e. the SBP assets rose), the monetary impact was sterilized by keeping
the borrowed funds in the reserved special accounts (i.e. an increase in SBP liabilities).

In fact, it was the rising fiscal burden of what were essentially notional payments that eventually
persuaded an accounting change leading to the cancellation of a portion of the domestic debt stock
against the accrued Rupees in the Special Accounts, reducing at a stroke the size of the domestic debt.
It must be noted that these fiscal adjustments left the accrued external liability unaffected, until it too
was eliminated through rescheduling of external debt, and the receipt of grants during FY02.

8.2.2 Composition of Domestic Debt

Pakistan’s public domestic debt is divided into three categories, largely based on the maturity
structure of the instruments.

Tenor of debt Category Billion Rupees Redemption

Short term (one year or less) Rs557.8 billion Floating debt 557.8
Fixed maturity Rs925.8
billion
Permanent Debt 368.0
Long term (greater than one year) Rs1137.7 billion
On demand
Unfunded debt 769.7
Rs769.7 billion
Note: Prize bonds are also included in permanent debt.

As can be seen from Figure 8.2, the composition of domestic debt has seen significant changes in
FY02. The year saw a reversal of the steady up-trend in the share of short-term debt, helped by the
retirement of MRTBs as well as the greater market interest in PIBs.

This points to greater stability in the government’s funding cycle. Moreover, the fact that a larger
portion of fresh long-term borrowings was through PIBs means that the government is locking-in the
benefit of historically low interest rates. To put this in perspective, one of the important reasons for

2
A more detailed discussion on this issue is provided in a special section on Domestic Debt in SBP Second Quarterly Report
for FY02.
135
State Bank of Pakistan Annual Report FY02

the government’s inability to reduce its debt Figure 8.2: Long Term Debt
servicing costs significantly over the last few Short term debt Long term debt
years, is the lingering impact of very expensive
long-term debt taken in earlier years. 2,000

1,600

billion Rupees
Permanent Debt 1,200
The permanent debt to GDP ratio has
800
persistently declined from over 18.0 percent in
FY93 to only 8.2 percent in FY01, before 400
spiking again to 10.0 percent during FY02 (see 0
Figure 8.3). This declining trend was largely

FY99

FY00

FY01

FY02
attributed to maturing market loans, Bearer
National Fund Bonds (BNFB), and Federal
Government Bonds. Specifically, the total
outstanding balance of these instruments has Figure 8.3: De bt Compone nts as Perce nt of GDP
gone down from Rs 58.8 billion in FY92 to Rs Permanent Floating Unfunded
15.1 billion in FY02. Maturing Federal 25
Investment Bonds (with no fresh sale since
20
FY98) have also played a role in dragging percent
down the permanent debt to GDP ratio. 15

However, the FY02 reversal of the declining 10

trend is largely attributable to the introduction
5
of the “Pakistan Investment Bond”, which was
FY92

FY93
FY94

FY95
FY96

FY97
FY98

FY99

FY00
FY01

FY02
heavily subscribed by the market. During
FY02, the government mobilized over Rs
100.0 billion from this instrument alone,
causing an increase in the permanent debt to GDP ratio. The successful launch of this instrument not
only set a market-based long-term benchmark yield, but also helped the government to finance its
budgetary requirements with stable long-term debt.3 In absolute terms, the permanent debt saw a net
increase of Rs 86.9 billion during the year, compared to a Rs 21.5 billion rise in FY01 (see Table
8.2).

Floating Debt Table 8.2: Outstanding Level of Domestic Debt

In sharp contrast to previous years, the billion Rupees
outstanding level of floating debt has witnessed FY99 FY00 FY01 FY02
a reduction of Rs 180 billion during FY02 (see A. Permanent debt 256.9 259.6 281.1 368.0
Table 8.2). This massive retirement is the B. Floating debt 561.6 647.4 737.8 557.8
result of a variety of factors, including the C. Unfunded debt 557.4 652.9 693.7 769.7
termination of the Special Account for debt Total (A+B+C) 1,375.9 1,559.9 1,712.5 1,695.5
repayments and bilateral grants from friendly As percent of GDP
countries. As a result, the floating debt to GDP A. Permanent debt 8.7 8.2 8.2 10.0
ratio has declined by 6.5 percentage points in B. Floating debt 19.1 20.6 21.6 15.1
just one year (see Figure 8.3). C. Unfunded debt 19.0 20.7 20.3 20.9
Total (A+B+C) 46.8 49.6 50.1 46.0
Unfunded Debt
Unfunded debt largely comprises of instruments offered by Central Directorate of National Savings
(CDNS). The outstanding level of unfunded debt touched the level of Rs 769.7 during FY02, with a
net inflow of Rs 76.0 billion. As can be seen from Figure 8.3, the unfunded debt to GDP ratio has

3
For detailed discussion on PIBs, please see section on Money Market.
136
 Domestic and External Debt

witnessed a continual increase from FY93 to FY00, largely on account of higher profit rates relative
to other government debt instruments, despite the absence of incremental risk factors.

Realizing the dis-intermediary impact of higher profit rates of National Savings Scheme (NSS), as
well as its distortionary implications for monetary policy, the NSS instruments have been restructured
during the last three years. Their profit structure has been drastically changed and the profit income
has been brought under the tax net. More specifically, the profit rates on Defense Saving Certificates
(DSCs) have been linked with market based PIBs and are subject to revision after every six-month.

Furthermore, the institutional investment in NSS was banned before the launch of PIBs. This specific
measure coupled with reduction in profit rates resulted in lower net inflows in these schemes
(compared to average inflows in earlier years) during FY00 and FY01, which helped to arrest the
increasing share of unfunded debt. However, unfunded debt to GDP ratio has again slightly increased
during FY02 largely on account of higher inflows in NSS, which almost doubled as compared to last
year.4 The FY02 jump appears to reflect both, the external account improvement and the fact that
rates on NSS instruments did not adequately mirror the decline in market-based instruments.

8.2.3 Classification of Domestic Debt by

Owner Figure 8.4: Debt He ld by the Banking Sector
Domestic debt is broadly classified into two 60
categories by ownership, i.e. by the banking
and non-banking sectors. Although, the share 55
of the banking sector in domestic debt has been 50
percent

declining since FY96, this trend was more

pronounced during FY02 (see Figure 8.4), 45
mainly due to a large one-off retirement of
SBP T-Bills. The increased borrowings from 40

non-banking sources were largely driven by 35

higher inflows in the NSS and the sale of PIBs
FY96

FY97

FY98

FY99

FY00

FY01

FY02
to non-banks.

Debt Held by the Banking Sector

Compared to an increase of Rs 67.8 billion Table 8.3: Domestic Debt by Owners
during FY01, the banks’ holdings of billion Rupees
government debt saw a steep decline of Rs FY99 FY00 FY01 FY02
118.0 billion during FY02 (see Table 8.3). Bank debt 673.6 764.9 832.7 714.7
Scheduled banks 314.0 213.5 228.1 388.5
Interestingly, this decline was not equally SBP 359.5 551.4 604.6 326.2
shared within the banking sector, as debt Non-bank debt 702.4 795.0 879.8 980.8
holdings of SBP declined sharply, while NSS 542.4 633.8 670.2 741.2
holdings of commercial banks rose by a smaller Others 160.0 161.2 209.7 239.6
amount (see Figure 8.5). More specifically, the Total 1,375.9 1,559.9 1,712.5 1,695.5
SBP holdings of government paper plummeted
by Rs 278.4 billion during FY02, while commercial banks holdings surged up by Rs 160.4 billion
over the same period. This drastic shift of government debt from SBP to commercial banks is largely
attributed to two factors: (1) the government retired Market Related T-Bills for replenishment and
Adhoc T-Bills, both of which are held entirely by the SBP, and (2) the easy monetary policy, coupled
with large foreign exchange inflows, helped the government in re-pricing a portion of its outstanding

4
This is because NSS rates have not weakened in correspondence with the declining yields on comparable market based
instruments.
137
State Bank of Pakistan Annual Report FY02

domestic debt through higher borrowing from Figure 8.5: Share of SBP in Debt Holdings of Banking
commercial banks and an offsetting decline in Sector
SBP debt.5 75

Debt Held by the Non-banking Sector 65

In sharp contrast to the banking sector, the debt
holdings of the non-banking sector recorded an

percent
55
increase of around Rs 101 billion during FY02
(see Table 8.3). This was primarily driven by
45
higher inflows in NSS and Prize bonds.

Net inflows in NSS stood at Rs 71 billion 35

FY96

FY97

FY98

FY99

FY00

FY01

FY02
during FY02, which is almost double as
compared to a year ago. This increase is
mainly attributable to higher national savings
and rise in profit rates on these schemes. The Table 8.4: Net Inflows in Major NSS
instrument-wise mobilization reveals an billion Rupees
interesting development as this increase was FY99 FY00 FY01 FY02
largely driven by higher amount in SSCs DSCs 38.3 41.2 16.6 21.2
instead of DSCs, which had been the preferred SSCs 30.0 -14.7 9.4 36.3
instrument in past years. This departure from RICs 59.1 26.1 8.6 10.9
trend is quite visible in Table 8.4, as net
inflows in SSCs during FY02 constitute around 50 percent of total inflows in NSS.

The unusual shift from DSCs to SSCs appears Table 8.5: Profit Rates on DSCs and SSCs 1
to be the result of changing profit rates on these percent
schemes. The government announced revised DSCs SSCs
profit rates twice in the year under review; first 01-07-2000 to 30-06-2001 14.0 11.3
with effect from July 1, 2001 to December 31,
01-07-2001 to 31-12-2001 15.0 12.6
2001 (for H1-FY02) and second with effect
01-01-2002 to 30-06-2002 14.1 12.6
from January 1, 2002 to June 30, 2002 (for H2- 1 : Compound annual average rates
FY02). In first revision, the compound profit
rates on DSCs and SSCs were increased by about one percentage point to compensate for a
withholding tax imposed with effect from July 1, 2001 (see Table 8.5).

During the second revision, the government Figure 8.6: Net Inflows in DSCs vs SSCs
reduced the profit rates on DSCs by one DSCs SSCs
percentage point, following the reduction in 7
PIBs coupon rates with effect from November 6
6, 2001, while the profit rates on SSCs were
5
billion Rupees

kept unchanged. This rendered the SSCs

4
relatively more attractive as compared to
DSCs, increasing their sales in the following 3

months (see Figure 8.6). 2

1
Furthermore, this pattern of inflows for SSCs 0
was also traceable in overall inflows in NSS.
Aug
Jul

Sep

Feb

Jun
Dec

Mar
Apr
Nov

Jan

May
Oct

Specifically, investment in NSS stood at Rs

21.2 billion during H1-FY02, which was only

5
For details, Please see section on Money and Credit.
138
 Domestic and External Debt

27.9 percent of total net inflows for the year. The larger portion of FY02 NSS inflows was received
in H2-FY02 when SSC rates were relatively more attractive.

8.2.4 Interest Payments on Domestic Debt

Interest payments on domestic debt for FY02 recorded an 8.3 percent decline (Rs 16.3 billion in
absolute terms) over the preceding year. This was entirely driven by a massive fall in the cost of
unfunded debt. The decline in interest payments on floating debt was almost negligible, while interest
expenses on permanent debt increased by Rs 2.2 billion (see Table 8.6).

The rise in FY02 interest payments on Table 8.6: Interest Payments

permanent debt stems from rising stock of this billion Rupees
component, as elaborated in Sections 8.2.3. FY99 FY00 FY011 FY022
Specifically, interest payments on PIBs rose Permanent debt 38.002 54.809 40.675 42.848
sharply to Rs 8.5 billion as compared to only Floating debt 63.422 58.344 53.239 53.189
Rs 0.9 billion in FY01. Additional Unfunded debt 77.462 93.168 101.479 83.044
contributions to the rise were from interest Total 178.886 206.321 195.393 179.081
payable on other maturing government bonds, Note: Data on ‘permanent debt’ exclude interest payments on FEBC,
and on liabilities of Pakistan Steel Mills. US$ bearer certificates, FCBCs and Special US $ bonds as these
bonds are classified as explicit liabilities. Data on interest payments
on unfunded debt include provincial interest payments, commissions,
The marginal decline of Rs 50 million in the charges, and printing charges.
interest paid on floating debt calls for an 1
: Data on Federal interest payments are taken from ABS FY03
explanation, given that the outstanding debt 2
: Latest data received from Ministry of Finance
saw a steep fall of Rs 180 billion and that FY02 Source: Ministry of Finance
interest rates were lower. The apparent
contradiction is explained by the accounting treatment; since the interest is computed on a cash basis,
the cost shifts from one year to year. If we adjust the accrued interest of Rs 14.4 billion on MRTBs,
the interest payments on floating debt drops to Rs 38.8 billion, which is substantially lower than both,
the budget estimates and the interest cost for FY01.

Interest payments on unfunded debt include interest payment of provincial governments,

commissions, charges and the printing costs of debt instruments. During FY02, these were Rs 18.4
billion lower than in the previous year; in fact, the fall was even higher than the fall recorded in
overall interest payments on domestic debt. This suggests that a portion of this saving was offset by
higher interest payments on permanent debt (see Table 8.6). Also, a compositional breakdown of the
interest on unfounded debt shows that interest payments on NSS actually increased during FY02
(compared to FY01) but remained significantly below the budget target. This relatively low increase,
despite heavy inflows in these schemes during FY02, is simply because the initial payments on the
incremental NSS inflows will fall due in FY03 and beyond.

8.3 External Debt

The considerable improvement in Pakistan’s external debt and liabilities (EDL) profile during FY02
reflects the country’s adherence to the Debt Reduction and Management Strategy (DRMS). This
period witnessed a reversal in the country’s EDL trend through a US$ 0.6 billion reduction to US$
36.5 billion. There was also a visible shift in its maturity profile and the cost structure (see Table
8.7). Within the EDL, while the debt burden has increased by US$ 1.3 billion, this is on very
concessional terms and is more than offset by a US$ 1.9 billion fall in liabilities.

The EDL reduction in FY02 is quite creditable, but there is no room for complacency. Given the
magnitude of the external debt burden, sustained macroeconomic discipline will be required over a
number of years before Pakistan can completely extricate itself from the debt trap. Also, it must be

139
State Bank of Pakistan Annual Report FY02

Table 8.7: Pakistan's External Debt and Liabilities

million US Dollar
FY99 FY00 FY01 FY02 P
I. Public and publicly guaranteed debt 26,025 27,862 28,145 29,235
A.Medium and long term (> 1 year) 25,873 27,732 27,888 29,052
Paris club 11,873 12,428 11,822 12,516
Multilateral 10,599 12,292 13,343 14,331
Other bilateral 629 639 421 429
Eurobonds 608 620 645 643
Military debt 1,004 653 554 819
Commercial loans/credits 1,160 1,100 1,103 314
B.Short-Term ( ≤ 1 year) 152 130 257 183
IDB 152 130 257 183
II. Private non-guaranteed debts 3,435 2,842 2,450 2,226
Medium and long term (> 1 year) 3,435 2,842 2,450 2,256
Private loans/credits 3,435 2,842 2,450 2,256
III. IMF 1,825 1,550 1,529 1,939
Total external debt 31,285 32,254 32,124 33,400

IV. Foreign exchange liabilities 5,315 5,664 5,015 3,132

Foreign currency accounts 1,719 1,733 1,100 406
FE-45 1,380 1,072 774 234
FE-31 deposits (incremental) 272 300 326 172
FE-13 67 361 - -
Special US Dollar bonds 1,164 1,297 1,376 924
National debt retirement program 196 156 150 75
Foreign currency bonds (NHA) 263 241 219 197
Central bank deposits 700 700 700 750
NBP/BOC deposits 616 781 749 500
Others liabilities 657 756 721 280
Total external debt and liabilities (I to IV) 36,600 37,918 37,139 36,532
FCBCs/FEBCs/DBCs (payable in Rupee) 195 148 90 66
P
: Provisional
Note: Due to changes in definitions (as explained in Sections 8.3) the data in this table is not directly comparable with data
presented in earlier Annual Reports

noted that a substantial part of the FY02 improvement is based on improved debt management rather
than a very strong growth of the domestic economy.

Nonetheless, Pakistan did achieve a number of milestones during FY02 that will help the transition
towards a sounder and more sustainable debt path:

1. The successful completion of an IMF Stand-By Arrangement (SBA) considerably restored

Pakistan’s credibility with IFIs by demonstrating the government’s commitment to the reform
agenda.
2. The government’s decision to join the international war against terrorism also revived our
previously strained relationships with major bilateral creditor countries. As a result, Pakistan
received improved access to some key markets and saw the removal of a number of economic
sanctions imposed after nuclear test and the military takeover in October, 1999.
3. These steps paved the way for the successful negotiation of a relatively generous medium-
term PRGF and also led to additional assistance and support from bilateral creditors and IFIs,
as reflected by the higher FY02 receipts on account of non-food aid (see Table 9.1).

140
 Domestic and External Debt

4. The restructuring of Pakistan’s bilateral debt by Paris Club creditors was also on very
generous terms6; the sharp reduction in the Net Present Value (NPV) of external debt
(between 28 to 44 percent) was achieved without the stigma of a HIPC restructuring.7
5. Pakistan also posted a record current account surplus of US$ 2.7 billion during FY02. This
was instrumental to the accumulation of the SBP foreign exchange reserves to an all-time
high of US$ 4.8 billion by end-June 2002, as well as facilitating the retirement of the more
expensive external debt and liabilities.
6. Finally, the unprecedented appreciation of Rupee/Dollar parity by 6.7 percent, and resulting
end to devaluation expectations (evident in the virtual disappearance of the kerb market
premium) carries major positive direct8 and indirect9 connotations.

8.3.1 External Debt Indicators Figure 8.7: Non-inte re st Curre nt Account Balance
A majority of Pakistan’s debt indicators
6
witnessed an improvement during FY02.
4

billion US$
2
External debt ratios show a mixed
0
performance in FY02. The increase in soft
loans worsened some debt indicators, while -2
others saw dramatic improvements due to a -4
jump in remittances, and the rise in net -6
receipts under the services account. The debt -8
to GDP and debt to export earnings ratios FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02
worsened, but despite the increased debt, the
TED/ FEE ratio decreased (see Table 8.8).
Similarly, an unprecedented US$ 4.8 billion accumulation of foreign exchange reserves increased the
RES/TED ratio.

By contrast, since the liabilities have

decreased in absolute terms, all of the liability Figure 8.8: Gross and Ne t Debt and Liabilitie s
indicators show an unambiguous positive Foreign Exchange Reserves (RHS)
change in FY02. The record level of foreign Gross EDL (LHS)
exchange reserve build up during FY02 also Net EDL (LHS)
bolstered the ratio of foreign exchange 45 5
reserves to EDL, which improved from 5.6 5
40 4
percent in FY01 to 13.5 percent during FY02. 4 billion US$
billion US$

35 3
Another important indicator of a country’s 3
external debt profile is the non-interest 30 2
2
current account balance. It reflects a 25 1
turnaround from negative to positive balance 1
since FY00, which shows the concerted 20 0
efforts of current government to bring strength
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02

and stability to external sector and check the

6
One can say that if the September incident had not occurred, Pakistan would have performed well and thus to be granted
PRGF and restructuring from Paris Club but might be on bit harder terms.
7
In a sense this is beneficial for Pakistan as the restructuring terms for Heavily Indebted Poor Countries (HIPC), restrict
borrowings on normal terms from IBRD, ADB or market sources. Pakistan is the only fourth country in world to be granted
such generous terms.
8
Not only did the rupee cost of external debt servicing declined, foreign currency liabilities also fell sharply (as investors
preferred to encash their holdings in Rupees)
9
The improved external account contributed to the easing of monetary policy and a consequent decline in the cost of
servicing domestic debt.
141
State Bank of Pakistan Annual Report FY02

growth of un-sustainable external debt (see Figure 8.7).

Net External Debt & Liabilities

This is computed by subtracting the entire stock of a country’s EDL from its liquid foreign exchange
reserves, and it simply measures the country’s immediate ability to redeem its EDL. Thus the smaller
the value of this indicator, the better off the country is. The sharp US$ 3.3 billion improvement in this
indicator during FY02 mirrors the unprecedented accumulation of foreign exchange reserves as well
as a complementary decline in the country’s EDL (see Figure 8.8).

8.3.2 Size & Structure of External Debt and Liabilities

Prior to discussing the components of Pakistan’s external debt and liabilities, it is important to note
that the definitions of external debt and liabilities have undergone a small modification in FY02.
Specifically, NHA bonds, central bank deposits and NBP/BOC deposits of different maturity, that
were earlier components of external debt, have been re-classified as external liabilities. The change
simply recognizes that funds under these heads were repeatedly rolled over and effectively had no
definite repayments schedule. Accordingly, the data in Table 8.7 has been adjusted to make it
comparable over the years.

The following coverage of the components of EDL is based on the revised definitions. As mentioned
earlier, according to provisional estimates, Pakistan’s total external debt and liabilities declined by 1.6
percent to US$ 36.5 billion during FY02 (See Table 8.7). This was achieved principally due to the
retirement of commercial and private loans/credits, IDB credits, foreign currency accounts, special
US$ bonds, National Debt Retirement Program (NDRP), other liabilities and NBP deposits.

Public and Publicly Guaranteed Debt 10

This is the single largest component with an 88
Figure 8.9: Re valuation Impact on PPG
percent share in the Pakistan’s total external
Revaluation (RHS) PPG (LHS)
debt. However, before discussing the PPG
30 2.0
debt in detail, it is essential to highlight the
issue of revaluation, which increased the stock 29 1.6
of PPG significantly during the last three years.

billion US$
billion US$

28 1.2

All data related to public and publicly 27 0.8

guaranteed debt published in the report is taken
from Economic Affairs Division (EAD). EAD 26 0.4
data diverges significantly from creditor’s 25 0.0
external debt stock primarily due to the
FY97

FY98

FY99

FY00

FY01

FY02

revaluation treatment. The main reason for this

difference is that such loans are denominated in
different currencies and these amounts were converted into the US dollar to report the outstanding
stock at a particular point in time. Although EAD valued the disbursement and repayments at current
exchange rates, but this revaluation had not been applied to previous debt stocks. Hence, past
discrepancies in cross rate were corrected and an up-dated value of stock of debt was derived (for
more detail, see External debt section in SBP Annual Report for FY01). In order to remove these
discrepancies, the EAD carried out a revaluation of Pakistan’s PPG debt during FY01, that increased
the stock debt significantly (see Figure 8.9).

10
This PPG debt owned by the government, public sector enterprises and autonomous bodies.
142
 Domestic and External Debt

Table 8.8: Selected External Debt/Liabilities Indicators

Non-interest current
Total external debt to Total external debt and liabilities (EDL) to
account balance
GDP EE FEE RES/TED GDP EE FEE RES/TEL (million US Dollar)
FY95 47.7 371.4 232.9 9.5 61.4 479.0 300.3 7.4 -3,583
FY96 47.1 358.3 232.2 6.9 91.6 695.9 451.0 3.6 -5,923
FY97 48.4 372.6 233.4 4.0 68.0 523.3 327.7 2.9 -5,274
FY98 49.4 363.0 229.0 3.0 52.2 383.9 242.2 2.9 -3,421
FY99 53.4 415.6 278.2 5.5 62.5 486.2 325.5 4.7 -457
FY00 53.1 395.1 252.9 4.2 62.4 464.5 297.3 3.6 1,381
FY01 55.1 359.6 224.1 6.5 63.7 415.8 259.0 5.6 1,874
FY02 56.7 365.7 216.4 14.4 60.3 389.1 230.2 13.5 4,208
Note: Foreign Exchange Earnings is the sum of earnings from Goods, services, and income (credit entry from Item A: BOP-IMF/92) and
private transfers (credit entry from Item B.7: BOP-IMF/92).
TED: Total External Debt
TEL: Total External Liabilities
RES: Foreign Exchange Reserves
EE: Export Earnings
FEE: Foreign Exchange Earnings

Despite this revaluation, some differences remained between EAD and creditors’ book numbers, and
the EAD finally reconciled the numbers in FY02 adopting the information provided by the creditor
agencies during FY02. Since the EAD has already revalued the debt stock to a major extent, the
adoption of creditors’ number has a minor impact on total stock of debt during FY02. However, the
IMF debt is denominated in SDRs and the value of IMF outstanding debt recorded an increase of US$
103 million in FY02 due to valuation change in SDR/US Dollar parity.

Within total external debt, long-term public & Table 8.9: Pakistan's External Debt: Share-wise
publicly guaranteed debt has the dominant percent
share due to heavy reliance on the official FY99 FY00 FY01 FY02
sources of financing (see Table 8.9); of this, 93
I. PPG guaranteed debt 83.2 86.4 87.6 87.5
percent is from multilateral and bilateral
A.MT/LT (> 1 year) 82.7 86.0 86.8 87.0
sources. Multilateral claims are dominated by
Paris club 38.0 38.5 36.8 37.5
loans from IBRD, IDA and ADB, which
Multilateral 33.9 38.1 41.5 42.9
constituted 98 percent of multilateral loans.
Other bilateral 2.0 2.0 1.3 1.3
The Paris Club creditors own 37.5 percent of
Eurobonds 1.9 1.9 2.0 1.9
the country’s outstanding debt obligations. The
Military debt 3.2 2.0 1.7 2.5
bulk of these loans are from Japan, US,
Commercial loans/credits 3.7 3.4 3.4 0.9
Germany and France.
B.ST ( ≤ 1 year) 0.5 0.4 0.8 0.5
IDB 0.5 0.4 0.8 0.5
It is evident that multilateral credit rose from
US$ 10.6 billion in FY99 to 13.3 in FY01 II. Private non-guaranteed debts 11.0 8.8 7.6 6.7

mainly due to revaluation while the increase Private loans/credits 11.0 8.8 7.6 6.7

during FY02 was US$ 1.0 billion (see Table III IMF 5.8 4.8 4.8 5.8
Total External Debt 100 100 100 100
8.7).

However, one of the positive aspects with respect to multilateral debt was the shift from ‘hard’ to
‘soft’ loans. More specifically, Pakistan contracted soft loans from IDA at zero interest rates with a
35-38 year maturity, and paid back US$ 0.9 billion in expensive loan of IBRD. This substitution of
debt from hard to soft debt is one of the key elements of the DRMS. As a part of this strategy, the
following inflows were realized from World Bank and ADB during FY02:

143
State Bank of Pakistan Annual Report FY02

• US$ 510 million from the World Bank (specifically IDA). This loan has maturities between
30-35 years, 10-year grace period and service charges of 0.75 percent. It aims to support
structural reforms in Pakistan and focuses on governance, economic growth and the delivery
of social services.
• Another loan of US$ 188 million was also realized under the Banking Sector Adjustment
Credit from World Bank, the facility aims to support the restructuring process of the financial
system.
• A tranche of US$ 50 million under the Trade Export Promotion and Industry Program Loan
of the ADB, which was approved on March 31, 1999. The facility aims to support the private
sector exports by focusing on trade liberalization, financing, facilitation for trade and export,
and the privatization of manufacturing units.
• US$ 100 million from the Asian Development Bank (ADB) under the Legal Reforms
Program Loan. Approved on December 20, 2001, the facility aims to support a strengthening
of the legal system to improve legal protection for all, and especially for the poor and other
vulnerable groups.
• First tranche of US$ 35.0 million realized during current fiscal year from ADB’s under Road
Sector Development Program (RSDP) to uplift the roads in Pakistan. Approved on December
19, 2001, RSDP consists of a US$ 50 million policy loan to support national reforms and a
US$ 150 million investment loan for a Provincial Sector Development Project. The program
is taking a sequential approach, starting with Sindh province and to be extended to other
provinces later on. The investment project will improve 164 km of provincial highways and
1,200 km of rural access roads in Sindh province. This rehabilitation will enhance
communication between farm communities and market centers, as well as provide much-
needed access to villagers for education and health facilities, and job opportunities in urban
areas.

Commercial Loans/Credits
These comprise loans guaranteed directly by the federal government. Other than the oil import
facilities, these are mostly cash disbursing facilities for BOP support received in one or multiple
tranches, having maturities of less than two-years. The total stock of commercial loans and credit fell
significantly, from US$ 1.1 billion in FY01 to US$ 0.3 billion during FY02, due to the repayments of
PTMA credits.11 The outstanding end-FY02 figure includes the amounts due under the Pakistan
Trade Maintenance Agreement (PTMA), PTCL securitization and new loans contracted during last
year, etc.

IDB Credits
The IDB does not provide any cash disbursing loans, but finances the import of crude oil and
fertilizer. The closing stock of this debt fell by US$ 74 million during the year to US$ 183 million at
end-June 2002.

Private Loan/Credits
These are mainly “Supplier’s Credit Schemes” (SCS) and “Pay as You Earn” (PAYE) credits and are
contracted by private sector from multilateral sources, NCBs, and Export Credit Agencies in OECD
countries. The federal government does not directly guarantee these loans, but convertibility is
guaranteed by the SBP.

11
The PTMA refers to Pakistan Trade Maintenance Agreements. Pakistan contracted this debt during 1990s to finance the
huge current account deficit. However, after the nuclear test in 1998, which exposed Pakistan’s inability to repay its debt
following the economic sanctions from its major sovereign creditors. The country approached Paris Club to reschedule our
bilateral debt during FY99, which in turn also invoked the comparability clause to private and commercial creditors.
Therefore, we also rescheduled PTMA credits from “London Club” in December 1999.

144
 Domestic and External Debt

While the schemes still exist, they have been effectively dormant after the imposition of economic
sanctions following the nuclear test in 1998. More specifically, there was an embargo on deferred
payment PAYE and SCS from donor countries as well as the difficulties in exchange risk coverage
from SBP. The net outflows under these schemes over the years confirm the above point (see Figure
8.10). However, in light of the recent lifting of the relevant economic sanctions, these schemes could
be reactivated.
Figure 8.10: Private Loans and Credit
The end-FY02 stock stood at US$ 2.2 billion Net Inflow Outflow
as compared to US$ 2.5 billion last year. A 1,000
breakup of the amount by economic groups 800
shows that the largest component accrues to 600

million US$
the Power sector (mainly IPPs), with the 400
Cement sector a distant second. 200
0
-200
IMF
-400
The stock of debt from IMF increased from
-600
US$ 1.5 billion to US$ 1.9 billion during

FY90

FY92

FY94

FY96

FY98

FY00

FY02
FY02. This is the upshot of the disbursements
on account of SBA, PRGF and valuation
changes (for details, see section on Transactions with IMF in Chapter 9).

External Liabilities
The most noteworthy development is the retirement of external liabilities by US$ 1.9 billion during
FY02. The end-June FY02 stock of external liabilities is US$ 3.1 billion as compared to US$ 5.0
billion last year.

Foreign Currency Accounts

Due to the hefty increase in foreign exchange reserves, SBP returned the FE-31 and FE-13 (part of
FE-25 placed with SBP previously) to the mobilizing commercial banks, while the stock of FE-45
deposits fell from US$ 1.1 billion to US$ 0.4 billion during FY02 due to hard currency payments.12 &13

Special US Dollar Bonds

As of end-June 2002, the outstanding stock amounted to US$ 0.9 billion as compared to US$ 1.4
billion at end-FY01 (see Table 8.7).14 The majority of the bonds issued had a maturity of 3-years.
Thus, as the initial maturities fell due in FY02, the SBP sought to protect its fragile foreign exchange
reserves by offering (1) 5 percent bonus to bond-holder opting for Rupee redemptions keeping in view
the kerb premium, and (2) an attractive reinvestment option, i.e., the face value of the bond could be
re-invested for a further 3 years (from the date of redemption) at LIBOR + 2 percent.

The reinvestment option was relatively more attractive as compared to Rupee redemption bonus till
November 2001 when the kerb premium collapsed. After the collapse of kerb premium the incentives
to dollarize faded and bondholders increasingly availed the option of redemption in Rupees with 5

12
Originally solicited under circular FE 45 of 1995, these deposits carry interest payments at LIBOR + 0.75. Rupee liquidity
and forward cover (at 5.5 percent) is provided to mobilizing banks against these deposits.
13
These represent the incremental deposits in the old FCA scheme. As was the case with the frozen FCAs, commercial
banks are provided Rupee liquidity against these deposits at the prevailing interbank exchange rate, and mobilizing banks are
permitted to purchase forward cover at a rate of 8 percent per annum.
14
After the freeze of FCAs following the nuclear test, the Government of Pakistan launched the Special US Dollar Bond
scheme in July 1998. This scheme offered 3, 5 and 7 years Dollar denominated instruments with interest payable half yearly
at LIBOR + 1, 1.5 and 2 percent, respectively. These bonds could be purchased against frozen FCAs, FCBCs, DBCs, or by
surrendering hard currency.
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State Bank of Pakistan Annual Report FY02

percent redemption bonus. Although the SBP withdrew the premium by March 2002, these Rupee
redemptions continued apace in subsequent months (see Table 8.10).

National Debt Retirement Program

Table 8.10: Encashment and Reinvestment of Maturing 3-Years
(NDRP) Special US$ Bonds
NDRP was launched on February 27, 1997 to million US Dollar
solicit funds from non-resident Pakistanis Repayment
(NRPs) towards retiring the country’s external Maturity
Converted 5% Reinvestment
US$
debt. Resident Pakistanis were also allowed to into Pak Rs Bonus
participate in the scheme using their foreign Oct-01 0.1 0.0 0.1 0.0 0.0
currency accounts, FEBCs, FCBCs, traveler Nov-01 38.9 0.3 3.4 0.2 15.1
cheques, remittance from abroad or by Dec-01 89.7 5.0 44.0 2.2 21.2
surrendering hard currency.15 The bulk of Jan-02 70.5 4.8 124.8 6.2 4.9
funds mobilized under NDRP scheme was Feb-02 28.7 1.9 28.8 1.4 7.6
placed in 5-year maturity of profit bearing Mar-02 45.4 1.6 44.3 2.2 2.9
deposits. These expensive liabilities are Apr-02 71.5 13.3 29.8 1.5 2.9
expected to be retired as they mature. The end- May-02 96.7 16.5 30.0 - 5.8
June 2002 stock of NDRP is reported at US$ 75 Jun-02 61.5 14.9 47.8 - 3.3
million, down 50 percent from end FY01 level. Jul-02 30.3 12.4 18.1 - 1.4
Total 533.3 70.6 371.0 13.8 65.1
NHA Bonds Source: Karachi and Lahore offices of SBP
The end-June 2002 stock of NHA bonds is US$
197 million as compared to US$ 219 million last year due to the normal repayments of these bonds.

Central Bank Deposits (CBD)

These comprise of deposits by central banks of various friendly countries (UAE: US$ 450 million and
Kuwait: US$ 250 million) placed with SBP at end-June FY01.16 The stock of these placements
increased during FY02 as Libya also placed a deposit of US$ 50 million in December 2001.

NBP/BOC Deposits
These comprised NBP Bahrain and Bank of China deposits. The end-June 2002 stock of these
deposits is US$ 500 million as compared to US$ 750 million last year. During FY02, Pakistan retired
the two deposits of NBP Bahrain of US$ 46 million (placed with GOP) and US$ 203 million (placed
with SBP). The remaining outstanding amount is a Bank of China deposit.

Others Liabilities
These comprise of swaps from various commercial banks and moneychangers. The stock of these
swaps declined by US$ 441 million during FY02, as Pakistan repaid all the swaps to moneychangers,
the remaining stock of US$ 280 million is owned to various commercial banks.

8.3.3 External Debt and Liability Servicing

Following the acute balance of payments difficulties after the nuclear detonations in May 1998,
Pakistan has received two back-to-back rescheduling (January 1999 and January 2000), the first of
which was accompanied by a rescheduling by the quasi London Club creditors (December 1999).17

15
For details, please see FE Circular 2 of February 24, 1997.
16
The UAE deposits were originally placed in FY97 and FY98 but have been rolled-over indefinitely. The deposit from
Kuwait Monetary Authority had also been originally placed for two years in FY98 but has been rolled-over for two years.
17
Debt restructuring is different from rescheduling as: (1) it provides relief in the form of reduction in NPV of external debt;
(2) interest rate on the outstanding loans is on concessional terms; and (3) the consolidation period is much longer.
146
 Domestic and External Debt

However, even after the recent consolidation period that ended in September 2001, Pakistan was still
unable to rebuild its debt repayments capacity, and was therefore, again forced to approach Paris Club
creditors for yet another restructuring. In view of Pakistan’s strict adherence to the IMF reform
program during FY01, the response was very positive.
Table 8.11: Salient Features of Paris Club Restructuring
Loan Group Debt Consolidation Interest rate Grace Maturity Repayment
Restructured Date(s) Profile
Paris club eligible Reschedule As of Nov. 2001 Original interest rate; 15 years 38 years Each payments
bilateral pre-cutoff stock interest rates on Each semester
bilateral Japanese loans reduced
concessional loans to 2.4 percent

Paris club eligible Reschedule As of Nov. 2001 Loan currency specific 5 years 23 years Paris club
bilateral pre-cutoff stock CIRR rate or provided
bilateral non- equivalent proxy repayment
concessional loans Profile

Paris club Reschedule As of Nov. 2001 Original interest rate; 15 years 38 years Each payments
Concessional Pre. stock interest rates on each semester
Restructure debt Jan. Japanese loans reduced
1999 & Jan. 2001 to 2.4 percent
Paris club Reschedule As of Nov. 2001 Loan currency specific 5 years 23 years Paris club
Non-Concessional stock CIRR rate or provided
PRD Jan. 1999 and equivalent proxy repayment
Jan. 2001 Profile
Non-Paris club Reschedule As of Nov. 2001 Original interest 15 years 38 years Each payments
bilateral pre-cutoff stock Rate Each semester
bilateral
concessional & non-
concessional
Cash-flow relief Defer 100 Dec. 2001 to Market rate 3 years 5 years 4 equal payments
maturities on post percent June 2002 each semester
cut off dates Principal and
interest
Cash-flow relief Capitalize 100 Dec. 2001 to Market rate 3 years 5 years 4 equal payments
interest payments percent interest June 2002 each semester
due on restructure
amounts
Capitalize 20 July 2002 to Market rate 3 years 5 years 4 equal payments
percent interest June 2003 each semester
Capitalize 20 July 2003 to Market rate 3 years 5 years 4 equal payments
percent interest June 2004 each semester

The Paris Club offered very generous terms; in contrast to the previous two rescheduling agreements
that provided relief only in terms of debt flows (as per Houston terms), the existing arrangement is
applicable to the entire stock of US$ 12.5 billion of Pakistan’s bilateral debt owned by Paris Club
creditors.18

Consequently, this provided an implied debt reduction without having a HIPC status, which is
generally associated with Naples terms.19 The other salient features of current restructuring can be
gleaned from Table 8.11.

In overall terms, despite the restructuring, Pakistan’s external debt and liabilities servicing increased
from US$ 5.1 billion to US$ 6.3 billion during FY02 (see Table 8.12). The most noteworthy

18
This comprised ODA: US$ 8.8 billion, non-ODA: US$ 3.6 billion, and arrears of US$ 77 million. In this regard, “official
development assistance (ODA)” is defined by the OECD as credits with a low interest rate and aimed at development.
19
In a sense this is beneficial for Pakistan as HIPC status restricts borrowings on normal terms from IBRD, ADB or market
sources.
147
State Bank of Pakistan Annual Report FY02

Table 8.12: Pakistan's External Debt and Liabilities Servicing (New Format)
million US Dollar
FY00 FY01 p FY02 p
Rescheduled/ Rescheduled/ Rescheduled/
Actual paid Actual paid Actual paid
Rollover Rollover Rollover
1. Public and publicly guaranteed debt 1,871 2,209 2,401 1,119 3,055 1,208
A. Medium and long term (> 1 year) 1,723 2,209 2,209 1,119 2,631 1,208
Paris club 423 1,149 438 934 187 1,094
Principal 308 851 221 681 71 652
Interest 115 298 217 253 116 442
Multilateral 938 0 910 0 903 0
Principal 556 0 572 0 583 0
Interest 382 0 338 0 320 0
Other bilateral 40 132 221 68 124 32
Principal 29 104 180 55 100 25
Interest 11 28 41 13 24 7
Eurobonds 62 610 62 0 67 0
Principal 0 610 0 0 3 0
Interest 62 0 62 0 64 0
Military debt 49 166 56 117 24 82
Principal 49 130 56 92 19 63
Interest 0 36 0 25 5 19
Commercial loans/credits 211 152 522 0 1,326 0
Principal 59 152 445 0 1,283 0
Interest 152 0 77 0 43 0
B. Short-term ( ≤ 1 year) 148 0 192 0 424 0
IDB 148 0 192 0 424 0
Principal 141 0 184 0 403 0
Interest 7 0 8 0 21 0
2. Private non-guaranteed debts 838 0 696 0 795 0
A. Medium and long term (> 1 year) 838 0 696 0 795 0
Private loans/credits 838 0 696 0 795 0
Principal 590 0 500 0 586 0
Interest 248 0 196 0 209 0
B. Short-term ( ≤ 1 year) 0 0 0 0 0 0
3. IMF 340 0 299 0 247 0
Repurchases / principal 280 0 239 0 194 0
Charges / interest 60 0 60 0 53 0
Total debt servicing (1 thru 3) 3,049 2,209 3,396 1,119 4,097 1,208
4. Central bank deposits 43 300 46 400 38 300
Principal 0 300 0 400 0 300
Interest 43 0 46 0 38 0
5. NBP/BOC deposits 64 500 209 500 287 500
Principal 10 500 147 500 249 350
Interest 54 0 62 0 38 150
6. Special US$ bonds 86 0 104 0 537 0
Principal 0 0 0 0 470 0
Interest 86 0 104 0 67 0
7. Foreign currency loan bonds (NHA) 39 0 39 0 38 0
Principal 22 0 22 0 22 0
Interest 17 0 17 0 16 0
8. Swaps 0 0 866 0 441 0
9. FCAs 392 1,072 365 776 777 235
FE-45 (institutional) 383 1,072 347 776 569 235
Principal 308 1,072 295 776 544 235
Interest 75 0 52 0 25 0
FE-13 (interest) 9 0 18 0 4 0
FE-31 0 0 0 0 204 0
10. NDRP 0 0 0 0 62 0
11. FEBCs/FCBCs/DBCs 83 0 76 0 50 0
Principal 48 0 39 0 27 0
Interest 35 0 37 0 23 0
Total (1 through 11) 3,756 4,081 5,101 2,795 6,327 2,243
p
: Provisional

148
 Domestic and External Debt

developments are the reduction of US$ 1.9 billion in total external liabilities during FY02, the
immediate cash relief from Paris Club creditors by deferring all the interest and principal repayments
due on the post cut-off date during November to June 2002.20 On the other hand, the rescheduled and
rollover amount decreased from US$ 2.8 billion to US$ 2.2 billion due to the lower rollover of
external liabilities (FE-45 and CBD) in FY02 as against the case in FY01. In case of external debt,
the rescheduling of all bilateral loans (pre and post cut-off date) from Paris Club increased the
rescheduled amount marginally.

Financial Saving from the Current Restructuring of Paris Club Debt 21

The realized financial savings from the current restructuring will, of course, depend on the interest
rate negotiated with individual creditor countries.22 However, Table 8.13 presents an indicative
implied debt reduction that is computed on the basis of various assumed interest rates both for ODA
and non-ODA creditors.

Table 8.13: Financial Impact of Restructuring of Paris Club Debt

Interest rate Saving over Expected NPV of Expected
PRGF Grace period NPV of debt before debt after NPV
restructuring
restructuring reduction
ODA Non-ODA
percent million US Dollar percent
Scenario I 1.0 3.0 2,971 11,060 12,599 7,112 44
Scenario II 1.5 3.5 2,848 9,880 12,599 8,090 36
Scenario III 2.3 4.0 2,711 8,541 12,599 9,029 28

This NPV reduction of bilateral debt together Box 8.1: Cohen’s Solvency Index
with the exceptional increase in foreign Cohen (1985)1 used following ratios to compute the
exchange reserves would not only improve solvency index for developing countries. The formula of
Cohen’s index is:
Pakistan’s liquidity position, but also provide an
b1 = (R – X)/(1 + X) * Debt/GDP ratio (A)
opportunity to exit from IMF programs after the b2 = (R – X)/(1 + X) * Debt/EE ratio (B)
completion of the PRGF. Furthermore, the where R is real average interest rate on external debt, X:
fiscal space provided by the restructuring would growth rate of export earnings.
allow the government to increase development
expenditures. A simple solvency condition compares the growth rate of
exports and real interest rate. A country is said to be
insolvent if R is greater than real growth of exports.
8.3.4 External Debt Sustainability However, Cohen suggests that this is a simplistic and
“External Debt Sustainability measures the inadequate method of determining insolvency because a
country’s ability to repay debt in relation to its country is not necessarily insolvent as long as it satisfies
earning capacity.” the condition that PV of future debt tends toward zero in
The debt sustainability is investigated using an the long term. This index assumes that a country is
analytical framework adopted from Cohen interested in maintaining the variable at some constant level
in order to be creditworthy. So it is essential to generate
(1985) (for more detail on indices, see Box 1). enough trade surpluses, represented by b, to maintain a
If the value of the index turns out to be negative given level of debt to GDP ratio or Debt to EE. Therefore,
it means that the interest rate on external debt is b is a level of trade surplus or maximum proportion of
less than the export earnings, which indicates resources above that a country would rather default than
that country is solvent. In case of positive remain solvent.
1
number, the country is insolvent, as it is not : Cohen, D. (1985), “How to Evaluate the Solvency of an
Indebted Nation” Economic Policy, Vol. 1, No.1.

20
When a debtor country first meets with Paris Club creditors, the "cutoff date" is defined and is not to be changed in
subsequent Paris Club treatments; this means that credits granted after cutoff date are not subject to future rescheduling,
thereby protecting credits granted by Paris Club creditors after a rescheduling.
21
The financial impact or saving is measured by comparing the cash flow with that of the same stock of debt prior to the
restructuring exercise.
22
According to the Paris Club restructuring agreements, Pakistan has to negotiate the interest rate with individual member
before the September 2002. However, the GOP has requested the Paris Club to extend this date upto December 2002.
149
State Bank of Pakistan Annual Report FY02

earning enough resources to pay off its debt obligation. If a country pays all interest falling due every
period, the value of debt remains constant. If an indebted country neither pays its debt nor makes the
associated interest payments, the debt grows at the rate of interest. The central focus of Cohen’s
analysis is on the minimum level of debt repayments that keeps the debt to exports or debt to GDP
ratios constant.

The Cohen’s solvency indices computed for Pakistan are presented in Table 8.14. The total time
period from FY81 to FY02 has divided into four sub-periods FY81-88, FY89-96, FY97-99 and FY00
-FY02. The indices imply that on average Pakistan was solvent throughout FY1981-88 due to the
healthy real growth of exports. In second sub-period from FY89 to FY96, Pakistan remained solvent
due to the buoyant growth of exports in FY91 and again in FY96. The solvency condition
deteriorated during FY97-FY99 and reached a peak as shown by the index value of 8.4 in FY99.
However, the solvency condition for Pakistan improved to –1.3 from 6.0 during FY00-02 despite the
revaluation of external debt which increased the debt to GDP ratio from 53.1 percent to 56.6 in FY01.
Table 8.14: Cohen's Solvency Index for Pakistan
Real exports Real Solvency index
TED to GDP TED to EE
growth rate interest rate b1=(r-x)/(1+x)*Dg b2=(r-x)/(1+x)*Dx
FY81 35.0 360.3 0.237 -0.063 -8.5 -87.2
FY85 39.2 486.1 -0.096 0.002 4.3 52.8
FY90 52.6 414.2 0.058 -0.022 -4.0 -31.5
FY97 48.4 372.6 -0.127 0.012 7.7 59.5
FY98 49.4 363.0 -0.012 0.023 1.7 12.8
FY99 53.4 415.6 -0.126 0.012 8.4 65.7
FY00 53.1 395.1 0.080 0.007 -3.6 -26.6
FY01 56.6 369.4 0.053 0.016 -2.0 -13.0
FY02 55.1 364.7 0.001 0.031 1.7 11.0
Averages
FY81-88 38.8 418.9 0.087 -0.008 -2.9 -25.1
FY89-96 49.5 381.1 0.052 -0.003 -2.3 -17.4
FY97-99 50.4 383.7 -0.088 0.016 6.0 46.0
FY00-02 54.9 376.4 0.045 0.018 -1.3 -9.5

8.3.5 Future Debt Reduction Strategy

As can be seen from Table 8.11 and Table 8.13, Pakistan expects to achieve an NPV reduction of
between 28 to 44 percent, from recent restructuring from Paris Club creditors. The expected write off
of US$ 1 billion from US, which is in addition to the Paris Club restructuring, will further reduce the
external debt burden.23

At the same time, since multilateral debt (from the IFIs) cannot be rescheduled or re-profiled, non-
concessional loans from the World Bank, Asian Development Bank and IMF are being substituted by
new loans on easier terms.24

23
Under the US laws, the congress has to appropriate US$ 200 million in the budget which is equivalent to NPV of US$ 1
billion over 20 years.
24
In addition to the current PRGF from IMF (which is on concessional terms compared to the SBA), the World Bank is also
providing credit on IDA terms (zero interest rate, 0.75 percent service charge, 10 year grace period and 30-35 years
repayment period). Furthermore, ADB is not only increasing its annual assistance to Pakistan, but also shifting gradually
from ordinary capital resources to concessional resources of Asian Development Fund.
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 Domestic and External Debt

Unlike the recent past, when the buildup of foreign currency reserves was largely due to commercial
borrowings, the present government is focusing more on retiring expensive short-term commercial
debt as reflected from the retirement of US$ 1.9 billion during FY02.

In this backdrop, Table 8.15 projects Pakistan’s stock of external debt and liabilities from FY03 to
FY04.25 As evident from this table, by June 2003, FE-45, FE-31 and NDRP would be liquidated;
BOC and Central Bank Deposits would be partially repaid; first installment of Eurobonds US$ 155
million would be paid and the stock of Private loans/credits and defense would also decline.

Table 8.15: Revised External Debt Stocks: Published in DRMS (Summary Report)
million US Dollar
End-June 2001 End-June 2002 End-June 2003 End-June 2004
Revised Revised Projected Projected
Medium & long-term EAD1 25,586 27,276 28,170 29,062
IMF 1,529 1,939 2,115 2,168
Short-term commercial & IDB 1,360 497 940 837
Euro & Saindak bonds 645 643 485 327
Defense 554 819 543 543
Private loans un-guaranteed 2,450 2,226 1,853 1,626
NBP (BOC) deposits 500 500 300 -
NBP deposits with SBP 203 - - -
NBP deposits with GOP 46 - - -
Central bank deposits 700 750 400 -
Special US$ bonds 1,376 924 472 344
FE-45 774 234 -
FE-31 326 172 -
Bearer certificates
NHA bonds 219 197 175 153
SWAP 721 280 177 175
NDRP 150 75 - -
Total 37,139 36,532 35,630 35,235
1
EAD: Economic Affair Division, Ministry of Finance

The actual stock of Medium & long-term debt (EAD) increased mainly due to the revaluation of debt
and availability of highly concessional loans from World Bank and ADB.

In overall terms, the total stock of Pakistan’s external debt and liabilities should gradually decline. In
this regard, the current account surplus posted during the last two years and the substantial gains from
recent developments in the external sector (higher worker remittances, forex reserves build up etc.)
are very encouraging.

25
These estimates, which are based on the Report prepared by Debt Reduction and Management Committee, also include
other external debt and liabilities like NBP (Government) deposits, FE 31, FCL bonds, Swaps and NDRP.
151