External Debt Servicing
Table VII.10 shows Pakistan’s debt servicing over the last 6 fiscal years. The following points highlight the main findings:

The decrease in debt servicing over the last two years is on account of the rescheduling of Pakistan’s external debt. Most of this leeway comes from postponing principal payments.

The nature of S&MT debt implies that principal payments dominate interest payments.

Despite the slowdown in the growth of external debt, Rupee payments have increased sharply between FY96 to FY99 (see Table VII.1). This is due to two factors: (1) the debt rescheduling does not impact the budgetary allowance for debt servicing, as the Rupee counterpart for rescheduled payments continues to be credited in a special account with SBP, and (2) the depreciation of the Rupee has a direct pass through impact on this Rupee allocation.

Table VII.9
Standard & Poor's Sovereign Rating History of Pakistan

*SD = Selected Default; **CW: Credit Watch
It is important to repeat the point that the rescheduling of external debts has not had any impact on Pakistan’s Rupee debt servicing. All rescheduled repayments still require the borrower (the government or PSCEs) to make Rupee payments to SBP according to the original schedule of repayments. This has been done to insulate the impact of the external constraint (which required the rescheduling) from the performance of Pakistan’s fiscal system. Since payments on external debt are a significant part of total debt servicing, it was important to make sure that the leeway provided in terms of hard currency payments was not being reflected in lower debt servicing. In effect, the government and PSCEs that have had their debts rescheduled are still required to pay the Rupee equivalent to SBP. A similar procedure has also been adopted for the country’s balance of payments where the accrual method of accounting has been used (see Chapter VIII).

Table VII.10
External Debt Servicing to Official Creditors
(US$ million)

Conclusion
Continuous imbalances in the external sector have resulted in heavy reliance on external borrowings. However, the stagnant external debt stock belies the acute financing problem that Pakistan faced in the latter half of the 1990s. Although inflows of LT and S&MT debt are important components of financing the country’s external deficit, there was an increasing reliance on external liabilities. Nevertheless, the shorter repayment schedule on S&MT debt did add to Pakistan’s repayment pressure.

With the freeze of FCAs, these problems were brought to the forefront. The foreign exchange crisis that followed, led to the suspension of certain debt repayments, which provided the basis for the rescheduling agreements concluded in January and December 1999 under the Paris and quasi-London Clubs, respectively. With the consolidation period set to end in December 2000, and in the absence of a fundamental change in the external sector, an extension will be sought to rehabilitate Pakistan’s repayment capacity. With an improvement in international prices, this leeway should be used to make the difficult structural adjustments in Pakistan’s external sector. The required changes include: (1) increasing worker’s remittances from the Gulf region, (2) export diversification to ensure that revenues are not vulnerable to international prices, and (3) containing domestic consumption of imported oil.

If these changes can be made, it will credibly reduce Pakistan’s external deficit. This, in turn, should create the capacity to repay past loans (especially ST commercial credits) without having to borrow more. Privatization proceeds will help, but this requires prior actions to improve foreign investor confidence.

Reclassification of external debt and liabilities
The following pages highlight the new classification of external debt and liabilities. See Table I.4 in the Overview for the revised format. The definitions, and stocks, under each sub-head are presented below.

Public & publicly guaranteed debt
The sphere of public and publicly guaranteed debt is such that it includes all loans, credits, market debt, etc. that is either borrowed directly or guaranteed by the federal government. More specifically, public debt primarily represents project loans contracted by the government for social and economic development.

Publicly guaranteed debt refers to loans contracted by non-government entities (e.g. public utilities and other PSCEs) on the basis of federal government guarantees. While these do not represent a direct liability of the federal government, in case of cash flow difficulties, the federal government must make the hard currency payments. Additionally, the earlier breakdown of public and publicly guaranteed debt was in terms of consortium, non-consortium, Islamic countries and financial institutions. After the country’s rescheduling agreements, this breakdown can be revised to a more ‘universal’ categorization in term of: Paris Club, multilateral, and other bilaterals (See Table VII.11).

Table VII.11
Pakistan's creditors
(US$ million)

Source: Economic Affairs Division

Medium & LT debt (> 1 year)
Eurobonds
Following an agreement with the quasi-London Club creditors, Pakistan launched a voluntary exchange offer on 15th November 1999, to convert the three existing issues of market debt for one bond with a realized value of US$ 610 million. The terms of the restructured bond are: 10 percent rate of interest payable semi-annually, and a final maturity of 6 years, where the first three years entail no principal payments (grace period); the first principal repayment is due on 13th December 2002. The successful exchange offer was based on a number of factors: (1) a credible possibility of default by Pakistan if these bonds were not restructured, (2) the terms of the exchange offer were better than the bonds being replaced, (3) the better rating by Standard & Poor’s on the new bond (from D on the existing instruments to B- on the new bond), and (4) there were a limited number of bond holders, which made negotiations easier. Outstanding stock as of end FY00: US$ 610 million.

NHA Bonds
In July 1990, the GOP issued foreign currency bonds on account of a failed National Highway Authority contract in the Gulf, which carried a GOP guarantee. The guaranteeing banks paid off the amount, and GOP (in exchange) issued 20 foreign currency bonds (of 20-year maturity) to these banks. The last principal repayment of these bonds will take place on 1st July 2010. End-FY00 stock: US$ 241 million.

Commercial Loans/Credits
These are federal government guaranteed loans, usually of less than 3-year maturity. Except for oil import facilities, these are mostly cash disbursing loans for BOP support, and come in one or multiple tranches. Reflecting the increased hesitancy of commercial creditors to lend to Pakistan, the stock of these loans decreased from US$ 1.2 billion in FY99 to US$ 1.1 billion in FY00. As fresh disbursements fell, principal repayments continued on non-rescheduled debt thereby decreasing the overall stock.

Short term (< 1 year)
IDB
The Islamic Development Bank (IDB) does not provide any cash disbursing loans. IDB credits are usually for the import for crude oil and fertilizer, whereby the supplier is paid off directly by IDB. End FY00 stock: US$ 130 million.

Private non-guaranteed debt
Medium and long term (> 1 year)
Private Loans/Credits
Also known as private non-guaranteed credits, most of these loans are of greater than 5 years maturity. The federal government does not directly guarantee these loans, but they usually carry guarantees by SBP (foreign exchange convertibility guarantee), multilaterals, NCBs, and Export Credit Agencies belonging to OECD countries. Most of these loans and credits are L/C based comprising: (1) Supplier credit, (2) Buyer’s credit (when the credit-providing agency buys the goods and sends them to Pakistan), and (3) Commercial credit (cash loans kept abroad that are used to finance imports). After the systemic problems following the nuclear tests, fresh inflows of private loans have fallen dramatically. This is reflected in the stock decreases in FY00. Stock as of end-FY00: US$ 2,842 million.

Central Bank Deposits
Used for BOP support, these LT deposits placed with SBP from Gulf countries. End-FY00 stock: US$ 700 million.

IMF
This represents financial assistance from the IMF for various BOP support facilities. As no new flows were forthcoming from this institution in FY00, the debt stock fell to US$ 1,550 million from US$ 1,825 million in FY99.

Summing these components, Pakistan’s total external debt is US$ 32,746 million.

Foreign exchange liabilities
Special US$ Bonds
These were launched in July 1998 to facilitate conversions from frozen FCAs. Initially, banks were given the option of retaining the Rupee counterpart from the Dollar Bonds as a special government deposit for one year if they had liquidity problems. This option was revoked on 13th November 1999 with the Rupee counterpart of subsequent conversions to be surrendered immediately to the government. Given this restriction, all Rupee counterpart funds (against Dollar Bonds) will be surrendered to GOP by mid-November 2000. Premature encashments of these bonds are in Rupees, while interest payments and principal repayment (at maturity) is in US Dollars. End-FY00 stock: US$ 1,297 million.

Foreign Currency Accounts
FE 45: These are foreign currency deposits solicited by commercial banks and NBFIs operating in Pakistan from their overseas network, or syndicated from other financial institutions abroad. Foreign banks had a large role in raising these deposits. GOP actively solicited these deposits in the mid-1990s, primarily for BOP support at above international interest rates. Rupee liquidity and forward cover is still provided to mobilizing banks against these deposits (see Chapter V). No new inflows have taken place since the freeze in 1998. End-FY00 stock: US$ 1,072 million.

FE 25: Initially, commercial banks were free to place these FCAs locally or abroad; but lacking demand for hard currency loans in Pakistan, mobilizing banks placed these funds abroad. However, in June 1999, restrictions were imposed on the placement of additional deposits abroad, as there was a real concern about the risk profile of the assets in which banks were placing these funds. Although these restrictions forced banks to use the funds locally, lacking alternatives, all incremental deposits were placed with SBP. Stock as of end-FY00: US$ 616 million (outside SBP).

FE 13: Commercial banks place these FCAs raised through FE 25 since June 1999, with the State Bank at a rate less than LIBOR (this is revised at the beginning of every month). Currently, the rate is set between 4.0 to 4.5 percent per annum depending on maturity. No Rupee liquidity is provided against these deposits. Although these deposits are included in Pakistan’s foreign exchange reserves, they are reported separately. Stock as of end-FY00: US$ 361 million.

FE 31 (incremental): These represent the incremental deposits in the old frozen FCA scheme. As was the case with the frozen FCAs, commercial banks are provided Rupee liquidity against these deposits at the prevailing interbank rate exchange rate, and mobilizing banks are permitted to purchase forward cover at a rate of 8 percent per annum. End-FY00 stock: US$ 300 million.

National Debt Retirement Program (NDRP)

In February 1997, the then Prime Minister launched the NDRP, appealing to non-resident Pakistanis to help repay external debt. The salient features of this scheme are as under:

Donation can be made in three currencies, US Dollars, Pound Sterling, and Deutsche Marks, in deposits of two to five year maturity.

The donations can be in three forms:

Outright donation, meaning no liability or servicing on the amount deposited.

Qarz-e-Hasna, which carries no servicing liability, but principal repayment at maturity is payable in hard currency or Rupees; a minimum period of 2 years for the deposit was allowed.

Profit bearing deposits, carrying varying interest rates (in a range of 5.10 to 9.75 percent) payable quarterly, depending on maturity and currency.

The amount outstanding as of end-FY00 is US$ 156.1 million (under the last two forms of deposits).

External liabilities payable in Rupees
Frozen FCAs
End-FY00 stock: US$ 1,572 million. As hard currency withdrawals are not permitted from these accounts, they are not part of foreign exchange liabilities, but represent external liabilities payable in Rupees. Returns were brought down following the freeze and the increase in forward cover charge.

FEBC, FCBC & DBC
In the circular that froze hard currency withdrawals from FCAs, Dollar repayments on account of FEBCs, FCBCs or DBCs were also suspended. Therefore, they do not represent a foreign exchange liability in the true sense, but Rupee payments are linked to the exchange rate at the time of repayment. End-FY00 stocks are given below: