Monday, March 28, 2011

The End is NEAR!!!

Digging a deeper hole: The risky strategy of borrowing to pay off loans 

The country is passing through one of its worst ever economic crises and the omens are not good as the government is seeking to borrow more from the internal and external resources to pay off foreign debts which have surged to $59 billion.
And sources in the finance ministry accept the fact that the economy is caught in the vicious cycle of having to borrow externally to pay off existing foreign debt.

Fast increasing public debts clearly indicate that the financial managers should look at the option of falling back on the internal resources for debt-servicing. The country’s total foreign and domestic debt at the beginning of 2011 has touched the dangerous mark of almost Rs 11 trillion. The debt-to-GDP ratio has gone up to 74 per cent from 64 per cent in January 2010. The government is continuously borrowing heavily to meet its burgeoning budgetary deficit. According to the State Bank of Pakistan, domestic debt increased to Rs4.958 trillion by September 2010, from 4.018 trillion in September 2009.

The external debt of the government increased to Rs3.864 trillion in September 2010 from Rs3.656 trillion in September 2009. By September 2010, the foreign debt was $58.41 billion as against $55.62 billion in June 2010, showing an increase of $2.79 billion in three months.

And this trend was echoed by domestic debt growth as well. By the end of 2010, our domestic debt went up to Rs5.50 trillion as a result of the government’s insatiable borrowing quest. In September 2010, domestic debt and liabilities were of Rs 5.191 trillion, which registered an increase of Rs306 billion in just three months. During 2009 to 2010, domestic debt showed an alarming growth of Rs1.05 trillion. In December 2009, domestic debt/liabilities stood at Rs4.447 trillion rupees, which increased to Rs5.5 trillion by December 2010.

In the first quarter of 2010-11, debt servicing amounted to 1.2 billion US dollars as per State Bank of Pakistan figures. Since then, the size of debt servicing has increased by about 49 per cent as compared to the same period last year. Pakistan had to pay 5.641 billion US dollars as debt servicing in fiscal 2009-10, which accounts for more than 33 per cent of the country’s total foreign exchange reserves. The total foreign debt and liabilities of Pakistan reached 58.512 billion US dollars, up from 47 billion US dollars two years ago.

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