FOREIGN DEBT TRAP
FOZIA AROOJ (firstname.lastname@example.org)
Oct 13 - 19, 2008
Pakistan's economy is at the brink of insolvency-like situation. Liquidity is fast approaching a dried up condition. Macro economic indicators are melting down. Currency has experienced a decline of over 25% or Rs15 per dollar in value in less than six months consequently the external debt and liabilities have increased in rupee value by more than Rs705 billion. The country's overall external debt stock has increased by almost $7 billion to $47 billion since June 2007. In the mid-1950s Pakistan's foreign debt used to be about $350m. It now stands over $47bn. The country's annual balance of trade deficit exceeds $10bn. This deficit may be met by dipping into overseas Pakistanis' hard-currency remittances and foreign borrowings. The cost to protect $2.7 billion sovereign bonds in the international capital market from preventing default is increasing. Capital markets are also following the same pattern of disaster. Foreign investors in the capital market are loosing confidence and flight of capital by Pakistanis mostly to the Middle East is gaining momentum. Market capitalization has almost halved to $39 billion because investors are reluctant to invest in politically instable countries.
The country's total debt stock now hovers around Rs7 trillion, up by about Rs1.4 trillion from Rs5.6 trillion in March 2008. This includes about Rs3.4 trillion domestic loan and Rs3.6 trillion in foreign loan and liabilities. For many years in decades, Pakistan's external debt in rupee value has surpassed the domestic debt. In the current financial stress, while we struggle with the fallout from the all-time high trade, balance of payment and current account deficits, payment of the re-scheduled non-ODA Paris Club debt began in FY07-08, and the bonds and Sukuks issued in 2004 and 2005 are due for payment in FY08-09 and FY09-10. The build-up of this load calls for urgent steps to bolster the exchange reserves. It is highly unlikely in the current environment to float major sovereign bonds or sell government entities because of political instability and overall security situation. The cost to protect sovereign bonds from default that stood at 788.8 basis points on August 22 has increased to 975 basis points, overtaking Argentina's number one position of being the riskiest investment paper.
EXTERNAL DEBT REPERCUSSIONS
We are over head and ears in debt at the moment and government is trying to take up with more donors and financial institutions to sanctions further aid and loans. The financial aid offered by international financial institutions and developed countries was usually misperceived as grant. However, in fact all types of financial aids are basically loans on which the receiving states paid back heavy interest rates. It is unfortunate that the way the financial aid is currently offered, planned and implemented, external grants and loans generally failed to promote rights-based development. As in the experiences of mega development projects such as the World Bank-funded Left Bank Outfall Drain (LBOD) and the Asian Development Bank-sponsored Sindh Coastal Community Development Project, the aid was usually provided in the name of development but these projects had impacted negatively on the lives and livelihood of local communities especially the poor and the marginalized.
The economic and social benefits of such loans have been much less than designed or targeted, according to the ADB's own assessment. In five, out of eight ADB-funded sector loans, the performances over 22 years (1985-2006) have either been 'unsuccessful' or partly 'successful'. Even in areas where the ADB found its operations as 'successful', the country's own problems are more serious than ever before.
These projects had badly affected natural resources, agriculture and ecology causing widespread migration and displacements. The resistance to existing exploitative culture of such foreign aids needed to be democratized.
The broader problem is the distortions created by the aid regime as these distortions diluted if not negated democratic structures and processes in the receiving countries like Pakistan. There are several reasons which are all associated with lack of democratic accountability in governance. The borrowing process, conditionality by the donors and aid-utilization should be made democratic, accountable, transparent and subject to parliamentary debates.
Currently in the wake of liquidity crunch the government is taking up with International Monetary Fund (IMF) at the top level to secure a letter of comfort that should help Pakistan persuade the World Bank and the Asian Development Bank to provide at least $1 billion in quick disbursement loans to overcome some of the immediate liquidity problems.
Simultaneously government recently sent a delegation to Saudi Arabia with a wish-list of about $17 billion multi-year bail-out package for oil imports and balance of payment support. The delegation met the Saudi leadership and sought oil supplies on deferred payments and other facilitations for budgetary support to boost foreign exchange reserves. Government wanted to have a soft term credit facility of about $2.5 billion from Saudi Arabia for essential commodities like fertilizer, another $7.3 billion oil imports on deferred payments or reduced rates and rescheduling or write off of about $5.8 billion amount it was required to pay to the brotherly state on account of oil it had imported on deferred payments during 1999-2004.
Likewise, Islamabad also wants to have an arrangement with Kuwait on special terms for diesel imports of over $4 billion over a period of two years. Pakistan imports about one million tons of diesel from Kuwait for Pakistan State Oil under a long-term agreement. Relevant government agencies believed the United States' reduced crude imports from Arab countries offered good chances for Saudi support to divert its surplus production.
Government is hopeful of a positive response although the arrangements for imports of crude oil from Saudi Arabia are yet to be worked out, any relief from the brotherly nation are seen as the best solution to economic problems. This could provide reasonable breathing space to the government till such time it comes out of the political crisis surrounding presidential elections and concentrate on economic revival.
Pakistan has to place an economic revival plan on war footings and return to political stability. Only these measures can be a positive move towards restoration of investor confidence needed to revive direct investment in capital and money markets.