HOW TO REFUND EXTERNAL DEBTS?

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Dec 01 - 07, 2008

As government of Pakistan has allowed IMF to rescue the economy blighted with colossal trade deficit and exchange rate depreciation with a loan package rising total external debt liabilities of the country to all time high, now this is in its discretion to ascertain fertile sources of revenue that can handsomely meet the periodical installments so that huge external liabilities will be paid off on time and without creating a need of debts rescheduling. While rise in export in different potential laden sectors can cash on opportunity given by the Fund's balance of payment cushion, taxation can also become a productive source of revenue.

"By improving export volume from non textile sector government may also create a way to offset external liabilities," said a veteran corporate leader, Majyd Aziz who also has been a president of Karachi Chamber of Commerce & Industry. Mainly this non textile sector comprises of emerging gems and jewelry and other items. Having said that other export oriented sectors need to be explored, importance of textile in reducing widening trade gap is undeniable, he clarified and added combination keys were to be aligned to determine ways of payback. He thinks dependability on external loans will not subside for next two years entitling it also major an avenue of fulfilling international debt obligations.

During current fiscal year, Pakistan will likely to get $13 billion foreign loans. First tranche of $4.7 billion of IMF package will soon be received while $3.8 billion will hopefully come from Islamic Development Bank and World Bank and another $4.5 billion from Friends of Pakistan group and other international creditors.

According to SBP data, before making recently approved IMF loan of over $7 billion a part, Pakistan owed $45.5 billion dollars till end of September, 2008 to various bilateral and multilateral financial institutions, Paris club, Euro/Sukuk/Global bonds, IMF, and others on account of external debt and liabilities. In debt servicing, an aggregate of $1.1 billion was paid during the first three months of the current fiscal year, of which $925 was paid as principal and $254 million as interest. It is notable that during the period $550 million loan was rescheduled.

Majyd Aziz advises a breathing space in the shape of incentives be provided to textile sector in order to enable it cope up with the competition in foreign market. "We have to reinvigorate base of value addition in the sector by 2010, he urged referring to textile R&D fund held back by the government. But he was hopeful about a surge in textile exports from the country after the removal of anti dumping duty on Pakistan's textile in European Union. Interest rate review by the government and betterment in infrastructure will compensate losses in textile exports from Pakistan, answered when asked if slump in consumer demands in world market will impact textile exports from Pakistan. "The impact takes in fact in piecemeal and it will not altogether corrode away the market share of Pakistan's textile export in international market," he explained.

"Since the foreign orders have already been booked, negative growth in textile exports in this fiscal year is not in sight," Jawed Bilwani, Zonal Chairman Pakistan Hosiery Manufacturers Association replied when asked if world economic slowdown or Pakistan's internal negativities would result in contraction in exports. However, it will lead manufacturers on the verge of default if R&D does not restore as costing has factored in the subsidy on the government's assurance about restoration of R&D, he added. He said there was no positive sign of exports growth however. "In spite of that global recession will unlikely to pose challenge to country's textile exports," he believed. Garment is essential goods in the prime destinations, of Pakistan's textile, under threat of demand slump, which has caused slowdown mainly in luxurious goods purchases.

"Besides promotion of value addition in textile and non textile sectors to abridge trade deficit, there is also a need to enhance tax to GDP ratio in the country," said Majyd. He favors taxation of agriculture sector. He said real estate market should be brought under the tax network. Taxation will yield dual benefits, he said and added this would not only enlarge government revenue base but pave a way to implementation of rules and regulations over property market after making records of transactions.

"Government should exempt textile exporters from all taxes and levies including property tax," pleaded Jawed. The present condition calls for government to facilitate and incentivize textile exporters in all possible ways. "Making us free will absolutely encourage exports," says he adding when IMF loan is collected on interest then why not some payment is made to realize and outperform export target.

Debt servicing of external loans which are gaining weight year on year will remain a blot on the current account balance that is greatly disturbed owing to outflow of portfolio investment and capital and originally to rising trade deficit unless manufacturing sector catches its real pace and production from agriculture sector increases. While LSM growth has declined to considerable level, some critics opined that income tax on agriculture will not have sector promising higher production rather worsen miseries of common person by passing on affects of cost pull inflation to them. But reversed opinion is that a large farm income gets immunity from tax and engenders uneven tax culture. Government still oscillates between the two.

"Basically, government has no vision and is rudderless. If there is a will then things may be changed", lamented a dispirited Mohammad Azhar Akhtar, ex-Chairman Rice Exporters Association of Pakistan. He said rise in interest rate had shattered the confidence of business community. This fiscal year prospect of rice exports growth is entirely dependent on upcoming policies, he added. It is notable that rice exports in July-October, 2008 was significantly soared to $701 million from $309 million in the corresponding period of last year. If the height of jump persists on then over $2 billion rice exports may be thinkable.

Instead of considering adjustment in policy framework as a last resort and taking harsh steps such as GST increment or pension deferment government should recourse to public-innocuous measures and act to tap on revenue from other sources.