DEBT SERVICING REMAINS A DAUNTING CHALLENGE
TARIQ AHMED SAEEDI
Sep 13 - 26, 2010
Servicing of external debts will remain a daunting challenge for the economy of Pakistan in years to come until monetary reserves are not kept on the level to timely repay instalments of huge external debts of over 54 billion dollar piled up over the years. Alternatively, Pakistan needs an indefinite recess to be able to come out of the economic mess that has pushed it to near debacle. If foreign reserves will not be sufficient for the repayment of debts then more debts are required or default will be unavoidable. While suggestions are replete in the concerned circle, that Pakistan should pronounce default or refuse to meet international payment obligations on the ground it is muddling through a historical natural disaster, yet little is suggested about the pernicious outlook in a subsequent effect.
Default results in a halt of foreign investments in the country and deals a blow to economic growth. In the present situation, when Pakistan's economic growth target has been revised down two per cent and foreigners are reluctant to embark on new ventures in the country, the default will be a last nail in the coffin.
External debt liabilities of Pakistan have reached to a considerable point and made people-spirited analysts baffled over the prospects of the country's economy, which at present is fed on the external inflows to run its affairs. The common concern is that external supports are not without its implications on political and economic sovereignties.
International Monetary Fund (IMF) approved 450 million dollar emergency relief funds for Pakistan to help the country meet reconstruction and rehabilitation costs after the floods ravaged the infrastructures and income earning sources. Earlier, Washington-based fund agreed to provide 11.3 billion dollar loan to the country to lend supports to the country's balance of payment in lieu of stringent conditions related to power and financial sectors. These conditions have put a match to the price hikes in the country since, for instance, withdrawal of subsidies on consumer products was one of the conditions stringed to IMF's stand by arrangement. Noncompliance with the conditions means stoppage of release of tranche, which happened in the penultimate tranche of over one billion dollar. This tranche was suspended due to noncompliance detected during the country's performance review by the fund.
Borrowings from international financial institutions for developments and supports to balance of payment are usual in the global economy. Even developed countries knock at the door of external financiers to shore up economic developments. But, sources to pay off loans and proper utilisation of funds are clearly predetermined therefore keeping on restraint interventions of policies of outsiders in the mainstream economics. In other words, such loans are on sustainable path. Pakistan's economic independence has been impinged because of its inability to persist on debt servicing of external liabilities it acquired from different financial institutions.
Rescheduling or restructuring of loan agreements in different time gave the country a temporary respite from the hefty repayments, nevertheless, the resultant costs compromised on economic progress.
Remittances are the main source of increasing dollar reserves in Pakistan. In recent time, such inflows remained staggering improving foreign reserves of the country. However, foreign investments, which are the second stimulant to foreign reserves, are not showing positive sign due to political instability and deteriorating law and order situation.
Never in the history, have net foreign exchange earnings in Pakistan been sufficient for debt servicing. Therefore, more loans are taken to stave off defaults on debt obligations. Understandably, borrowing on concessionary rates and long-terms debts are considered earned incomes, which do not virtually help retiring debts but add to them in real terms.
In its research report in 2003 titled, 'Pakistan's external debt burden: causes, complexities, and remedies' Social Policy and Development Centre (SPDC) pointed out that Pakistan was out of the external debt crisis, although the country's leading policy research institute emphasised on the needs of sustainable debt servicing, which it said depended on 'sustainable GDP growth and foreign exchange earnings'.
Decline in debt servicing liabilities by $2.7 billion during 2002 and 2004 because of the restructuring agreement with the Paris Club in 2001 that gave Pakistan a grace period of 15 years was the main base of its comment. Besides, situations on other macroeconomic fronts were also satisfactory. For example, remittances, inflows from USA to feed war on terror, and budgetary supports all were the factors to have brought about current account surplus in 2001/02.
Two events in the recent past worsened the economic situations in the country. Following nuclear test in May 1998 during the Nawaz Sharif's government, G-8 countries slapped ban on bilateral and multilateral lending to Pakistan. Fuelling to the fire was military coup led by Musharaf in 1999. Both events weighed heavily on the economy. It was not before 2000 when Pakistan became able to get into a rescheduling agreement with Paris Club for almost four billion dollar.
Low tax to GDP ratio is the prime cause of underperformance of the economy. The country will more likely miss the revenue collection target of this year because of the devastations of the floods, which also provided tax evaders with an apt leeway to evade taxes. Collection of taxes in accordance with the potentials and plugging of seepage in tax system will increase the national wealth, which not only reduces incidences of regressive taxes but also gives a boost to real economic growth.
In a given circumstances, Pakistan needs productive sources to put an end to international lending programmes, which are a drag on its national wealth. Controlling non-development expenditures will minimise the requirements of budgetary supports from external sources. Incentives can attract remittances and foreign investments.