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Rescheduling of Pakistan's debt

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No plan to meet revised obligation

From SHAMIM AHMED RIZVI, Islamabad
August 16 - 22, 1999

Finance Minister Ishaq Dar, at a press conference, announced yet another achievement of the present government that is rescheduling of $877 million commercial short-term loans by the London Club creditors. These loans carry, comparatively, a higher rate of interest. He boasted that "the agreement was the result of arduous negotiations which were held in Pakistan instead of London whereby we saved 5 to 6 million dollars."

The rescheduled amount includes $ 512 million under Trade Maintenance Facility (TMF), $ 265 million National Bank's rolled-over loan and another $ 100 million arranged under Non Trade Facility (NTF). With the present accord, the entire debt rescheduling process sought under Paris and London clubs worth $ 5.5 billion has been completed and all the pending loans upto December 31, 1998 stand cleared as on June 30, 1999.

According to the Finance Minister, Pakistan was able to secure very favourable terms and conditions of rescheduling. Under the arrangement, no payment of interest would be made till December 31, 2000. After this date, payments will be made on quarterly basis. Fifteen per cent of the original amount will be paid back on January 1, 2001, 10 per cent on March 31, 2001 and June 30, 2001, 12.5 per cent on September 30, 2001 and December 31, 2001 and 20 per cent on March 31, 2002 and June 30, 2002. No repayment of principal will be made during consolidation period.

Interest rates agreed under the final rescheduling arrangements with the London Club are also significantly lower than proposed earlier by the lending institutions. They have now been worked out at LIBOR plus one per cent upto June 30, 2000, LIBOR plus 1.25 per cent from July 1, 2000 to June 30, 2001 and LIBOR plus 1.50 per cent from July 1, 2001 to June 30, 2002 and are extremely reasonable. The overall cost of rescheduling is estimated at around $ 50 million per annum. Another favourable aspect is the rescheduling of IMF loan which is technically non-rollover.

Earlier, Paris Club had agreed to reschedule loan of over $ 3.5 billion providing relief to Pakistan from debt-servicing for a period of 2 years. While there is little doubt that these rescheduling would have an immediate positive impact on Pakistan's economy as it would ease pressure on the forex reserves by no means it is an occasion to be celebrated. Now when the process of rescheduling process has been completed providing some breather to the economic managers of the country, instead of celebrating this success we should focus attention on the underlying reality that we have to pay more and more in foreign exchange as loan installments and interest in the years to come.

The country is being burdened with additional loans with every passing day and the tragedy is that the government takes pride in securing fresh loans. The nation is eagerly awaiting for official steps to lessen its dependence on foreign debts, in keeping with Prime Minister Nawaz Sharif's pledge to the masses during the last elections which had, in return, bestowed unprecedented mandate on him in the hope to free Pakistan of shackles of economic colonialism of IMF and World Bank.

The question which needs our utmost attention is what Pakistan would do in year 2001 when all these payments of rescheduled loans would fall due with public debts close to its gross domestic products. According to an estimate, Pakistan would be needing about $5.5 billion or over Rs.300 billion for debt servicing in the year 2001.

The Nawaz government's management of the economy is reflected in its handling of the nation's debt, both external and internal, which has gone up by 16 per cent from Rs. 2.15 trillion when the government took office in February 1997, to Rs. 2.5 trillion at present. The extra Rs 350 billion equals last year's revenue target, which was not achieved. The government can plead that the increase roughly corresponds to inflation in this period, and debt has shrunk as a proportion of the GDP. Or that the debt had to be incurred because of stagnant revenues, in turn the result of a prolonged recession. Or that the foreign debt remains the same when denominated in dollars, but devaluation has increased the rupee burden.

The debt figures were de-emphasized by the Finance Minister in his budget speech. In direct proportion to the emphasis he placed on Rs. 66 billion in debt retirement. This conceals the fact that, to meet this year's deficit, more debt will be incurred ensuring that debt servicing remains the biggest single item in the budget. The Nawaz government's record on debt deserves severe criticism because it has committed itself publicly to reining in government expenditures, raising revenues and reducing the debt burden. The much-touted Debt retirement and National Self Reliance Funds yielded paltry results, while all the government's announcements about reducing non-development expenditures, downsizing government departments, austerity programmes, and privatizations have proved ineffective. The government is apparently still skirting around the main problem of reduced or stagnant revenues because of an economy in recession.

Ideally, the government should have reduced its spending to bring its budget closer to balance, but since, unlike ordinary citizens facing reduced incomes, the government cannot be expected to cut back on its lifestyle, it has not taken the measures necessary to revive the economy and thereby enjoys the benefit of increased revenues. The national housing schemes is the government's latest panacea to the country's economic woes, but it will not be enough. For one, it does nothing about Pakistan's sagging exports, which play a key role both in revenue generation and in approaching a trade balance and thus stabilizing the rupee's dollar parity, a key variable in calculating the debt. The nation cannot afford to go on accumulating more and more debt and it is up to the government to use the rescheduling window of opportunity to reverse a dangerous trend.