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Pakistan's external debt scenario

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At present Pakistan's economy is one of the most debt infested one in the world

From Shamim Ahmed Rizvi, Islamabad
May 01 - 07, 2000

According to the World Bank's report on the World Development indicators 2000, Pakistan's external debt increased more than four times in last 18 years from $ 9.9 billion in 1980 to $ 32.23 billion in 1998. The country's long-term debt shot up from $ 8.5 billion in 1980 to $ 28.66 billion in 1998. The World Bank and IDA loans and credits in 1980 stood at $ 2.25 billion compared with $ 6.93 billion in 1998. Pakistan's use of the IMF credit in 1980 was $ 674 million, which had risen to 1.36 billion 18 years later. On population, the World Bank report says that Pakistan's population is projected to rise from $ 131.6 billion in 1998 to 196.4 million in 2015 at a rate of 2.3 per cent compared with 2.8 per cent in the 1980-1998 period. According to the latest figures compeiled and released the State Bank of Pakistan the burden of foreign debts has risen to over $ 38 billion by Dec 31, 1999.

Interestingly, the four-fold increase in foreign debts has been registered despite successive governments tall claims of pursuing policies to turn the country self-reliant, over the period under review. The major portion of this increase in foreign debt had, however, come during the past decade when Nawaz Sharif and Benazir Bhutto played musical chair in and out of the Government although both had heavily relied on the slogan of self-reliance to win the elections. Ironically, Chief Executive General Pervez Musharraf was also qutre vehement on the issue of self-reliance at the time of his take-over but his Finance Minister Shaukat Aziz has been going abroad to seek financial help from the International Monetary Fund and World Bank. By now it has perhaps become our compulsion. As rightly explained by the Finance Minister Mr. Shaukat Aziz there is no immediate solution of this problem. It would take years of prudent handling of the economy, austerity and economy drive in all sectors that Pakistan can get out of the debt trap.

At present Pakistan's economy is one of the most debt infested one in the world. We are drowned in foreign debt to the tune of 3$ 8 billion and its debt servicing has risen to over Rs. 275 billion which works out to be almost 65 per cent of the total revenue budget. Its total public debt (both internal and external is about 95 per cent of GDP or 600 per cent of annual revenues. Its external debt at 38 billion dollars exceeds 350 per cent of its annual foreign exchange earnings.

A much needed work has, however, been done by the government of Gen. Pervez Musharraf which set up managemennt Committee mainly to devise measures for breaking the debt trap in which the country was deeply entangled. The 11 member committee headed by Dr. Pervez Hassan, former Chief Economist of the World Bank, has been asked to assess Pakistan's debts, review the existing framework for debt contracting, recommend medium and long term goals for the reduction of burden of public as well as external debt, and to specify the institutional arrangements of a debt management system.

The committee, will prepare an interim report by the end of May 2000 focusing on policy issues such as goals of debt reduction, consistency with macroeconomic framework and need for additional external debt relief. The final report, to be submitted to the Cabinet for consideration will articulate the policy issues and will provide guidance for the future institutional framework.

The huge debt trap in which Pakistan finds itself entangled today has in fact, turned out to be a death trap stripping the country of its sovereign right to take important decisions independently for its political and economic survival and progress. None else but our own short-sighted leaders of the past are to be blamed for this traumatic national misfortune. However, the present government seems determined to tackle this vital problem too, along with others already placed on its agenda.

The debt management committee will further aim at ascertaining their impact on economic growth and macro economic management with special reference to: Factors underlying the growth in debt burden as measured by indicators such as ratios of debt to government revenues, interest payments to government revenue, foreign debt service to foreign exchange earnings: impact of high public debt interest payments on government development and social spending, implications of large contingent liabilities of the government for further debt and fiscal management and consequences in near term of large gross external borrowing requirements for balance of payments managements.

It will also review the existing framework for debt contracting and evaluate the present capacity for the debt management, identifying weakness and shortcomings, with special reference to present guidelines, if any, on internal and external debt, system of debt accounting and statistics, respective institutional responsibilities of the Finance, Economic Affairs and Planning Divisions of the government and the State Bank of Pakistan and existing procedures for tracking contingent liabilities of the federal Government.

Moreover the committee will recommend medium and long term goals for the reduction of burden of public as well as external debt in order to bring them down to sustainable levels, and outline a debt management strategy to achieve these goals without sacrificing economic growth unduly.

While making the recommendations, the committee will give special attention to the need of consistency between macro economic framework and borrowing plans, the role expanded exports and government revenues can play in decreasing debt burden, the contribution that privatisation revenues can make to reduce outstanding debt, and the additional external debt relief that will be needed during 200l-2002 to deal with the large over hang of external debt payments, maintain an adequate level of imports and to quarterly build up foreign exchange reserves.

The body will also specify the institutional arrangements of a debt management system which will help implement the government strategy, monitor the goals on debt reduction and contribute to an efficient use of externally borrowed resources. This will outline the allocation of responsibilities for debt management between Ministry of Finance, Planning and Economic Affairs and the State Bank of Pakistan and the organizational structure of the debt management bureau and its needs.

The PPP and PML governments' criminal negligence of drifting the country into the international monetary institutions' trap is the crux of the nation's financial crisis. BB and Nawaz Sharif are also guilty of failing to turn the situation, rather further burdening the country with additional external debts. To rebuild the national economy from the shambles, inherited by the previous government is certainly an uphill task. Although there has been no turn around. So far Gen. Musharraf has identified the real issues and has started moving, slowly of course, in the right direction.