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"Pakistan's foreign debt problem has become even more serious than its domestic debt problem

From Shamim Ahmed Rizvi, Islamabad
Jan 17 - 23, 2000

Pakistan's debt burden which has already assumed alarming proportions is likely to grow further in the coming year because of continuing reliance on loans and foreign assistance and mounting debt maturity. If appropriate measures are not taken with immediate effects to check the current trend, it may become difficult to avoid debt trap leading to a default and its adverse consequences on the national economy.

Dr. Parvez Hassan, former Chief Economist of the World Bank, while addressing the annual meeting of Pakistan Institute of Development Economics (PIDE) in Islamabad, warned that Pakistan debt burden had reached a dangerous point. He disclosed that Pakistan's public debt exceeded 90 percent of its GDP and 600 percent of its annual revenues with external debt touching 35 billion dollars (about 350 per cent of its foreign exchange earnings) and domestic debt exceeding 1900 billion. Quoting an official report news agency PPI, now says that the external debt is expected to grow faster in the coming years, because of continuing reliance on foreign assistance and mounting debt maturity. The report said that in order to keep the external debt within manageable limits and to reduce country's vulnerability to external shocks, there is an urgent need for a long-term and comprehensive debt strategy based on the principle of self-reliance. The report suggests avoidance of high cost short-term borrowings, urgent measures for attracting direct foreign investment, generation of higher exportable surpluses and pricing structure in the economy, as tangible measures to overcome the crisis.

In his exhaustive paper on "Pakistan's debt problem, its changing nature and growing gravity", Dr. Parvez Hussan had observed, tha all borrowing decisions were adhoc in the past. The institutional capacity to monitor debt levels, analyse debt management issues and give advice on annual borrowing plans has been almost non-existent. "The new economic team should rectify this and set up a high-level "Debt Bureau" either in the Ministry of Finance or the State Bank to undertake the debt management functions, "he suggested".

Despite substantial debt relief and some debt reduction from the Paris and London Clubs totalling nearly US $ 5 billion the foreign exchange situation remains very difficult. He said that exceptional financing from the International Monetary Fund (IMF) the World Bank and other sources would continue to be needed at least in the next three years.

The debt burden was made much worse by the inability or unwillingness of elected leaders to reduce the fiscal deficit significantly. Real revenue growth during the period from 1996-99 has remained zero per cent per annum. Fiscal deficit as a percentage of GDP remained at 6.1 per cent on an average in the same period. These and other developments resulted in the rapid increase of implied real interest rate on debt from 3.5 per cent in 1988-96 to 6.5 per cent in 1996-99, on an average.

Stagnation or fall in exports and revenues, coupled with a quantum jump in external debt in the total public debt composition, had created a vicious debt-trap. Pakistan's total public debt as a percentage of revenues was 423 per cent in 1976-77 that had gone up to 604 per cent in 1998-99. As a result, cost of interest payment had also jumped up from 32.9 per cent in 1992-93 to 42.6 per cent in 1998-99. The debt is now driven largely by interest rate costs, observed Dr. Parvez Hassan. He stated that it was not surprising that the debt indicators, which relate to debt or debt service to revenues, have shown much greater deterioration in the 1990s than in the 1980s. Thus real debt has continued to grow even though the primary fiscal balance is now in surplus. "Pakistan's foreign debt problem has become even more serious than its domestic debt problem that was reflected in the near default and subsequent rescheduling of external debt. Pakistan's debt crisis was essentially triggered by the unsustainability of the level of the current account balance of payments deficits and the pattern of their financing. During the eight years 1991-98, Pakistan ran current account balance of payments deficit of over US $ 28 billion, or on an average of 5.5 per cent of GDP.

The alarm bells on the external debt, however, did not ring in this period partly because balance of payments financing needs were being taken care of by the short-term foreign currency deposits, volatile portfolio investment and fixed cost direct foreign investment in the power sector.

Dr. Hassan said that debt problem cannot be separated from broader issues of economic strategy and management, notably trend in savings, exports and government revenues and quality of public resource use. In the near terms, say over the next two to three years, he said, Pakistan will have to live with the macro-economic consequences of the heavy debt.

According to the latest official report Pakistan's external debt (Short-medium and long terms) stood at 30.5 billion dollars (it perhaps does not include over 4. billions in the freezed FCA still uncashed). Indicating a rise of $ 1.65 billion or 5.7 per cent during fiscal 1998-99 as compared to a rise of $ 1.62 billion or 6 per cent in the preceding year. Despite decline in disbursements of foreign aid, external debt increased during the years reflecting the impact of temporary suspension of amortization payments in the wake of economic sanctions imposed after the nuclear detonation in May 1998.

At this level it constituted 51.7 per cent at the country's GDP in fiscal 1998-99 as compared to 48.4 pet cent in the previous year. This rise in the debt GDP ratio (in rupee terms) despite sharp decline in disbursements is largely attributable to lower growth in GDP during the year, conversion of external debt figure into Pak-rupees at more depreciated exchange rate and lower amortisation payments because of temporary suspension of debt service payments on selective basis. The break-up of external debt revealed that long-term debt rose by $ 1.53 billion, (6.8 per cent) while short medium-term debt increased by $117 million (1.9 per cent). The maturity structure of outstanding debt indicated a steady decline in the share of long-term confessional debt in total debt, reflecting increasing recourse to short-term borrowings.

Comparison of standard debt ratios revealed that ratio of Pakistan's external debt to export of goods and services (including workers remittances) at 302.5 per cent during 1998-99 was much higher than 146.2 per cent of developing countries and 201.0 per cent of South Asia, as a group, during 1998. Similarly debt service (including workers remittances) at the level of 26.4 per cent was also considerably higher when compared with 17.6 per cent of developing countries and 17.9 per cent or South Asia.

Pakistan's ratios of external debt and debt service payments also exceeded the prescribed debt sustainability normal limits of 225-250 per cent and 20.25 per cent respectively.

The ousted government of Nawaz Sharif has been publicising the fact that there has been significant retirement of its domestic rupee denominated debt with the banking system or over Rs. 62 billion during 1998-99. This was hailed as a great accomplishment by the government in reducing the burden of outstanding debt. But what was not highlighted is that there had simultaneously been a massive build up of external debt, which is larger than domestic debt. External debt has increased by over Rs. 290 billion in 1998-99. This dwarfs the retirement of domestic debt by almost five times. What explains this dramatic change in the composition of public and publicly guaranteed debt in 1998-99. The answer lies in the debt relief obtained from the Paris Club. This has enabled Pakistan to defer the repayment of some of the external debt. Consequently, the net inflow of foreign assistance is substantially higher. Given the borrowing requirements of the government (depending upon the size of the budget deficit), the need for domestic borrowing has diminished correspondingly.

Like the previous governments the present regime also seems to be fast sinking into the country's marshy economic situation. Nothing substantial has been done on this front except the rescheduling of eurobonds. That amounts only to postponement of liabilities. A noted economist, Dr. Akmal Hussain has rightly warned the government should proper ground for another rescheduling as Pakistan would, most likely, be unable to meet its liabilities when the rescheduled loans full due in 2002. What is imperative in the country's prevailing economic conditions is the compulsive need for reorientation of our fiscal approach from external assistance to the boosting of agricultural and industrial production, which has unfortunately remained static for years now. It is rightly apprehended that it will be difficult for the country to survive economically, if the present trend of dependence of foreign help will persist for a few years more. It is, therefore, essential that the fiscal policies should not only reduce the existing external debts, but should also leads the nation towards cherished goal of self-reliance.