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Government has formed a Debt Reduction and Managment Committee to derise new measures for breaking the debt trop.

From Shamim Ahmed Rizvi, Islamabad
Feb 07 -13, 2000

A much needed work has been done by the government of Gen. Pervez Musharraf which set up on last Saturday, a Debt Reduction and Management Committee mainly to devise measures for breaking the debt trap in which the country was deeply entangled.

The 11 members 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 within 3 to 4 months, 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 names of the members of the committee are: Mueen Afzal, Secretary General Finance, Dr. Ishrat Hussain, Governor State Bank of Pakistan, Javed Akram, Secretary Economic Affairs Division; Fazlullah Qureshi, Secretary, Statistics Division, Fateh M Chaudhri, Honorary Advisor, Bashir Ahmed, Chairman, Islamic Investment Bank, Khurshid K Marker, Chairman Merck Marker, Dr. Ayesha Ghous Pasha, Deputy Managing Director, Social Policy and Development Centre, Dr. Aliya H. Khan, Assistant Professor, Department of Economics, Quaid-e-Azam University and Dr. Ashfaque Hasan Khan, Economic Advisor, Finance Division, (Member Secretary).

Pakistan is now a severely indebted country. Its public debt exceeds 95 per cent of GDP and 600 per cent of annual revenues, the external debt at $ 35 billion stands at 350 per cent of annual foreign exchange earnings.

Real revenue growth during 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 of 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 payments had also jumped up from 32.9 per cent of 1992-93 to 42.6 per cent in 1998-99.

This situation forced Pakistan to seek exceptional financing arrangements from the International Monetary Fund in January 1999, after facing a severe balance of payments crisis. This also paved the way for a debt relief agreement with the Paris Club. Independent economists feel that the government may have to seek further debt relief from the official creditors, as its inflow-outflow position would again be strained after expiry of the debt relief period by end-December 2000.

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 blame 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.

It is amply manifested by the terms of reference of the newly formed powerful committee of experts which is to assess Pakistan's debt and analyse the evolution of public debt and external debt problem both with respect to the impact of exogenous factors and domestic policy, and decision-making process.

It 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 GDP public 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 privatization revenues can make to reduce outstanding debt, and the additional external debt relief that will be needed during 2001-2002 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 personnel and automation needs.

Efforts to shed the heavy debt burden may not find easy sailing nor are these short-term measures. There are reasons to believe that IMF attitude is covertly linked to Pakistan signing the CTBT. As pointed out by SG, Finance, IMF and World Bank have also shifted their focus from structural reforms to monitoring effects of these reforms on poverty alleviation covering nearly one-third of the country's population. The only course, therefore, left for the government is to depend on its own corrective measures, reducing dependence on these aid agencies to the minimum, in the economic recovery drive. There are already some hopeful signs of arrest and reversal of sliding trends in the economic sector. Business community has responded positively to the CE's economic formula, exports have started picking up, confidence of domestic investors appears being restored which may lead to attracting foreign investment as well and cash crops of wheat and cotton present optimistic prospects. These along with a transparent privatization process of state owned enterprises, revival or disposal of sick industrial units, multidirectional reformatory steps and the continuing tough slow, accountability of loan defaulters, should all be expected to make the tough assignment of the proposed debt management body a bit easier.