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From Shamim Ahmed Rizvi, Islamabad
Feb 21 - 24, 2000

Pakistan's foreign debt problem had become more serious than our domestic problems

The State Bank has also emphasised the urgency for putting in place an action plan for ensuring payment of rescheduled foreign debts starting from next year. 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.

A sort of the warning is contained in the second quarterly SBP report in the state of economy for the year 1999-2000. The report warns that trade deficit will exceed the target for the year due to larger than expected imports. It says though pressures on external sector have eased by rescheduling of debt owed to Paris and London Club "an action plan needs to be put in place for payments beginning January, 2001 and to reduce the debt burden".

In a TV interview, Dr. Ishrat Hussain, Governor State Bank, said that Pakistan's foreign debt problem had become more serious than our domestic problems because of our sharp depleting foreign exchange reserves. The continued neglect by successive governments in the past of this vital economic issue the country has landed in a debt trap. Recent rescheduling of some foreign loans has provided us only with a breather and the situation can be worst compounded if we do not urgently attend to this problem wholeheartedly and with all the resource at our command.

Dr. Parvez Hassan, former Chief Economist of the World Bank, while addressing the annual meeting of Pakistan Institute of Development Economics (PIDE) in Islamabad last month had 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 earrings) and domestic debt exceeding 1900 billion rupees.

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 US 4 billion dollars in the frozen FCA still uncashed). Indicating a rise of 1.65 billion dollars or 5.7 per cent during fiscal 1998-99 as compared to a rise of 2.62 billion dollars or 6 per cent in the preceding year. Despite decline in disburse ments 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 per 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 amortization 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 dollars (6.8 per cent) while short medium-term debt increased by 117 million dollars (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 ratio 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 246.2 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 of 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.

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 percent in 1992-93 to 42.6 per cent in 1998-99. 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 as it 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.

Independent economists have been warning that the government should prepare ground for another rescheduling as Pakistan would, most likely, be unable to meet its liabilities when the rescheduled loans fall 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 fiscal policies should not only reduce the existing debt, but should also leads the nation towards cherished good of self reliance.