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Foreign debt
Strategy 2001-2004

The debt reduction committee has warned that default is not an option at all

Mar 12 - 25, 2001

The Debt Reduction and Management Committee appointed by the Ministry of Finance and Economic Affairs, last year, under the Chairmanship of Dr. Purvez Hassan has finally submitted its report to the government which is being released to the press for eliciting public opinion before finally implementing it. The final recommendations will be adopted in the next year budget.

The Committee has recommended both short-term and long term measures to rid country from debts specially the foreign debts. As a short term measure "the exit from debt strategy (2001-2004) envisages exceptional concessional loans from multilateral agencies, building of $5 billion reserves and further rescheduling and reduction of debts from donors.

The committee says the goals of the debt strategy are that Pakistan should not seek any IMF assistance beyond PRGF (Poverty Reduction and Growth Facility) in 2004, no debt relief after PRGF. Reduction in external debt burden to be less than 200 per cent of the foreign exchange earnings by mid 2005, building up of foreign reserves of $5 billion to withstand any unexpected economic shocks by mid 2004 and limiting of short term loans with maturity of less than a year to less than 10 per cent of the total debts.

According to the committee report the instruments of the exit strategy are sharp improvement in exports and curtailment in imports, vigorous privatization to retire short-term expensive debt, further restructuring of Paris Club debt, and seeking exceptional quick disbursing concessional loans from the World Bank, Asian Development Bank and possibly from some donor countries.

The debt reduction committee has warned that default which hovers around the corner because of difficult debt position is not an option at all, for it has a chain reaction totally adverse for the country. Its domestic investors, what to say of foreign investors would hesitate to invest. It would result in flight of capital, and the medium and long-term economic programme would be severely affected.

The report says the country stands committed to honour its external debt obligations. The government policies must help not only create conditions for price and exchange rate stability but also provide a boost to economic growth, through creating confidence in Pakistani currency, discouraging capital outflows and encouraging foreign private investment. The government policies, should lay the basis for elimination of the need for IMF assistance in about three years and obviate the need for additional debt relief after middle of 2004.

The committee suggests that as long as the daunting external finance challenge remains, the country may seek exceptional assistance from IMF, World Bank, ADB and other donors, additional debt relief, large private receipts, achieve sizable non-interest current accounts surpluses to meet the debt servicing programme and build up foreign exchange reserves to adequate level.

The report admitted that historically Pakistan has received large net resources transfer from abroad. There is need to increase it to about $1.5 billion by 2003-04 through vigorously expanding exports and slowing down the rate of growth in imports. According to the committee, the reduction in burden of external debt to sustainable level requires that much of new foreign borrowing during this period be on concessional terms.

It further recognised that Pakistan indebtedness to the multilateral institutions is high. Pakistan needs to largely eliminate its normal terms and fresh borrowing from World Bank and ADB terms should be confined only to non-project assistance.

The committee is of the view that since inadequacy of foreign exchange has been a major source of Pakistan's external difficulties, it suggests building of $5 billion reserves or at least enough amount to meet four months imports. It stresses that this foreign exchange target should be pursued even at cost of some less of short term momentum in growth of imports and investment because domestic and capital flight and for private investment decisions are significantly affected by a country's level of foreign exchange reserves and its perceivable ability to withstand economic shocks.

The committee estimates that by end of PRGF, the country should achieve surplus of non interest currency account surplus of $3.8 billion; normal disbursement of medium and long term loans $6.2 billion, net foreign investment 2.5 billion; rescheduling from Paris Club 5.1 billion, receipts from privatization $3 billion, exceptional quick disbursing assistance from World Bank, ADB, and possibly some donors $6 billion and trade financing $0.3 billion. Of this the possible shortfall may be by $2.5 billion.

In the word of the committee, the first and foremost, Pakistan will have to achieve a surplus in non interest current account of balance of payment of nearly one billion annually during 2000-2004. This is in sharp contrast to the average annual deficits of $1.5 billion during the 1990s. This would require a major expansion as well as substantial import savings. Even so, the country would need exceptional assistance of $6 billion under PRGF and short term rescheduling of $5 billion. If the latter flow do not materialise, Pakistan will not be able to meet its debt obligations even if succeeds to implement a strong adjustment programme. It is also important that exceptional assistance to Pakistan during 2001-04 be entirely on concessional terms. If it does not happen, multilateral debt service payments would become extraordinarily large. It is of considerable interest to Pakistan, the committee says, to reduce the present value of debt outstanding to multilateral institutions. The committee expects that over and above the normal lending, Pakistan should seek $700 million from the World Bank soft window and similar treatment is expected from the ADB which, may also be asked to provide 600 million.

Although some economic experts do not agree with the recommendations describing it too assumtive, by and large the report is considered sound, bold and practical with potential of yielding dividend expeditiously for lifting the country out of its current quagmire.

The recommendations, will put the national economy back on track as it has the set objectives and targets, implementation of the recommendations however, requires perseverance, objectivity and commitment on the part of the government. Our history is replete with instances wherein we had fumbled in the process of implementation of the excellent plans and programmes, which led to their failures, causing colossal financial loss to the state.