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Domestic and external debt

Acquiring of foreign aid in the present time is not an easy task

By Abdul Rahman
 Apr 23 - 29, 2001

In the past Pakistan had easy access to abundant foreign aid. Moreover the quantum of remittances from expatriates was also high in proportionate, which kept rising debt volume under control. However economic conditions changed subsequently due to adoption of different economic policies by the subsequent governments. During this period the government's current account deficits began to rise which led Pakistan to rely heavily over external and internal borrowings. In the past, Nawaz's regime was responsible for introduction of Foreign Currency Accounts, which led the country towards dollarization by developing the habit of using short-term commercial borrowings instead of long term borrowings which accompanied with a sizable reduction in concessional financing as witnessed in early 1990's. Resultantly indebtedness increased sharply and with the lapse of time it was found very difficult to meet external debt payments. The debacle of stoppage of Foreign Currency Accounts being the last nail put into the coffin of shattered economy of the country. This action not only shattered the confidence of foreign investors but also had negative impact on remittances of expatriates. So called remedial measures taken by the govemnent for restoring the lost confidence is yet to produce the required results.

The position of Domestic and External Debt of Pakistan is depicted in the following table:

Domestic and External Debt

(Rs. billion)

.

1996

1997

l998

l999

2000

Total Debt

1877.3

2184.5

2516.1

2907.1

3095.5

l.Domestic Debt

901.4

1037.2

1l76.2

1375.9

1558.8

(48.0)

(47.5)

(46.7)

(47.3)

(50.4)

2.External Debt

975.9

1147.3

1339.8

1531.2

1536.7

(52.0)

(52.5)

(53.3)

(52.7)

(49.6)

Total Debt as % age of GDP

88.5

90.0

94.0

99.8

97.5

Domestic Debt as % age of GDP

42.5

42.7

43.9

47.2

49.1

External Debt as % age of GDP

46.0

47.2

50.0

52.6

48.4

Total Debt Servicing

199.8 255.9 275.5 339.9 338.2

a) Total Interest Payment

130.5 158.4 188.8 216.9 240.2

Domestic

104.8

129.9

160.1

178.9

189.6

Foreign

25.7

28.5

28.7

38.0

50.5

b) Repayment Of Principal (foreign)

69.3

97.5

86.7

123.0

98.1

Ratio of External Debt Servicing to: Tax Revenue

65.4

78.8

76.2

87.0

83.3

Total Revenue

54.2

66.6

63.1

72.5

63.0

Total Expenditure

38.6

47.3

46.7

52.5

45.5

Current Expenditure

47.1 56.2 55.5 62. l 52.6

(Source SBP Annual Report-1999-2000)

From the figures it is evident that with the decrease in foreign assistance during the preceding few years, Government is mobilizing funds domestically through its various savings schemes. It is interesting to watch that the share of domestic debt that stood at Rs. 901.4 billion in 1996 jumped to Rs 1558.8 billion in the year 2000 which almost is double when compared with the figure of the year 1996.

These deductions also equally holds good in respect of figures of domestic interest payments.

Breakup of Domestic Debt outstanding for the last four years of the country is as under:

Domestic Debt Outstanding

(Rs. million)

Debt Instrument

l997

1998

1999

2000-(P)

A. Permanent Debt

281269

277140

256928

259599

B.Floating Debt

433833

473850

561590

647428

C.Unfunded Debt

322085

425244

557389

651748

Total (ABC)

1037187

1176234

1375907

1558.775

A critical view of reflect that the debt under the category of "Unfunded Debt" has doubled in the year 2000 when compared with the year 1997. This increase has taken place in a very short span of four years. In order to investigate as to which item of unfunded debt recorded highest increase and what impact it could have on the balance of payment in the shape of interest payment, the position of Unfunded Debt for the last four years has been jotted in the table.

Unfunded Debt

(Rs million)

.

1997

1998

1999

2000

Defence Savings Certificates

136568

168840

207190

247840

N.D.C /Accounts

233

132

83

57

K.D. C/Accounts

867

827

756

700

SSC (Reg/Bearer) A/cs

126978

148109

178063

202340

Regular Income Certificates

30591

85000

144100

170110

Mahana Amdani A/cs

1821

1869

1886

1940

Saving Accounts

14724

8025

10321

10603

Postal Life Insurance

10301

12441

14989

18159

Total:

322085

425244

557389

651748

The above tables clearly depict that Government borrowings through National Savings Schemes viz. Defence Savings Certificates, Special Savings Certificates/Regular Income Certificates almost 60 to 85% of the whole unfunded debt. It is interesting to note that the above schemes carry higher rates of interest, when compared with the interest offered in the market by different financial institutions.

In other words Government borrowed funds through these schemes at much more higher rates than the interest rate prevailing in the financial market. The costly borrowing by the government also disturbed the debt servicing capacity of the country.

The total debt servicing of the country inclusive of both Foreign aid and Domestic Debt was 338.2 billion, which is equal to 83.3% of our tax revenue or 63% of our total revenue. This is indicative of the fact that only a small portion of its earning is left with the government to meet development, defence and administration expenditures.

Conclusions

Acquiring of Foreign Aid in the present time is not an easier task and with the lapse of time it will become more and more difficult. It is reality of time that political viability determines the quantum of economic assistance to a country from abroad. It has now become practice to enforce sanction or stop or reduce economic assistance of a country by the donor countries on one or the other pretext. All the developing countries are facing this problem from donor countries. Pakistan is no exception to this problem as such it is logical not to rely heavily on foreign economic assistance in future. Under the circumstances Government will have no alternative but to bank on domestic borrowings? Hence it will be essential to borrow funds domestically at competitive rates of interest. This is so because borrowing at uncompetitive rates of interest will have adverse effect on country's current account deficit. In order to remove this bottleneck it has become inevitable to reduce substantially the rate of interest/profit offered on Defence Savings Certificates and Special Savings Certificates. The rate of profit should be brought down keeping in view the profit rate offered by different financial institutions/Commercial Banks. Resultantly Government will be in a position to borrow domestically through National Savings Schemes cheaply for using the same to meet its development /administrative expenditures. Since the rate of profit on above schemes would be reduced equal to the rate of profit offered in the market as such it will have no negative impact on national savings rate of the country. The action is of prime importance and earlier the decision is taken the better it would be.