According to the latest report of Global Development Finance
of the World Bank, Pakistan has been included in the list of Severely Indebted
Low Income Countries (SILICs) of the world. The report has included 33 countries
in this category. The list has come down from 41 to 33 but now two countries
Pakistan and Ukraine have been included as their debt indicators have worsened.
According to another report emanating from Washington,
Pakistan has declined to seek extraordinary debt relief to which it becomes
entitled in the light of this report and, instead, asked for fresh credit at
below normal rate of interest. The World Bank report officially released last
week shows that Pakistan's debt burden has increased from $30 billion in 1997 to
$34.4 billion in 1999, but Gross National Product (GNP) had declined from $63.5
billion in 1997 to $58.8 billion in 1999.
The Global Development Finance 2001 has used two indebtedness
ratios in its analysis. The ratio of the present value of total debt service in
1999 to average GNP in 1997-1998, and 1999; and the ratio of the present value
of total debt service in 1999 to average exports (including workers'
remittances) in 1997, 1998 and 1999.
If either ratio exceeds a critical value — 80 per cent for
debt service to GNP ratio and 220 per cent for the debt service to exports ratio
— the country is classified as severely indebted. In case of Pakistan,
external debt as a percentage of exports of goods and services (including
workers' remittances) has increased from 265 per cent in 1997 to 344.5 per cent
in 1999. External debt as a percentage of GNP has also jumped up from 47.4 per
cent in 1997 to 58.5 per cent in 1999.
This debt to GNP ratio is the only indicator that makes
Pakistan's economy better than Highly Indebted Poor Countries (HIPCs) all other
ratios are even poorer.
The SILICs group, as classified by the Bank, includes some
extremely poor countries of the world, like Angola, Burundi, Congo, Ethiopia,
Guinea, Indonesia, Nigeria, Rwanda, Somalia, Sudan and Uganda.
The statistical data of Pakistan shows that Foreign Direct
Investment (FDI) that peaked in 1996 to $922 million had declined to $370
million in 1999, and portfolio investment that touched the level of $1335
million in 1994 (due to floatation of PTCL shares) had actually been shown as
zero for 1998 and 1999, in the Bank report.
The Bank states that the official foreign exchange reserves
coverage for imports tended to decline across the South Asian region as
merchandise import growth was high in 2000. This ratio fell precipitously low in
Pakistan in September to only one month of import coverage, and was also
hovering around two months coverage in Bangladesh and Sri Lanka.
Inflation, as measured by the consumer price index, averaged
3.5 per cent for the region, with some upward pressure in Pakistan toward the
end of the year, but a tailing off of inflation in India. The rise in oil prices
in 2000 was counterbalanced by softer food prices and declining non-oil
international commodity prices. Monetary policy was accommodating, as policy
rates and inflation were largely unchanged, the report observed.
The Bank reckons that the average growth for the South Asia
region is expected to fall modestly in 2001, to 5.5 per cent, and to remain at
this level in 2002, with a small up-tick in 2003.
External demand is expected to soften, but the region as a
whole is not very dependent on external demand. In particular the region's
merchandise exports won't be directly affected by the sharp slowdown in global
Fiscal deficits are expected to remain high, albeit on a
slowly declining trend, which will continue to limit growth below long-term
potential. First, already-high debt servicing prevents regional governments from
expanding key public services and investment in infrastructure, both of which
are badly needed to reduce poverty and clear economic bottlenecks. And second,
the deficit tends to rise interest rates, thereby reducing private investment
The current account deficit is expected to remain above 2 per
cent of GDP. Export growth is expected to decline and import growth will remain
robust. Further moves to liberalize the import and foreign investment regimes
are both likely to yield additional demand for imports, even if alternative
trade barriers partially offset the impacts of liberalization.
It makes sense as the Pakistan would immediately lose all
access to the capital market and will become dependent on just concessional
loans. The rating would nose dive led foreign investment would stop altogether.
But many at the World Bank insist that if Pakistan continued to go the way it is
going, it might be left with no recourse except this one. The stand-by
arrangement is just a breather and not a solution.