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Pakistan: A severely indebted low income country

The stand-by arrangement is just a breather and not a solution.

From Shamim Ahmed Rizvi,
 Islamabad
 Apr 30 - May 06, 2001

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 high-tech sales.

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 opportunities.

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.