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The debt trap

The time has come that Pakistan move for the debt forgiveness rather than mere rescheduling

Feb 12 - 18, 2001

No doubt that another doze of timely relief from the Paris Club in the form of rescheduling of debt of about 1.8 billion dollars has saved the country from immediate risk of default and resultant horrendous economic cost, the fact remains that Pakistan debt trap is getting thicker and thicker with every passing day. It has already assumed alarming proportion and according to some, with pessimistic approach, it is now turning into a "death trap".

Non official economists now believe that the time has come that Pakistan move for the debt forgiveness rather than mere rescheduling and thereby adding up liabilities for future rulers of the country. The global gathering of the rich states as well as international financial institutions and the super-rich individual last year in Davos decided to provide debt relief to the heavily indebted poor countries of the world either by writing off the outstanding amounts totally or partially depending on the economic health of the debtor country. Pakistan fully qualifies for substantial cut if not total write off as Pakistan's average debt servicing on external debt at 64.9% of total foreign exchange earning is higher than the Heavily Indebted Poor Countries (HIPC).

According to a latest staff report of the International Monetary Fund (IMF) Pakistan's debt servicing on external debt stock of 35.5b touched a staggering level of 8.2b, including principal amount of 6.529b and interest of 1.68b, which is almost 64.9% of the total foreign exchange receipts of year 2000.

The IMF report estimated that the total debt relief during 1999-2000 amounted to 7.3b for Pakistan, including official bilateral, commercial and private debts (rollovers of foreign currency deposits). However, despite this massive relief, 30% of the country's current foreign exchange earnings were consumed in debt servicing alone.

The paper has reckoned that change in the structure of debt stagnant exports and other macroeconomics vulnerabilities contributed to this rapid growth of external liabilities. The IMF staff has given a cross-country analysis of all the low and middle-income countries, South Asia region and the HIPC's which clearly depict that Pakistan should seek debt forgiveness from the official bilateral sector.

Out of the three basic criterions of the HIPC initiative, Pakistan already falls in below 500 per capita income group, and its debt to export ratio is also of similar nature. The third condition for being considered as the HIPC country is that the country should be classified for only the International Development Assistance (IDA) loans of the world. However, Pakistan, along with China and India are categorized in the mixed group, which qualifies both for IDA and IBRD loans.

Given the current burden of external debt servicing on national resources, and inability of the country to remain current on its international debt obligations, Pakistan should seriously approach the international community for seeking debt forgiveness, as debt reschedulings may not be enough in future.

The government had appointed a committee last year headed by former World Bank Pakistani Vice president, Dr. Pervez Hassan to recommend measure through which the debt burden, which appeared almost unmanageable could be reduced. The committee known as Debt Reduction and Management Committee was to submit its recommendations by Dec. 31 has not been able to finalise its report so far. The committee is finding it difficult to make recommendations how to curtail the country's over 60 billion dollar (both domestic and foreign) debt because of the continued failure of the government to increase exports, remittances and revenues of the country.

Also the committee is believed to have called for restructuring defence spending to reduce the debt burden. It is of the view that funds coming in the shape of foreign loans should not be used for defence purposes. The proposals of the committee which are already late, are likely to be presented to the federal cabinet in the form of "summary recommendations". Before that, the committee wishes to make these recommendations public to have the input and suggestions of the people in order to make viable recommendations.

"The mandate of the committee is to propose both short and long-term plans to meet the challenge of huge debt but I should tell you very frankly that our position is that of an advisory body as we have nothing to do with the implementation", said Dr. Pervez Hassan while taking to newsmen informally. There was a need to legislate restrictions on increase in the non-development expenditure and lay down conditions no future foreign loans were taken without full justification. "We are not against seeking foreign loans but this job should be dealt with utmost care so that there is a certain utility of each loan", he added.

He regretted that exports and revenues had not increased in the first six months of 2000-01. 'This is a serious issue and the government must ponder over it so that our stagnant exports could increase and more revenues received in order to have a meaningful poverty alleviation programme in the country", Dr. Pervez Hassan said.

But this was not the first time that a committee or an expert group had been set up to suggest measure to reduce the debt increase exports and revenues. Many times before such efforts were made these recommendations were not implemented. What is the magnitude of the debt is a question that perhaps nobody exactly knows even in the higher authorities. Only rough estimates are made to meet the immediate requirement and no organization has any authentic figure about the overall size of the debt burden.

Previously it was always recommended by official and unofficial quarters to the successive governments to reduce the debt burden by increasing exports and generating more revenues. This time again, the committee would end up suggesting the same. The fact of the matter is that there is no seriousness for achieving any target.

The Ministry of Commerce had given a 10 billion exports target for the current financial year but it does not seem to be achievable, with Minister of Commerce Razzak Dawood conceding that this "target was getting tougher and tougher."

He called for achieving a 20 per cent increase in exports during the remaining five months of the current fiscal to meet the target. But it appears that once again the government would end up getting Rs.8.5 billion or maximum Rs.9 billion through exports. The Chief Executive is all for improving the overall economic situation and chairs every now and then meetings over the issue. The question is whether he can fix the responsibility on any department for failure to increase exports which were actually down by 8 per cent in the month of December compared to the same month in 1999. Somebody should explain why there is no value addition and no diversification of exports. The private sector is interested to export only traditional items like raw cotton, textiles, rice, carpets, sports goods and surgical instruments. Pakistani exporters have failed to compete with other countries of the region. India, Bangladesh and Sri Lanka have been successful in increasing their exports by 20 to 25 per cent while we could increase only 10 per cent.

Likewise there is a shortfall of Rs.14 billion in revenues as the CBR could collect Rs.210 billion against the target of Rs.224 billion fixed for the first seven months of the current financial year. Under these circumstances, fears are being expressed that the CBR would not achieve its target of mobilising additional Rs.90 billion to achieve its revenue allocation target of Rs.430 billion which had already been revised downward by Rs.5 billion.

Furthermore the government has received one billion dollar less in foreign remittances due to prevailing hundi and havala systems. The reason is the continued poor performance of the Pakistan banks operating outside Pakistan.

Under these circumstances what could be delivered by the Debt Reduction Committee is a million dollar question and how would the government meet this situation is still to be seen.

There is almost a consensus amongst the independent economists that it is high time Pakistan should move for debt forgiveness. The West has gained a great deal from she technological advances, communications revolution and the information age. So, for a period of about ten years or so, it should be able to share this large wealth with the poor countries to help them pull out of poverty. And their debt forgiveness should not be confined to the least developed countries. Countries like Pakistan should also have the benefit of debt forgiveness, though not of the entire debt.