Pakistan needs to boost local demand, substitutes for imports and also to attract foreign investment especially in the capital market in order to pay debts.


July 22 - 28, 2002


Debts are not fortunate for both the developed and the developing nations. Most of the developing nations like Pakistan are trapped in debts and now borrowing more just to pay interest charges but its principal amount is still outstanding. The debts or external liabilities always after a certain point hit the economy and change the country's growth prospects.

Pakistan long days back in 1950s started to borrow from other countries and International Financial Institutions (IFIs). Whenever a country adopts foreign borrowings tool it must have some objectives e.g. i) to boost the economic activity ii) to develop the infrastructure iii) and to increase the activities that can increase the exports. Pakistan, initially, adopted this mode to address all these areas but failed to manage foreign assistance and wasted these funds in non-productive activities and most of these assistances went into pockets of certain people by one or the other mean.

So, with the passage of time donor countries asked for higher returns and also reduced repayment period by arguing that Pakistan has higher country risks. Meanwhile political instability and poor law and order situation in the country have also dampened the utility of these loans.

Now coming towards facts and figures that very simply can reveal the fact, how severely the country is caught in debt trap and with the passage of time its grip is tightening. IFIs started donations in 1950s on strict terms and conditions, as the country risk was high at that time because Pakistan was like a newborn baby. Later on after good relationships and better economic prospects these institutions softened their terms and conditions in 1960s and 1970s. The average rate of return was charged 4.6 per cent in 1950s and was lowered down in 1960s and 1970s. But later on increased to 4.8 per cent and 4.4 per cent in 1980s and 1990s respectively.

Pakistan's accumulated disbursed and outstanding external debt (medium & long-term and publicly guaranteed) by end March 2002 was around $ 26.3 billion. The stock of external debt during 1990-91 was $ 15.5 billion and reached to $25.4 billion by the end of 1999-2000, reflecting a net increase of $ 9.9 billion or 63.9 per cent at the end of 1990s. In other words, almost one billion US dollar of external debt was accumulated every year in the 1990s. External debt has grown at an average rate of 5.4 per cent per annum during the 1990s with 8.0 per cent per annum during the first half and almost 2.9 per cent per annum in the second half of the 1990s, mainly due to heavy reliance on short-term borrowing in the later half of the decade. Now coming to another analysis that will reveal, seriousness of the matter, if we analyze debt to gross domestic product (GDP) ratio. The ratio was 34 per cent in 1990-91 but increased to 41 per cent in 1999-2000 due to addition of capitalized interest in debt stock as a result of debt rescheduling agreements with the donors. This ratio further moved upward to 43.7 per cent during 2000-01 on account of second Paris Club rescheduling.

Now observing the matter from another angle that is in real terms shows Pakistan's external debt has mounted in the range of 252 to 327 per cent of the external earnings during the 1990s, which is significantly higher than the acceptable limit of 225-250 per cent.

All above analyses about debt's principal amount and Pakistan's situation has come to the point where it has become difficult to pay the interest on the principal amount. Overnight Pakistan's debt servicing liability has also shown a rising trend and rose 8.5 per cent per annum. Pakistan breathed for a while after some debt relief from the "Paris Club" and other donors. Foreign Economic Assistance during July-March 2001-02 amounted to $ 981 million and debt servicing as per cent of GDP increased to 3.3 per cent during 2000-01.

After detailed analysis and discussion about the debt's facts and figures now it is the time to discuss some means that can pull the country out of this trap. In the current situation one school of thought says that only an increase in the exports can help Pakistan to overcome this problem but at the same time it should be clearer in minds that exports alone can't sort out the problem. We need to boost local demand and also to attract foreign investment especially in the capital market. Reason is that whatever is being paid for imports and debt servicing can land back in the country. Here I would like to discuss that in the recent past the United States enjoyed from this phenomenon as locally they developed consumer market that generated trade deficit. But at the same time the US authorities worked on the capital market and made it attractive with higher returns and low risks. So in this way the US was able to bring back the money paid for imports. So making it simple Pakistan needs to build the confidence of the investors that ultimately can help us to pay actual debt as well as its charges.

Pakistan is a competitive exporter in textile goods but never tried to develop its own brands in the international market that in the long run will pay. For that purpose a comprehensive promotion campaign should be launched abroad.

In the current situation Pakistan also needs to introduce revolutionary changes in the agriculture sector. Agriculture is the backbone of our economy. Pakistan's all major exports are agriculture based e.g. rice, textile goods and leather. And is feeding around 68 per cent of the population as most of the Pakistan's population is residing in countryside. So just with hi-tech agriculture techniques and better living standards in villages the living standards can be lifted that in return can provide vast market to the local manufacturers and also help to increase the agriculture based exports.

For that in the town and big cities technical education should be promoted that can increase value added activities and also reduce wastage of resources. And one key and the most important thing that can be achieved is the introduction of substitutes for the imports, which will help to save the foreign exchange reserves. In order to promote local manufacturers and exporters, media war should be started at a national and International level accompanied with exhibitions. So, only a better planning to introduce revolutionary hi-tech agriculture and efforts to increase value added activates can help Pakistan to come out of this debt trap.