How to utilize it?


Oct 20 - 26, 2003






Pakistan's liquid foreign reserves are strengthening gradually and there are strong indications that the upward trend will keep its pace in the days to come.

Official figures were quoted as the total liquid foreign reserves held by the country stood at $ 11.4405 billion during October 2003. The break-up of the foreign reserves position indicates that foreign reserves held by the State Bank of Pakistan $10,0531 billion while reserves held by other banks was estimated at $1.3874 billion.

This should be a matter of great satisfaction for every Pakistani that the economic situation is quite different from what it was three years back. There were times when the central bank had an extremely lighter purse even less than a billion dollar and the people at the helm of affairs had to run from pillar to post for meeting obligatory payments either for debt servicing or for balance of payments.

The present government's agenda of debt retirement is one of the major achievements through strong financial discipline during last three years. Pakistan has been able to retire $4.5 billion of the foreign debt besides making the difficult task of debt servicing comparatively much easier as compared to the bitter experiences in the past. The country has not retired $4.5 billion but paid financial charges on the foreign debt to the tune of Rs15 billion during the last three years.

Today, despite a rosy picture of the financial health of the country painted by some optimistic well wishers there is a need to have a critical look at the economic affairs of the country. Undoubtedly, the country has met all its economic and financial targets including exports of over $11 billion, home remittances receipt were $4.23 billion, revenue targets were also achieved during the last financial year. The current account surplus recorded an increase of 51 per cent in the first month of the current financial year after the government received payments from the US for its logistics support.

Pakistan's current account surplus reached $477 million in July 2003, a growth of 51 per cent over what it was in July 2002. During last fiscal year, current account surplus was $4.028 billion, up from $2.833 billion because of increase in remittances from overseas Pakistanis, decline in interest payment on foreign debts and improvement in trade balance. Workers' home remittances were averaged around $350 million per month in 2002-03, were identical to the performance of the last year in the first month of the current financial year as well.



In the backdrop of the improved financial conditions, the financial managers are planning for productive investments abroad out of the available reserves, for which the financial managers are also being looked for. This sort of investment of the reserve funds may earn some profits for the country, but there are more significant yet neglected areas within the country which need immediate attention. These areas have the potential to produce much better results as compared to the plans for investing abroad. Before going into details, it seems pertinent to have a look into the factors which contributed significantly in building up our reserves in recent years. Of course, the timely and good decision making comes on top which gave a direction to our economy and that decision making deserves all marks. As a result of the decisions taken by the present government, the harsh and cold relations with some international forces became cordially which were also translated into happy rescheduling of formidably piling up foreign debts until three years ago. The successful rescheduling and retirement of some expensive debts have also provided relief up to 40 percent in debt servicing to Pakistan's economy. Besides grants and other incentives offered by the developed world in recognition of Pakistan's positive role in fighting terrorism, unprecedented increase in home remittances to the tune of $4.23 billion during last financial year also played major role in building up our reserves. This means that the economy at domestic front produced comparatively a very little impact on overall growth of our reserves. The ground reality is that the investment by the private sector was insignificant and what ever the investment has come out it was made through public sector in Pakistan. Commenting over the situation, a leading industrialist said that the only way to vibrate the economic activity is to encourage the private sector for investment at a massive scale. Currently, the only sector where the private sector has made noticeable investment was identified as the textile sector because of the growing market access in the developed countries especially, the EU and the United States. The level of investment even in the textile sector could be much more had the infrastructure and the utility services specially the electricity prices were kept at reasonable in Pakistan. Besides unreasonably high electric prices, another factor which discourages investment by the private sector is the tax regime and a variety of tax collectors and rampant corruption in these tax collecting departments. Despite repeated promises by every government that the number of taxes and tax collecting department will be reduced into a few taxes, the large number of tax collecting organizations continue to exist. Recently, the city government culture has also started new taxes to add to the problems of the investors.

The economic experts feel that cash flow from external sources was not a permanent feature. We have to develop our indigenous resources on sound footings to be able to produce skilled manpower, and export surplus both in the manufacturing as well as the agriculture sector. These are the areas which deserves utilization of available funds for building up our economic resources on sound footings.

The area of human resource development is extremely important for our future in all respects. The target of human resource development could only be achieved through imparting training and quality education at affordable price.

Unfortunately, excessive commercialization of the education sector has endangered the social as well as economic uplift of life in Pakistan. The higher education even in the public sector universities has gone beyond the reach of the majority of the people due to exorbitant price. We should make corrections in this highly important area of human resource development by offering subsidies so that the younger generation could discharge its responsibilities in future.

Energy sector including POL products and electricity are said to be the real engine of economic growth. Unfortunately these areas are being used at the tools for tax collection. Though on one hand the government received handsome amount of revenues from these sectors but on the hand, the excessive price of the energy has stalled investment in the industrial sector thus strangulating the economic growth through the private sector. These are the areas which need government support through subsidies to enable the private sector to generate more economic activity and create avenues for more revenue.

There is also need to increase Development Expenditure with a view to generate economic activity by arresting the declining investment climate within the country besides providing employment opportunities for the jobless.





















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Although the present government has successfully managed rescheduling of the huge foreign debt and has got a breathing space of 36 years for repayment of the foreign loans. We feel at ease after rescheduling of the foreign debt and of course after the change of the harsh attitude of the international forces against Pakistan. We hope that the current friendly attitude of our foreign friends will be long lasting; however, the debt retirement should be on top of the agenda. If we succeed in off loading the foreign debt to the maximum, the change in the wind would not pose any danger to the economy in future. Therefore, it will be wise on the part of the economic managers to get out of the debt trap as early as possible.

It is heartening to note that the government seems to be full alive and taking steps to reduce the burden of the expensive foreign debts. Recently, the government has sent formal notice to World Bank and Asian Development bank (ADB) for pre-payment of $1.78 billion costly loans.

The ADB loans amounting to $596.7 million with interest rates ranging from 6 percent to 11 percent, and 11 loans of $481.7 million with interest charges between 4.6 to 7.6 percent.

ADB loans were due for repayment between the period of 2007 and 2019 while World Bank loans to be paid back during 2005-2013. However, the government has already set aside the amount for early repayment, which also includes a small amount of penalty.

The government intends to use the fiscal space now available with the early debt clearance for development, poverty alleviation and social sector developments.

It may be mentioned that the total external debt, including foreign exchange liabilities, in 2000 amounted to $38 billion, which fell to $35 billion by June 30, 2002, while the government was aiming at to bring it down to $33.5 billion at the end of the current financial year.


Pakistan received the highest ever amount of over $4.23 billion in the form of home remittances during the last fiscal year. Never before in the history of Pakistan, had the country received more than $2.88 billion as remittances.

Home remittances during the last fiscal year (July 2002 to June 2003) were estimated at $4,236.85 million as against $2,389.05 million during July 2001 to June 2002 showing increase of 77.34 per cent. The total receipt of the cash flows, encashment of FEBCs and FCBCs, Haj remittances and remittances from Iraq-Kuwait war affectees.

Out of the total remittances received in the country during the last fiscal year, workers' remittances contributed $4107.88 million as against $2,299.62 million during July 2001 to June 2002 showing an increase of 78.63 per cent.

The total amount remitted in June 2003 was $363.50 million as compared to $268.54 million in June 2002 posting an increase of 35.36 per cent.


Dr. Ishrat Hussain, Governor State Bank of Pakistan, in his recent observations he made regarding economic revival in Pakistan has said that now we are entering the next phase of economic revival strategy aimed at reaching a trajectory of 6 per cent growth rate by 2004-05.

Pakistan had witnessed growth rates of 6 per cent over a long period of time and as a consequence poverty was reduced from 40 percent to 18 per cent in 1988-89. Thus it is imperative that we go back to that growth path of 6 per cent to be able to make a dent in unemployment and poverty.

The period 1999-2000 was devoted to get the country out of the debt trap and move towards a path of economic self-reliance and economic sovereignty. In 1999, Pakistani economy was already under the shell shock of the May 1998 events, the freezing of foreign currency accounts, nuclear sanctions, suspension of bilateral and multilateral assistance. The take over of the Government by the Military in October 1999 further made the problems worse as additional sanctions were imposed for suspension of democracy. The attitudes of the main donors and multilateral institutions, which used to fill in the gap between our external resource requirements and the availability of external finances from our own resources, became much hardened and harsher. The country's unencumbered liquid foreign reserves were hardly sufficient to meet the imports of next two to three weeks and we didn't know as to how we will meet our oil payments or debt servicing tranches. This was a totally unsatisfactory situation and we had to find a durable and long lasting solution for our external debt.

The first order of business was therefore to get out of the debt trap. For this to happen, fiscal deficit had to brought down from the level of 7 per cent of GDP to 4 or 3 per cent by raising revenues and reducing expenditures. The government's focus thus was on stabilization. In 1999-2000, the country's debt servicing obligations amounted to $ 7.8 billion and there was no way we could repay such huge amount of money out of our foreign exchange earnings. This amounted to 60 to 70 per cent of foreign exchange earnings including the SBP purchases from kerb market.

All possible efforts were made to ensure that no payments to foreign portfolio investors or foreign companies such as Hubco were stopped so that the country's credibility which was very low at the time could be restored.



Credibility had to improve as we were engaged in public dispute with IPPs and foreign investors were shying away for this and other reasons. Our worst critics also admit that Pakistan's standing in international financial markets has improved quite significantly and our sovereign ratings are gradually moving upwards.

To improve debt sustainability the following actual cash payments were made by SBP on account of external debt servicing during the last three years.

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These amounts include retirement of $4.5 billion of commercial and short term debt and other foreign currency liabilities. These payments were possible because of purchases of workers remittances through the kerb market in the first two years and heavy inflow since September 11, 2001. Pakistan was able to manage debt servicing in an orderly manner because the following amounts due on debt servicing to Paris Club and other creditors of Rs.9.1 billion were rescheduled.



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This strategy of debt re-profiling of Paris Club debt over a period of next 38 years, early and pre-payments of commercial and short term debt and substitution of soft term loans by international financial institutions for hard term loans has gradually led to lowering of our external debt indicators. We are committed to retiring non-concessional loans of World Bank, Asian Development Bank and IMF before time.

The new loans from these institutions are all concessional in nature zero interest rate, 10 year grace period and 30 years repayment. If the current trends persist we expect that external debt servicing ratio which has already come down to 40 per cent will further decline to 25 per cent of our foreign exchange earnings. This is a level where we will feel comfortable, as we will be able to meet these obligations from the country's own resources without recourse to exceptional balance of payments financing from international financial institutions.

The governor admitted that the period of stabilization has taken longer than we had originally envisaged. But this is how the real world works. Man proposes and God disposes, he remarked. If the country did not have to face four different shocks, the stabilization would have been completed in two years instead of three. The prolonged drought for last three years dwindled irrigation water supplies and affected our main economic sector i.e. agriculture. September 11, 2001 made Pakistan the front line state in the war against terrorism and inflicted a lot of damage to the economy including cancellation of export orders. Border tensions with India and mobilization of troops raised our defence expenditure which the government had frozen in nominal terms since 1999-2000. Domestic violence against the foreigners such as bomb blasts in Karachi and Islamabad did deter the foreign businessmen from visiting Pakistan and intensifying economic relations. Had these events not taken place the first phase of stabilization could have been completed at least a year earlier. Pakistan is now entering the second phase of economic revival i.e. stimulating growth and employment in the country. All indicators so far suggest that there is a strong likelihood that GDP growth this year (2002-03) will be 4.5 per cent. If all things remain constant and no unforeseen adverse event takes place the growth rate in 2003-04 will range between 5 and 5.5 per cent and hit the target of 6 percent in 2004-05.

Elaborating the factors that lie behind the projected targets, the government made following observations:

The effects of drought will whither away and irrigation water supplies for both Rabi and Kharif seasons will resume to their normal levels.

Water conservation techniques adopted by the farmers in the hard times will increase overall agricultural productivity and agriculture value-added will increase at the historical rate of 4.5 percent. Livestock will continue to expand its share within sectoral value-added.

Second, barring a fierce and prolonged war in Iraq, global recession will begin to dissipate and all the three main blocks US, Euro area and Japan will show buoyancy. Increased demand for goods and services from these blocks will induce further exports from Pakistan.

Third, as a result of lower debt servicing costs and higher tax revenue collections the size of public sector development expenditure will raise from Rs.130 billion to Rs.150 billion in 2003-04 and Rs.180 billion in 2004-05. This will help give a spur to private sector investment also. Tax revenues are projected to increase from Rs.460 billion this year to Rs.560 billion in 2004-05. Tax revenues have already risen by Rs.100 billion or 33 per cent in last three years. The projected increase of 21 per cent in the next two years is therefore very much in line with the past performance.



Fourth, the large investment in balancing, modernization and replacement (BMR) in textile industry during last few years will start paying dividends in the form of better quality and higher value added exports. The share of value-added items in total textile exports has already exceeded 60 per cent and it is postulated that this share will be almost 70 per cent by 2004-05.

Fifth, monetary and credit policies and banking sector reforms implemented so far will show some results in form of expansion in credit to housing, consumer financing, SME, agriculture sectors. As these sectors have strong backward and forward linkages the multiplier effects of aggregate demand expansion will reinforce growth impulses in the economy and induce supply and production response.

Sixth, the devolution of powers to local governments to deliver essential services at the grass root level will improve the effectiveness of development spending. As most projects will be driven by the demands of the community rather than imposed unilaterally by central planners, it is expected that waste and leakages will be kept at a minimum level.

Seventh, one of the major drivers of cost in the economy is electricity tariffs. Both the households as well as industrial units are facing unviable power tariffs. With the commissioning of Ghazi-Brotha project, the thermal-hydel mix will change. As more thermal power is switched to natural gas from furnace oil, losses in transmission and distribution are curtailed and financial charges of IPPs are cut down by pre-payment of expensive debt, power tariffs should come down and benefit the consumers.

Finally, the standards of governance set by the government in last three years should be sustained and further steps are taken to minimize corruption and leakages in financial transactions. Merit remains the basis for recruitment and promotion in public service and nepotism and favoritism are no longer the norms.

In this scenario we haven't still relied on private sector investment as the engine of growth. Public sector investment will go up from 4.7 per cent of GDP to 6.2 per cent in 2004-05 while private sector investment will remain at 9.4 per cent - not much different from the current level of 9.2 per cent.

If the existing policies continue, standards of good governance are not weakened, institutional reforms and restructuring are implemented and the country does not face any setbacks in the future, Pakistan would be able to attain a 6 per cent growth path and thus reduce poverty and unemployment. There is no doubt that this is a realistic goal to achieve something we have done in the past four decades. But this requires hard work, dedication and honest dealing by every Pakistani whether in the private or public sector.


Certainly, the government has made appreciable efforts for early retirement of expensive foreign and commercial debts. By the end of the current financial year, the foreign loans will come down to the level of $33.5 billion from $38 billion in 1999. The economic managers are also striving for a 6 per cent growth rate by the year 2004-05. This target of 6 per cent growth rate would certainly help reducing the poverty level in Pakistan. However, the situation demands that the benefits of the economic success so far achieved should also be passed on to people. Some key areas including education, electricity and POL products where prices have gone out of the reach of the masses should be given subsidies not only to provide relief to the price hit population to ignite the stagnant economic activity at domestic level.