Feb 02 - 15, 2004



Pakistan has decided to pre-pay its expansive loans of above $ 5 billion in the next 4 years (from 2003/2004 to 2007/2008), which carry a markup of 10 percent or above. The first installment of $ 1 billion will be paid to Asian Development Bank (ADB) during the current month.

Pakistan owes about $ 6.5 billion to ADB with the mark up ranging from 10 to 11.25 percent, which is considered to be a penal rate of interest by world standard. These expensive loans were borrowed during the troubled period of Pakistan economy in 1980s and 1990s. This was the period when Pakistan was the on the verge of default on more than 10 occasions. The donor agencies charged penal rate of interest each time for bailing the country out of the crises. The military government of General Musharraf in the year 2000 announced an end to the policy of seeking expensive loans.

The Fiscal Responsibility and Debt Limitation Bill 2003 which has already been moved in the National Assembly envisages to bring down the debt burden to 60 percent of GDP by June 2008 from 90 percent in 2003 and 109 percent in 1999-2000 and then to reduce it by 2.5 percent annually. The Finance Minister Shaukat Aziz while unveiling the second phase of economic reforms (2003/on to 2007/08) said that above $ 5 billion of expansive loans obtained from ADB by the previous government will be paid before maturity or falling due for payment.

The economic strategy of the present government hiring on cutting down on expensive debts, liberating thereby precious resources for effective governance and improving in the socio-economic conditions of the people. Furthermore, it is the most prudent use of accumulated foreign exchange reserves to retire all expensive debts so that the future burden on the economy is reduced. This decision to pre-pay $ 1 billion to ADB also has an important symbolic message that Pakistan is fast gaining economic sovereignty where it can meet not only its debt but go a step further to pay back before due date for repayment.

The most serious problem of Pakistan's economy over the last many years has been the exceptionally high level of debt burden, leading to all sorts of complications including the possibility of default on external payments on current account transactions and dwindling allocation of resources for social sector projects. Realizing the gravity of the situation, the previous military government undertook vital measures during the last three years to address the problem in right earnest. This together with a favourable external environment in the aftermath of the 9/11 occurrence has eased the debt burden to a large extent, but the situation could again become unmanageable if the government did not rigidly follow a path of austerity and self-discipline. A warning on these lines has been conveyed by the ADB in its paper on "Escaping the Debt Trap: An Assessment of Pakistan's External Debt Sustainability."

Tracing the history of the issue, the ADB points out that Pakistan experienced mounting debt burden through the 1980s and 1990s due to lack of fiscal discipline over an extended period of time. By the middle of 1990s, it exhibited many classical symptoms associated with debt trap; falling rates of investment declining development and social spending and progressively falling rates of GDP growth. This created a growing vulnerability within the economy and accelerated its slide into macro-economic instability. "By the time the country conducted nuclear tests and frozen foreign currency accounts in May, 1998, both its public and external debt burdens had become unsustainable." The subsequent economic sanctions triggered a full-blown debt crisis.

The previous government launched a formal debt-exit strategy under the aegis of a high-powered Debt Management and Reduction Committee, which devised a medium-term strategy envisaging strong fiscal adjustment, financial support from IFIs on concessional terms and use of privatization proceeds for debt reduction. This laid the basis for escaping the debt trap by the end of FY01. Pakistan's decision to support the US war against terrorism resulted in sizable cash grants by certain members of the Group of Seven (G7) countries, increased market access to the European Union and, most importantly, a re-profiling of bilateral external debt. At the same time, because of racial profiling and the perception of a growing anti-Islam sentiment in the West, particularly the US, the flow of home remittances increased steeply. As a result, Pakistan's external debt trajectory has assumed a more favourable course recently.

Why Pakistan landed in the debt trap is obvious. The past governments borrowed from various domestic and foreign sources to bridge the structural gap in the country's fiscal and external sector accounts, with the result that country's debt continued to mount. The past military government did a great service to the country by reversing this IFIs desire a continuation of this policy in order to reduce the debt to sustainable levels. An objective analysis would reveal that the problem needs to be addressed by following their advice but it is easier said than done.