There are positive indications from bilateral creditors and donor agencies

Nov 05 - 11, 2001

While painting a rather dismal picture of Pakistan's present state of economy, the governor, State Bank of Pakistan, in his lecture on "Global Economic Outlook" at the Government College Lahore, last week, expressed hope for a welcome change in country's economic scenario in the near future "thanks to government policy decision to join the international community in the fight against global terrorism".

The Governor, Dr. Ishrat Hussain, said that Pakistan was expected to receive financial assistance of about $800 million mostly in the shape of grants from the USA and other donor nations in the near future. He further sounded optimistic about relief partly in the form of grants and partly by way of restructuring in respect of the outstanding multilateral loans of $16 billion.

In the aftermath of September 11 events in the Washington and New York and Pakistan joining the US led war against terrorism, various initiatives have been taken by the International community and institutions to provide a measure of relief to the economy of Pakistan. The steps so far taken include lifting of sanctions by the USA, Japan, UK and Germany, liberal rescheduling of past loans, increased access to the markets of developed countries grants and aid for balance of payment and budgetary requirements in moderate amounts besides promises of soft term Liberal Loans from International Institutions.

In order to apprise the nation about the net impact of the crisis and the response of the International community, the Finance Minister, Shaukat Aziz, held a press conference in Islamabad last week where he disclosed that the minimum loss would be $ 800 million if the crisis persists for a short period but it may increase to between $ 1 and 2 billion if the current campaign continues till the end of the financial year. The negative effect would originate from reduction in revenues, exports, imports, delay in privatization and fall in foreign direct investment. As regards relief commitments Pakistan has so far been offered $ 781 million for covering its economic losses during the ongoing crisis with the highest package of $ 673 million coming from the USA, Japan, EU and UK, would contribute $ 25 million, $ 45 million and $ 38 million respectively. All of this amount consists of grants, deliverable in cash and would be provided as part of the budgetary support by June 2002. Also, Pakistan was given to understand that grant assistance would continue in the next fiscal. Canada has already converted its $ 285 million loans into social sector funding, which virtually amounts to writing off the liability. UK has also declared concellation of Commonwealth Development Corporation loan" amounting to 24 million pounds. Shaukat Aziz added that major debt relief was expected from Paris Club as bilateral creditors looked very supportive this time. Besides, Pakistan was negotiating foreign loans on concessional terms. In this regard, he referred to PRGF looked foreign PRGF and World Banks banking sector loan.

The Finance Minister also furnished, for the first time, latest foreign debt figures till September 2001. Total foreign debt had accumulated to the tune of $ 37 billion which included bilateral debt of $ 12.5 billion, while $ 15.4 billion were owed to World Bank, IMF, Asian Development Bank and Islamic Development Bank. As regards bilateral debt, Pakistan owed $ 5 billion to Japan, $ 3 billion to USA, $ 1 billion each to Germany and France, $ 318 million to Canada, $ 738 million to Korea, $ 175 million to Italy, $ 127 million to Sweden, $ 103 million to Russian and $ 80 million to the Netherlands. Other borrowings included $ 500 million from Paris Club and $ 751 million from foreign banks. Besides, $ 5 billion were in the shape of dollar deposits and Euro bonds. Against this backdrop, according to the Finance Minister, Pakistan was seeking debt relief from various sources to create fiscal space and reduce poverty from the country.

In his unusual interview to PTV the President Gen. Pervez Musharraf, enthusiastically listed the economic benefits, beginning with the European Union decision to remove duty and increase quotas for Pakistani products, which, he went on to explain, will increase exports, leading to the setting up of new industries and creation of jobs. On the more crucial question of debt relief too he had good news to offer, promising that bilateral debts, owed mainly to the US and Japan, would be written off. He rightly advised the public, though, to be patient in seeing such an outcome. But the then president himself conceded only about $ 8 billion out of the country's total $ 38 billion outstanding international debt has been obtained on a bilateral basis from the US and Japan another $ 4 billion is owed to some European countries, South Korea and Canada on the same basis all the rest is to be paid back to multilateral institutions, whose charter precludes debt write-offs. However, it is also true that the developed nations such as the US and Japan, being the major contributors to these institutions, also have a say in determining their policies. And if they really want they can indeed bring about necessary change in the rules not just to lighten Pakistan's economic burden but also to act in accordance with a growing international recognition that the idea of global economy can be strengthened on if the donor organisations decide to address the issue of world wide poverty by taking the single most important step of freeing poor countries from their crushing debt liabilities.

There is almost a consensus amongst the economists that the cost would had been horrendous, had Gen. Musharraf not taken the right decision at the right time. This is an example of how a single decision can change the destiny of a nation. We have been presented with another opportunity to fully integrate into the world economy on very attractive terms. We can build a future for our children as full participants in the world community.

In the first phase, lasting the next six months, the economic imbalances that have bedeviled the economy will be removed. Several important developments are taking place. First, the international focus on the havala trade is going to greatly increase the official home remittances of the overseas Pakistanis through the banking channels. It is estimated that three to four billion dollars were being channeled through havala to finance the Afghan trade.

This colossal amount has to find a new home and investment havens. Majority of this amount will now be channeled to Pakistan through the banking system ad will be initially invested in real estate and other liquid investments like the stock market. The first impacts are already visible in the shape of rising value of slight improvement in the real estate markets of the country. If this amount becomes a permanent feature of Pakistan's external inflows, our persistent balance of payments shortfalls would effectively be over. For the first time the country would be in a position to provide external finances for its development program without external borrowing.

In the medium term timeframe, lasting from six months to three years we should expect a major boost in our exports. If we are able to negotiate, as is likely, a quota free and duty free access to the American, European and the Japanese market, we will definitely see an era of unmatched economic growth in the country led by exports.

The EU has been the first to grant an increase of 15 per cent in quota and duty abolition. But this was something that was under discussion prior to the September 11 events. While any concession is welcome, a substantial increase or abolition of the quota is needed. We should be aware that there is a quota mafia in the country which would suffer major losses if quotas were removed. We have to ensure that the quota mafia should not be able to influence our negotiations with the USA on this score.

If quota restrictions are removed and duties are eliminated it should not be difficult to double our exports in the next three years. This will add three to four per cent to our economic growth rate and push the overall rate beyond sex to seven per cent The added employment and wealth creation would have a secondary impact on domestic demand and the long drawn out economic stagnation will come to an end.

In the longer term timeframe of three to ten years, reconstruction of Afghanistan and opening up of oil and gas development in Central Asia will be an unparalleled opportunity for Pakistan. A huge infrastructure development effort encompassing Central Asia, Afghanistan and Pakistan involving billions of dollars would be undertaken with all its magnificent benefits for the people of Pakistan and Afghanistan. This effort will continue to fuel our economic growth well into the next decade. The opportunities are so immense and the stakes are so high that we have to ensure that nothing jeopardizes the emerging opportunities.