FOREIGN DEBTS: A BANE OR BOON?

TARIQ AHMED SAEEDI (feedback@pgeconomist.com)
Feb
1 - 7, 2010

Recent unblocked resort of the government to international financial institutions and lenders has resurrected the issue of foreign debts with people prominently castigating the rise in foreign debts and the government for-despite its initial determination that it would not relapse to International Monetary Fund (IMF)-it acquiesced to martinet structural lending programme of the multilateral lender, and, they argue, therefore patronized economic marginalization of the people.

Following quick approval of a huge loan by the IMF, government doubled its time for considering financial assistances from other foreign lenders. World Bank and Asian Development Bank were two of the next donors. Pakistan has been on the payroll of these two. However, IMF's green signal was waited desperately by other lenders.

Critics say the foreign debt of IMF-to which many economists world over look at askance for its corporate intention of sucking blood from the debtor economies to ensure repayment of its debts-agreed by this government rings a death knell for masses of the country since it has stirred a price spike far and wide. They also reject foreign debts as recipe of disaster for the economy of Pakistan with dilemma of managing debts repayments due to resource constraints. The external debts continue to increase further because of the lapse in payments or rescheduling and reprofiling of loans, and currently, they have pierced through $50bn without an iota of sign of coming down in near future. Rather, the foreign debts outlook is no better for the four or five years to come.

There are many opposing foreign debts especially because of its negative fallouts on the economy of Pakistan. Especially, the antagonists criticise the IMF's structural adjustment programme-the lender approved $7.6 billion for Pakistan and revised it upward to $11.3 billion-for its conditionalities that made government to take unpopular decisions, which unrolled spate of socio-economic hardships for the common people. The utilization of foreign debts is also questioned by the people who say funds are siphoned off from the channel and could not properly address the problems for which they are acquired. This is also one of the reasons that the country has not yet attained an absolute salvation from the pestilence of debts.

The arguments are easy to be defended with the evidences of perpetual rise in foreign debts and of unbroken links of Pakistan with foreign lenders.

Interestingly, there are few in Pakistan who bring entirely different views about the foreign debts or IMF, which is the single largest lender for the country at present. The proponents are of the view that increase in foreign lending to Pakistan is a proof of trust of lenders on the economy of the country. They favour foreign debts openly.

Holding a flipside standpoint about the foreign loans, a veteran business leader says: "Why foreign lenders are ready to lend money to Pakistan, if they would doubt the solvency of the country." It does not require a rocket science to comprehend that "lenders [any lender] must analyse the repayment abilities of borrowers prior to sanction loans", says president Karachi chamber of commerce and industry (KCCI), Abdul Majeed Haji, adding no one likes to throw his money in dustbin. "Even simple trading on credit is based on this basic principle. A cycle of credit breaks off as a supplier smells inability of a contactor in meeting obligations," he explains to this scribe.

Foreign lenders have trust on revival of economic stability, observes president KCCI representing 16,000 members of small, large industries, and trade associations across Karachi. The chamber ranks top ten of the world in the Fortune's list in terms of members, according to him. He concedes the long-term impact of foreign debts on economy. However, all developing and developed economies prefer foreign loans to support economic programmes. Even leading economies in the world seek finances from financial institutions, syndicates, and groups. Their total loans equal billions and trillions of dollars.

Critics say the cost of foreign loans has far-reaching impact on the social and economic priorities of the government as the cutback on public spending becomes the primary option during fiscal adjustment in case of liquidity shortfall. Not directly because of this, even though Pakistan is revisiting its allocation for public sector developments for the current fiscal year (2009-10), revising its downward to abridge budgetary deficits.

The war on terror and security procedures nationwide is making it difficult for the country to take advantage of external supports since direct spending on this is rising unabatedly. Although, foreign military and non-military assistances are meeting the expenditures, they cannot compensate the social and wide range economic expenses emitting solely because of the military actions. Cut in public spending will hamper the economic progress, suggests president KCCI.

IMF extended finances to shore up position of balance of payment of Pakistan. Two years back when the Washington-based lender agreed to finance deficits in the balance of payment, Pakistan had virtually lost its ability to foot the bill of imports of three months. The heavy financial dose refilled the foreign reserves and technically staved off the impending default for instance on $500 million Eurobond. The corrections as part and parcel of IMF's standby arrangement for economic stabilization alienate the people from industry. Tight monetary policy and depreciating value of Pak rupee to a dollar are loathed widely. The food prices are going beyond the buying power of common person, dragging the people towards the poverty trap. Since imports are more than the exports, exchange rate disparity increases the cost of imported products. Removal of subsidies from energy sector stirred a storm of price hikes as well.

It is not easy to term foreign debts as bane or boon since it is up to the borrower who makes it one of two.