KEEPING DEBT SERVICING AT SUSTAINABLE LEVEL

BORROWING IS NOT HARMFUL AS LONG AS EACH DOLLAR IS SPENT PRUDENTLY

SHABBIR H. KAZMI 
(feedback@pgeconomist.com)
Sep 6 - 12, 20
10

During the recent discussions the International Monetary Fund (IMF) agreed to give Pakistan another US$450 million in aid to overcome emergency flood requirements and renewed militant attacks. Dominique Strauss-Kahn, Managing Director of the fund said funds would be disbursed in coming weeks. The recent discussions with the Pakistani delegation led by Dr Abdul Hafeez Shaikh, Finance Minister were held to reorganize US$11 billion IMF loan to ensure sustainability.

Kahn appreciating Pakistan's commitment to loan covenants including tax and energy sector reforms at joint press briefing said, "The floods in Pakistan are first and foremost a human tragedy still affecting millions of people. But this natural disaster will also have an important effect on the country's economy as it has caused serious damage to infrastructure, severely impacted economic outlook and resulted in a worsening of the fiscal situation. In response to this, I will ask the IMF Board to approve $450 million of emergency assistance to be made available this month." He said the dialogue with Pakistan on the current standby arrangement was progressing and the authorities had expressed their intentions to implement measures for the completion of the fifth review of the program later this year allowing the Fund to disburse an additional $1.7 billion, bringing total IMF disbursements, including proposed emergency assistance to $2.2 billion in the second half of 2010.

Kahn said, "The emergency financing would be provided under the Fund's policy for Emergency Natural Disaster Assistance (ENDA). The ENDA amount will be allocated to Pakistan's budget to support the authorities' emergency response. The ENDA funding, which is subject to approval by the IMF Executive Board, will be disbursed this month.

Analysts said the IMF decision was a vote of confidence. Millions of flood victims are still homeless and potentially fatal diseases threaten to bring a new wave of death. There was also good news from the World Bank, which has also increased funding by 100 million to help Pakistan cope with the floods, to a total of $1 billion. It is also encouraging that the international community has responded generously but the most difficult task would be judicious use of the aids.

Over the last few years government's domestic borrowing has taken a quantum jump, mainly because of military operation going on in the northern areas of the country. The recent floods have also forced the government to borrow more to undertake rescue and relief works. The mammoth task yet to start is rehabilitation of the flood affectees. It would be more than appropriate that after the receipt of aid, bulk of borrowed money should be repaid immediately. Some of the analysts believe that Pakistan's foreign exchange reserves may exceed $20 billion dollars after the receipt of the pledged amounts. Part of this should also be used to repay expensive short-term borrowing.

According to an expert, Pakistan's debt servicing in FY10 comprised of Rs578 billion against local debts and Rs63 billion for overseas borrowing. Domestic debt has swelled really out of proportion. Shaukat Aziz's government had reduced the burden of foreign debt servicing to a very low and affordable level. However, over the last couple of years the present government with limited option approached the IMF. Since the International Monetary Fund was dishing out money to other countries, giving a fraction to Pakistan didn't pose any problem, especially when its case was being pleaded by the US government. Since Pakistan is busy in weeding out foreign militants, the US government was of the opinion that any economic crisis in Pakistan would only help the militants.

The present regime has failed in containing budget deficit not because of lower revenue collection but extravaganzas. While on foreign visits, even to attend donors' conference, the elected representatives and bureaucrats stay in most expensive hotels. Funds allocated to MNAs and MPAs running into billions of Rupees are hardly used for any developmental work. Ideally, Pakistan should have opted for austerity drive because of living on borrowed money. However, it seems all and sundry are on 'honeymoon' and even don't have time to participate to discuss the most pressing issues, be it worsening law and situation or devastating floods.

No one is against borrowing because most of the developing nations use the borrowed money to accelerate GDP growth rate. However, the situation becomes alarming when Pakistan borrows for settling an outstanding liability. The country is trapped in vicious borrowing circle. More than generous support by the IMF has provided breathing space that should be used for restructuring for overcoming the weaknesses and harnessing the strengths.

Nawaz Sharif when was prime minister initiated 'Qarz uttaro mulk sanwaro' scheme but no one knows how much money was raised and where it was used. Domestic and external debts can only be got rid of if the economic managers make three commitments 1) no more money will be borrowed and the nation has to learn o live within means; 2) all sorts of debts have to be repaid under a phased program; 3) non-development expenditure have to be contained to cap budget deficit; and 4) imports have to be contained and exports to be boosted. On top of all, a homegrown plan for revival of the economy has to be prepared. All must remember that Pakistan does not suffer from lack of resources but gross mismanagement. Put the house in order and see the difference.