RELYING ON NATIONAL RESOURCES

KANWAL SALEEM
(feedback@pgeconomist.com)
Sep 13 - 26, 20
10

In Pakistan, debt is also used for meeting non-developmental expenditures putting heavy burden on the economy apart from causing unsustainable debt burden.

External borrowing is primarily sought to accelerate economic growth, especially when domestic financial resources are inadequate and need to be supplemented with funds from abroad. Theoretically, reasonable levels of borrowing promote economic growth through factor accumulation and productivity growth. If borrowing countries channel the borrowed funds into productive investments, they can achieve macroeconomic stability and accelerate their economic growth to easily settle debt obligations. But, foreign debt does not remain so easy to be retired after it gets accumulated beyond a certain limit. Too much debt can begin to dampen growth when greater percentages of reserves are consumed in meeting debt service, causing creditworthiness to erode.

Because of an injudicious utilisation of foreign loans, Pakistan's capacity to pay back its debts has weakened considerably. The present government seems to continue raising debt to pay debt and the relief impact of the expected foreign loans remains difficult to see. Undoubtedly, the country's economic situation is confronted with manifold challenges such as poor financial management, energy crisis, security situation, natural calamities such as floods, poor tax-to-GDP ratio, and tax evasion. What is needed at this critical juncture is to focus on improving governance and ensuring financial discipline. The government needs to prepare a roadmap for economic revival to pave the way for steering the country out of prevailing crises. An increase in debt takes place generally because of large fiscal and current accounts deficits, depreciation in exchange rate and uncontrolled borrowing. The foreign debt can be used for economic revival but for this strict fiscal discipline is a prerequisite that is however, not visible in our case.

According a report released by the International Monetary Fund (IMF), Pakistan's total external debt is likely to grow alarmingly by more than 43 per cent over the next five years, to about $73 billion in 2015-16 from about $50.76 billion early this year.

The debt will increase by about 13 per cent, or $6.4 billion, to $57.1 billion by the end of the current fiscal year (2010-11) and is estimated to increase by $7 billion, or 12.3 per cent, to $64 billion by the end of the next fiscal year (2011-12).

The public and publicly guaranteed debts, including IMF loans, are estimated to increase by 45 per cent from $47.26 billion on June 30, 2009, to more than $68.1 billion in 2015-16. The amount will increase to $53.3 billion during the current fiscal year and $59.9 billion by end of next year. The total medium- and long-term debt, which stood at about $41.5 billion at the end of June last year, will increase to $48.2 billion next year and reach $67.6 billion in 2015-16 -- an increase of about 40 per cent.

According to estimates, the Asian Development Bank will have the single largest share in the external debt, which will increase from $9 billion in July last year (2009-10) to about $15.8 billion in 2015, by more than 75 per cent in five years. The World Bank debt will increase by about 29 per cent from $12 billion to $15.5 billion by 2015. Bilateral debt is likely to increase by 96 per cent from the current $16 billion to $31.28 billion in 2015-16.

Despite this situation, the IMF believes that the country's external loan is sustainable; the debt stock will remain moderate when compared with the size of the economy and external debt servicing will remain manageable. However, economists in Pakistan have different opinion and even started saying that with rise in foreign debt and in the absence of financial management, the external debt is becoming unsustainable. They said, in 1999-2000, a major proportion of the national revenue was being consumed by debt servicing alone. This ratio was almost halved by 2006-07, which created some fiscal space for improving the feeble physical and human infrastructure across the country, and trying to reduce poverty. In the last two years, the debt-servicing ratio has again risen sharply, leaving little room for public spending and increasing poverty level in the country.

It may also be considered that a range of factors have contributed to the recent surge in debt. These include the persistence of large fiscal and current account deficits, sharp depreciation in the exchange rate and unrestrained borrowing. These factors have combined to lead to a surge in external borrowings, and led overall debt-servicing ratio to again reach unhealthy proportions.

Moreover, despite its assurances, the IMF itself is also concerned about the growing risks to its own fund since Pakistan has again become its fourth-largest borrower. A debt sustainability analysis conducted by the IMF and the government shows that Pakistan's external debt portfolio is highly vulnerable to shocks that might lead to a deterioration of the balance-of-payments position. This could include another spike in international commodity prices, a decline in exports and a slowdown in foreign exchange inflows into Pakistan. There is a real risk that such shocks are imminent given the lukewarm external demand and the rapid slowdown of financial inflows into emerging economies.

According to Pakistan Muslim League (Nawaz) central spokesperson, Ahsan Iqbal, flawed policies and mindset of rulers have pushed the country to the brink of an economic precipice to an extent that the federal government has not been able to disburse salaries to its employees for two months.

"The situation is alarming and owes largely to the government's reliance on costly foreign loans rather than depending on the national resources," he said, adding if a pragmatic approach is not espoused more disastrous economic consequences would ensue to the detriment of the people.

Ahsan Iqbal said the PML-N had long time ago advised the government to exploit to the maximum the national resources to overcome economic difficulties; but ironically rulers rather decided to go for expensive foreign loan even to tackle problems arising out of the flood situation. They even spent huge money for foreign visits to secure loans further burdening the exchequer and the people, he said.

The PML-N spokesperson said there is still time that the federal government pursues pragmatic policies and changed mindset by relying more on national resources and shows a policy prudence to avert an economic disaster at a time when each and every penny is needed to help flood affected people and rehabilitate devastated regions.