PAKISTAN IN THE DEBT MESS
Sep 13 - 26, 2010
Presently, Pakistan is engulfed by countless challenges on both domestic and foreign fronts. Security situation in the country has already crippled its economy following the country having become ally in war on terror. Energy crisis exacerbated the situation. Over and above that, floods added fuel to the fire of devastations.
Pakistan is facing a very alarming problem of ever mounting foreign and domestic debts. At the end of June this year, foreign debts crossed the figure of $55.63 billion, according to a report issued by State Bank of Pakistan.
During 2010, $3.30billion was added to the external debts and liabilities. In 2008, Pakistan's total external debt and liabilities stood at $46.3 billion; which clearly indicates that external debts are soaring with rocket speed. On the other hand, as on June 2009, domestic debts were estimated at $46.97 billion and the total floating debt, which consists of short-term domestic borrowing instruments such as treasury bills, was estimated at $24 billion dollars.
Pakistan has obtained loans from various sources. As on May 2010, Paris Club has a share of 27 per cent in total debt stock, multinationals 43 per cent, short-term loans 4.3 per cent, private non-guaranteed 6.6 per cent, IMF 8.4 per cent, and foreign exchange liabilities 4.3 per cent.
Currently, the annual inflow of external debt and outflow of debt servicing is almost parallel. This year the country paid $3 billion in terms of debt servicing, while the new debt increase was $3.30 billion. So, one can easily ascertain that debt servicing is badly affecting development expenditures.
Pakistan's total debt-to-GDP ratio has crossed 61 per cent this fiscal year, breaching the 60 per cent limit set under the Fiscal Responsibility and Debt Limitation Act. It should serve to ring alarm bells in the relevant policymaking circles. Such a heavy amount of debt has so far proved white elephant for the economy. In reality, some of the loans already received by the country have to be repaid with interest in the near future. For instance, the amount received by Pakistan under the present standby arrangement from the IMF would become due very soon and this would be a huge drain on the foreign exchange reserves of the country. Heavy outflow of foreign reserves in form of debt servicing always put pressure on exchange rate. During this month, one dollar crossed Rs86. Moreover, in order to keep wheels of government running, it has to do deficit financing.
Now Pakistan is trapped in vicious circles of swelling debt and interest payments. Ex-President Nigeria during G-8 Summit in 2000 said about interest.
"All that we had borrowed up to 1985 or 1986 was around five billion dollar and we have paid about $16 billion yet we are still being told that we owe about $28 billion. That $28 billion came about because of injustice in the foreign creditor's interest rates. If you ask me what the worst thing in the world is, I will say it is compound interest."
Pakistani officials succeeded in securing initial loan of $3billion: $1billon from World Bank and remaining $2billion from Asian Development Bank to help flood relief efforts and begin the task of rehabilitation and reconstruction. Even during this week, high level Pakistani delegation will meet World Bank officials to demand for more loans. Government said that it has no other option left but to knock the doors of donor banks irrespective of its implications on the economy. IMF is likely to impose strict conditions in exchange for the loans. It is not a pleasant option for the country, which has tried for decades to be free of the IMF's influence. Pakistan has already increased multi times energy tariffs to meet with the IMF conditions.
The implications of new debt will be hurtful because food inflation, which is already in double digits and if Pakistan accepts new terms of IMF then it has to make several unpopular decisions to get funds. It will have direct impact on poor people, who are already looking for relief and especially in case of flood. More than 22 million people are homeless, who have no access to food, clothing, shelter, and medicines. Instead of looking other measures such as internally generating resources, the government is trying to get some temporally relief but question is who will bear the pain of repayment of loans? Of course, burden will be on poor people in form of indirect taxation. According to Sakib Sherani, chief economist for Pakistan at Royal Bank of Scotland Group "The option of defaulting on those loans has never even been seriously considered but even if they don't have the willingness to default, that doesn't mean it couldn't happen."
Instead of self-reliance policy, every government runs for getting foreign loans, because it is an easy way for them. Event now Americans suggested Pakistani government to impose taxes on rich segment of population to deal with hovering crisis. A large majority of political class, landlords, businessmen, and influential senior government officials rather pay no tax or very less. It can safely be said that if we could not sustain GDP target between 3 to 5 per cent in coming years, which seems very difficult due to present situation in country, then wrestling down the debt will be very tough, indeed perhaps impossible without drastic cuts in spending and higher tax rates on many fronts.
The economic and flood crisis should not be seen solely as a problem but also as an opportunity to reform financial and economic systems so that we can tackle problems.
Pakistan has blessed with all those necessary resources, which are enough to build the country a modern democratic state. But, my question is when we will utilise these natural resources for the betterment of people? In my personal view, the only way we can achieve our lost destination and purpose of creation of Pakistan which was set by father of nation to make Pakistan a modern Islamic welfare state is "good governance" and "sense of responsibility".
Pakistan is at the threshold of economic disaster if we fail to make right decisions. The challenges are great but opportunities are immense at the same time and it is a wakeup call. Government should reduce non-productive expenditures and lay emphasis on development of internally available resources first. Efficiency and productivity can easily be achieved with proper education and health facilities so that people can contribute with their full potential. With improvement of law and order situation, we can attract foreign investments, which can shore up foreign exchange reserves. Government should take tough economic decisions to generate resources within the country. Because, development have neither been bestowed upon nations neither in charity nor in aid without right and timely actions. Foreign loans should be avoided because next generations have to pay back with huge amount of interest, which will also help to safe national sovereignity and to live gracefully among other nations.
The writer is a position holder of University of the Punjab, Lahore and currently a student of University of Applied Sciences Coburg Germany.