FOREIGN DEBT & DEBT SERVICING MAJOR PROBLEMS OF THE AILING PAK ECONOMY
FISCAL IN DISCIPLINE IS TERMED A ROOT CAUSE OF RISING DEBT BURDEN.
Feb 20 - 26, 2012
Fiscal in discipline is the root cause of rising debt burden leading to macroeconomic imbalances. Huge fiscal deficit worsens current account deficit by strengthening aggregate demand, which in turn is translated into higher imports.
Fiscal discipline is therefore vital for preventing debt crisis and maintaining macroeconomic stability - a critical element for promoting growth and poverty reduction.
High and rising external debt burden constitutes a serious constraint for development; a major impediment to macroeconomic stability and hence, to growth and poverty reduction; a discouragement to foreign investment because it creates a high risk environment and exchange rate depreciation; and a discouragement for government to carry out structural reforms in the various sectors of the economy.
Evidence suggests that external debt slows growth only if it crosses the threshold level of 50 percent of GDP or in net present value terms, 20-25 percent of GDP.
Pakistan has experienced serious debt problems in the recent past and accordingly witnessed deterioration in the macroeconomic environment,
leading to deceleration in investment rate and economic growth and the associated rise in the incidence of poverty.
Developing countries, like Pakistan, would need to borrow to finance their development. However, they need to enhance their debt carrying capacity as well. In other words, the borrower must continue to service its external debt obligations in an orderly and stable macroeconomic framework. Furthermore, the borrowed resources must be utilized effectively and productively so that it generates economic activity. Prudent debt management is therefore essential for preventing debt crisis.
Pakistan is facing serious financial crisis due to fiscal deficit. On one hand, Pak rupee depreciated heavily against dollar while on the other the already frail economy has been further burdened by an additional international debt of over $12 billion.
According to economic experts, the weak economy of the country is facing increasing burden of foreign debt, which has soared to $58 billion from $46 billion. Now the average debt per Pakistani stands at Rs29,000 which was only Rs6,000 before the present government took over after 2008 general elections.
Low level of revenue collection, losses in state owned enterprises and poor economic activity are cited by experts as the main reasons behind the increasing foreign debt. Now foreign debt is the major problem for Pakistan's economy. The country's economy is in bad shape with growth rate lowest in the region. Although there are many problems, foreign debt and debt servicing is a major problem of the ailing economy. It becomes impossible for the country to service its foreign debts or pay interest on foreign debts without taking more debts. Increasing level of external debts is not good for the country.
Currently, Pakistan is paying about $3 billion on debt servicing annually. As present foreign debt level is increasing, debt servicing will be up by the same ratio. Unfortunately, the policymakers of our country used to formulate short-term planning instead of focusing on next 20-years. It is high time that we start thinking beyond our nose.
If the increase in foreign debt and liabilities remain the same i.e. $1.3 billion in every three months then after a year an amount of $5.2 billion would be added. A huge increase in foreign debt would put the country in a tight spot in the near future. Neither the government's lavish expenditures nor other expenses are being cut down.
IMF's estimate suggests that the external debt will increase by another $2 billion in 2011-12 and cross $72.6 billion in 2015-16. In the medium term, such increases lead to a higher debt-servicing cost and restrict the government's ability to improve the condition of the people.
Experts believe that Pakistan can create a safe exit out of the menacing debt trap by increasing her indigenous resources, for which there exists huge reservoirs in the shape of its human capital, unexploited mineral deposits, hydropower potential, and huge agricultural and industrial potentials.
The huge debt trap in which Pakistan finds itself entangled today has in fact, turned out to be a death trap stripping the country of its sovereign right to take important decisions independently for its political and economic survival and progress. None else but our own shortsighted leaders of the past are to be blamed for this traumatic national misfortune.
At present, Pakistan owes $59.5 billion to various institutions and there is little possibility of the government being able to discharge its debt servicing obligations without getting more loans.
During the first year of PPPs government, Pakistan was facing the possibility of defaulting on current account payments; the country had no option but to seek credit from IMF
During the last two years, EDL has increased in absolute terms, but decreased in relation to GDP. This shift in momentum has highlighted the crucial role played by current account deficit and exchange rate stability on a country's debt burden, according to recent Pakistan Economic Survey.
External Debt & Liabilities (EDL) increased from $37.9 billion at end-June 2000, to $55.9 billion by the end of June 2010, and stood at $59.5 at end-March 2011. During the same period, EDL as a percentage of GDP decreased by 23.5 percentage points of GDP, falling from 51.7 per cent on end-June 2000 to 28.2 per cent by end-March 2011.
Economists say accumulating foreign debt has put negative impacts on country's fiscal stability. Poor debt management poses risks for both the public and private sectors in the form of economic instability, insolvency, debt distress, and fiscal crisis.