Pakistan’s debt trap

1. Pakistan’s Debt Trap
PAKISTAN’S DEBT TRAP:
CAN WE EVER ESCAPE IT?
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2. Pakistan’s Debt Trap
Abstract
The problem of debt is one that is plaguing Pakistan. Its obligations totals to about 65
billion dollars which includes domestic and external debt. External debt is definitely a
bigger issue for its repayment and servicing has left the nation completely paralyzed. We
as a developing nation have scarce resources and allocating them primarily to debt
servicing neglecting other areas which are more important for our prosperity. The foreign
aid and loans have been completely misused by different parties of power leaving us in a
pathetic state. Not only does this debt affect the economy but it also affects the common
man for depreciating rupee also gives rise to unemployment and the common man is not
allocated resources which are his rights. Although the condition seems to be bleak there
are some steps in economy, law, financial system and trade that if are taken can definitely
help us get out of this mess. Pakistanis both in and out of the government must take
extreme and immediate measures if they are to escape the debt trap.
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3. Pakistan’s Debt Trap
OUTLINE
I. Money is the Ultimate force of economy, exchange and Power in the world today.
A. It is the backbone of all trade and exchange in the markets.
B. It has become an object of power in the world today.
II. Debt Situation of the World and Pakistan’s Position
A. Debt servicing and repayment is the greatest problem facing developing
countries today.
B. Pakistan’s current debt situation and historical background to how it got
there.
III. Definition of and kinds of external debt.
A. The Multilateral Loans.
B. The Bilateral Loans.
IV. Pakistan’s present obligations to the world.
A. How much has accumulated and to whom we owe it.
V. Pakistan’s Opportunity Cost of debt servicing.
A. Where our resources are being lost and why can’t we move forward.
B. How much is debt servicing ACTUALLY COSTING US?
C. Social Sectors that are affected.
VI. Pakistan’s Debt Trap: How can we escape it?
A. Steps and reforms that need to be taken.
B. Various reforms that need to be implemented.
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4. Pakistan’s Debt Trap
PAKISTAN’S DEBT TRAP: CAN WE EVER ESCAPE IT?
Since the dawn of time man has always been better of by trade and exchange. At first
these changes were limited to crops for animals or basically one item for another. As
exchange became more and more complex and more items of exchange were involved
one problem which arose was determining the value of each item. This was where the
concept of money was introduced and it was quite useful but as time passed on MONEY
became more and more powerful and today has become an indication of power, prestige
and control. Keeping the value of this rich resource in mind we have to say that it is a pity
that Pakistan has a negative balance of money and this is one major factor affecting its
development today.
In times of recessions, countries that were affected by it were given loans and grants
but today these loans have become the major cause for further deterioration of the
condition of these developing countries. Perhaps it cannot be better phrased than in the
words of Simon Briggs (1999), In1984 in the time of recession economists said feed the
world but today they say free the world.
Debt situation has surely become the most important problem for the countries of the
developing world after the problems of poverty and ensuring human resource
development in the beginning of the new millennium. It has been seen that the nations
that are the poorest in the world are also the most highly indebted. These developing
nations are referred to as countries of the South or poor in the poor-rich context. In these
heavily indebted poor countries the revenue resources and the earnings from exports are
being spent on debt servicing instead of badly needed expenditures on health, education,
uplift of women and population welfare. Neither is this money being spent on
investments, nor economic growth or scientific research and development (R & D). There
can not be any doubt in the minds of economists, sociologists, political scientists or the
general public that external debt has become a burden for the poor nations rather than the
much-advertised source of financial help to these countries.
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5. Pakistan’s Debt Trap
Pakistan is suffering from the same disease. “Pakistan, India & Bangladesh are
the largest borrowers from World Bank in 1997-1998 fiscal years. These countries in
South Asia contain over one-fifth of the population, consisting of 1.2 billion people.
However these South Asian countries spend less than five percent of its combined GNP
on its people, due to which growing population has become a liability rather than a
precious human resource. Human deprivation in South Asia is massive. It is the poorest
region of the world, where five hundred million people live in absolute poverty.”
(Dr.Qais Aslam, 1999)
In the time of need, i.e. when government spending exceeds government revenue,
there are basically two kinds of debts a country may take;
1. Internal or Domestic debt from markets of loanable funds from within the nation.
2. External debt from foreign agencies
In this paper we will basically be focusing on the external debt of Pakistan. External
debt by definition is the outstanding amount of the actual current liabilities that are owed
to non-residents by residents of an economy, and require payments of principal and/or
interest by the debtor at some given point in the future. External debts are usually in the
forms of loans. Loans can be placed into two categories as well;
1. Multi-lateral loans: Loans from multilateral organizations are loans and credits from
the World Bank, regional development banks, and other multilateral and
intergovernmental agencies. These kinds of loans demand more than just an interest in
their payback. They imply sanctions and basically control the nation to whom they have
given the loan.
2. Bilateral loans: Bilateral loans are loans from governments and their agencies
(including central banks), loans from autonomous bodies, and direct loans from official
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6. Pakistan’s Debt Trap
export credit agencies. These kinds of loans have to be repaid over a period of time and
with the basic principle an interest also has to be paid.
The total external obligations of Pakistan today are about 35 billion dollars which
has accumulated over the past 52 years. The real problem lies in the large external debt
the country has accumulated over the last 20 years. Whereas the current value of India's
external debt is 20 per cent of GNP, for Pakistan it is 41 percent
(http://www.hvk.org/articles/0701/135.html). In other words, Pakistan is almost twice as
indebted as India to external creditors.
What is the cause of such a situation where the more we try to free ourselves, the
more entangled we get? Although Pakistan has taken so many grants yet the economy is
weak and no development has been done. It is as though the money never entered the
reserves of the country. The basic cause for this is the political condition and stability of
the nation. A couple of years ago general elections were a common festival in Pakistan
and with greeting a new season we would also greet a new senate in the assembly. This
condition drove away foreign investors and our net foreign investments rose which in
turn lead our currency to depreciate. This encouraged imports and further worsened the
conditions of balance of payments of Pakistan.
Corruption is another parasite draining the life out of our society. The misuse of
foreign loans is basically due to corrupt politicians who totally exploit the resources of
Pakistan for their personal use. Every time a new government comes it does not look at it
as an opportunity to serve the nation but look at it as an opportunity to serve themselves
the nation.
This increasing debt burden and the cost of servicing this debt is perhaps the
single most important economic issue in the country today. Economic policies of the
governments have failed completely to fill the gap in the trade balance, balance of
payments, budget deficit, or resource gap over the many decades. Poverty has grown in
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7. Pakistan’s Debt Trap
the country during the last ten years. Pakistan is among the most illiterate countries of the
world; school going children are out of school and working on road side workshops or
restaurants; women participation in economic growth and decision making is very low.
Child mortality rate as well as women mortality in childbirth is one of the highest in the
world. General health conditions of the population are very poor, so is the income
generating capacity of a large number of the population. Under this back drop, high
population growth rate, low economic growth rate and ever-increasing national debt are a
recipe of disaster for the country’s future which seems unsustainable under the
circumstances.
Pakistan is in a situation of a classical debt trap, where new loans are being taken
in order to service old loans. A simple Debt Burden Index (DBI) tells the story. By
dividing external debt as a percentage of GDP, and the debt growth rate by the GDP
growth rate, we can clearly assess how heavy the debt burden has become for the nation
and its people.
According to Dr. Ishrat Hussain (2002),”Economic Survey of Pakistan”(pg.123)
Pakistan was a nation that was spending only 2.2 percent of its budget on Education at
the start of the year 2000, 0.5 per cent on its health while 48.7 per cent was being used for
debt servicing. Where 80 per cent of its villages are without clean drinking water,
sewerage, hygiene facilities, and 60 per cent are without electricity. Where one child
under the age of 5 dies every 40 seconds and one child is born every 10 seconds. Where
one mother dies in child birth every 90 seconds because of lack of health facilities, and
where the per capita income is US$450 per annum which is less than US$ 500 World
Bank poverty line. One of the major sources of government expenditure is debt servicing
followed by the defense expenditure, and the expenditure on civil administration.
Development expenditure on economic sectors, social sectors, health and education are at
a very low priority.
The debt trap is an inherent problem that is restricting development of not only
Pakistan but also other low-income countries. GEOFFERY (1999) “Resolving the Debt
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8. Pakistan’s Debt Trap
Crisis of Low-Income Countries” gives solutions which need to be adopted by all low
income countries in order to get out of the debt trap.
GEOFFRY proposes a five tiered program. The first part of which deals with the
restructuring of debts that will provide the macroeconomic framework which can help a
country achieve the Millennium Development Goals as set up by the MONETARY
REGULATION BODIES. Before the repayment to creditors is commenced, debtors need
to start off from a fresh base and work for the preservation of their public functions; this
will broaden development objectives. Hence the foundations of a macroeconomic
framework will be laid.
Furthermore human resource development in every highly indebted poor country (HIPC)
should be encouraged. Plans for scaling up investment in health, education and basic
infrastructure should be enforced which should be fulfilled by 2015. These plans should
be designed as part of the poverty reduction strategy and their implementation would
indirectly lead to meeting the MDG’s.
Low income countries should seek help in costing exercises by the U.N agencies
such as the UNDP, WHO, and UNICEF and also the Bretton Woods institutions.
Estimates of these countries’ financing needs should be conducted independently by
these agencies and henceforth incorporated into the country strategy documents.
Representatives should be appointed by both creditor and debtor countries who
will act neutrally to make an independent review panel. This panel will review evidence
from both the countries and the international agencies to make recommendations on the
extent of debt cancellation and foreign assistance that should be granted to each country.
This cancellation and incremented foreign assistance will increase net resource flow and
will support the development objectives. The review panel could be convened under IMF
auspices, but the recommendations should not be subject to a vote by the IMF’s creditor-
dominated executive board.
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9. Pakistan’s Debt Trap
The United Nations and the Bretton Woods institutions should publish yearly
updates on the progress of each country toward each of the MDGs. These assessments
would help not only in monitoring the low-income countries, but in monitoring the
creditor-donor countries as well.
This broad based proposal aims to overcome the multiple problems of the utterly
impoverished countries which face challenges – education, hunger, water and sanitation,
and basic health – which cannot be met without vastly larger flows of resources from the
creditor countries.
Considering the debt trap of Pakistan, besides implementation of this
general proposal, specific measures that need to be introduced as proposed by Ishrat
Hussein are dealt with in the latter part of this section.
The major political parties in Pakistan should sit together and work on a national
consensus which promotes an irreversible economic growth program for the next 10
years. This will minimize the uncertainty in the economic policies of Pakistan and
furthermore it will introduce some semblance of stability, credibility and continuity. The
threat of abrupt reversal of gears during political changes is an anathema for long term
investment in the real sectors of the economy. Unless politicians realize the adversity
political instability poses to the economy and take active measures for the latter’s
development, marginalization will surely occur.
The lawlessness and lack of security for property and human lives need to be
addressed effectively. Short political terms should not be used as a scapegoat for
uncontrollable illegal situations. Any sort of economic revival at any level cannot take
place unless the cities and villages are safe from crime and violence. A pressing need in
this regard, is to ensure the sanctity of law and legal institutions and to assure that
sanctions of caste, creed, language, ethnic grouping, income class or political affiliation
do not impede the judicial system. The immense gap between rhetoric and action and the
obvious contradictions in the implementation and pronouncement of policies are
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10. Pakistan’s Debt Trap
increasing distrust in the government and reducing its credibility. This needs to be
worked upon and improved.
Fiscal deficits need to be restricted. This can be done by increasing the revenue
from tax, implementing structural readjustment programs that can broaden the tax base,
improving the efficiency of tax collection and reducing government consumption
expenditure. Budget allocation should adequately allow for both poverty reduction
activities and expenditure on infrastructure.
More efficient and integrated management schemes for water supplies need to be
developed. Since Pakistan is an agriculture based economy, it is imperative that domestic
and foreign entrepreneurs work for development in this sector. Progress will ensure
higher productivity growth and lead to the production of high value crops.
Pro free trade policies with minimalist trade barriers need to be encouraged which
will increase domestic competition. Diversification in manufactured exports and high
value added industries need to be encouraged which will broaden the existing narrow
export base in the country.
Reforms need to be introduced in the banking system to increase efficiency in the
economy. The regulatory framework and prudential supervision of non banking financial
institutions needs to be improved. Intensification of efforts to deepen and broaden the
financial markets must take place. Opening up of the banking sector to private ownership
needs to be done which will assist small savers with finance companies and cooperatives
to get the most out of their savings. This will also ensure supervision and regulation on
the State Bank as banks will be controlled by the private sector.
So thus it may be difficult but there is a way out. As difficult as it may seem at the
moment there is always a way out and if the right measures are taken with the right will
at heart we will escape this trap. It is only MISSION DIFFICULT not MISSION
IMPOSSIBLE.
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11. Pakistan’s Debt Trap
References
Anjum Nasim (1998). Financing Pakistan’s Development in the 1990s
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12. Pakistan’s Debt Trap
Dr. Ishrat Hussain (2002).Economic Survey of Pakistan, pg.121
GEOFFERY (1999) .Resolving the Debt Crisis of Low-Income Countries
Simon Briggs (1998, January). Scope in times. JublieePlus, pg. 21-27
WEB REFERENCE
(Dr.Qais Aslam, 1999, June 24.www.jubileeplus.org/analyisis/articles)
GOVT. PAPERS
Pakistan Economic Survey, Government of Pakistan, Islamabad
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