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UNSUSTAINABLE EXTERNAL DEBT: WHAT NEEDS TO BE DONE?

Pakistan has reached this point of carrying unsustainable and unmanageable external debt due to massive corruption levels, inefficient allocation of debt money, poor implementation of foreign-aided projects and financing of the current account. Consequently, the economy as a whole has become all the more dependent on large scale foreign long, and short-term borrowings.

In 2010, Pakistan was declared the third largest external debt recipient country in the region, after Sri Lanka and Nepal. Pakistan’s external debt stood at 33% of GDP as compared to India’s 15% and China’s 7%. The external debt and liabilities of Pakistan comprise of foreign exchange liabilities of the State Bank and all foreign currency debt contracted by the public and private sector.  About 76% of the external debt and liabilities is composed of public and publicaly guaranteed debt as Pakistan has been financing its current account deficit through loans from multilateral and bilateral lenders. Debt liabilities of the private sector are a minuscule 6% and borrowings from the International Monetary Fund intended to assist in balance of payment are 13% of the entire external debt and liabilities stock.  On June 30, 2012, the total external debt of Pakistan as shown by the State Bank was US $ 65.5 billion.

Domestic and external debts are treated separately. Domestic debt has to be considered as a charge on the budget and has to be serviced through government revenues or additional debt. External debt, on the other hand, in addition to revenues, is also a charge on the balance of payment and is serviced from foreign exchange earnings, reserve drawdown and additional borrowings. Inadequate debt management and a permanent growth of debt to GDP ratio may result in some negative consequences and changes in macroeconomic indicators, like crowding out of investment, financial system instability, inflationary pressures, exchange rate fluctuations, etc.

Debt servicing and external debt have been regarded as one of the major problems of Pakistan’s struggling economy. Governments of developing countries like Pakistan need to borrow in order to facilitate the development process and enhance their overall economic growth. The borrowed funds, if not allocated properly, create a host of problems for an economy as in case of Pakistan. Proper debt management has been regarded as useful for growth of a country however, dependence on debt has to be monitored closely. Due diligence has to be exercised for devising a strategy for making the optimum use of the debt money as well as enhancing the repayment capability of the country. Unsustainable levels of debt, over the years, have created serious problems for Pakistan as the country has to service this huge debt which consequently has shrunk the developmental expenditures. Pakistan has been trapped into a vicious circle where it has become impossible for her to service the foreign debt without taking additional debt.

The external debt component of Pakistan has grown over the past few years largely due to increased foreign public debt inflows on one hand and depreciation of US dollar against other major currencies on the other. During 2010-11, total external debt servicing was US $ 4.799 billion. A payment of US $ 2.348 billion out of this total was paid on account of maturing external debt and liabilities stock while interest payments were US $ 963 million. An amount of US $ 1.488 billion was rolled over.

 Inadequate debt management and a permanent growth of debt to GDP ratio may result in some negative consequences and changes in macroeconomic indicators, like crowding out of investment, financial system instability, inflationary pressures, exchange rate fluctuations, etc.
 Since 2007, domestic problems as well as international recession and credit crises have impacted Pakistan’s debt dynamics in an unprecedented way. Higher interest payments, large subsidies, especially food and energy, growing security spending needs, extremely low tax to GDP ratio and rising international commodity prices have resulted in large twin account (fiscal and current account) deficits. Lower FDI and other non-debt creating flows due to energy shortages and security concerns have contributed towards negative balance of payment and depletion of foreign exchange reserves.Policymakers in Pakistan have to seriously consider reforms to strengthen the quality of public debt management and reduce Pakistan’s vulnerability to international financial shocks. Vulnerability is often greater for countries like Pakistan because their economies are usually less diversified, have a smaller base of domestic financial savings and less developed financial systems. Each country’s capacity building needs in sovereign debt management are different. The needs are shaped by the capital market constraints being faced by the country, the exchange rate regime being followed, the quality of macroeconomic and regulatory policies, the institutional capacity to design and implement reforms, the country’s credit standing and its objectives for public debt management.

Debt managers, fiscal policy advisors and central bankers should share an understanding of the objectives of debt management, fiscal and monetary policies given the interdependencies between their policy instruments. Debt managers have to convey to fiscal authorities their views on the costs and risks associated with government financing levels and debt requirements. Debt management, fiscal and monetary authorities should share information on the government’s current and future liquidity needs.Pakistan has reached this point of carrying unsustainable and unmanageable external debt due to massive corruption levels, inefficient allocation of debt money, poor implementation of foreign-aided projects and financing of the current account. The country’s sovereignty and independent decision making have also been adversely affected due to influence of the lending countries and the multi-lateral lending institutions. Continued fiscal deficits have negatively affected various sectors of Pakistan’s economy. Inflationary pressures over the years have mounted and crossed tolerable limits creating huge problems for the common man.

Consequently, the economy as a whole has become all the more dependent on large scale foreign long- and short- term borrowings. Prudent fiscal management and reducing corruption have to be set as the top policy priorities within the policy agenda. For quite some time we have been hearing about the population dividend in Pakistan. Benefits from this huge population can only accrue if the government is sincere in properly investing into developing human capital by proper and efficient investments into the developmental projects. The question, however, remains who will do this when those at the helm of affairs are considered to be more motivated towards their self interest rather than national interest.

By: Athar Mansoor

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