Alarming increase in Pak external debt: Pakistan Observer

Shakeel Ahmad

Pakistan would have defaulted on its external debt obligations a few months back had it not been rescued by the IMF. Chronic fiscal and external deficits have resulted in the accumulation of large domestic and external debt. The total external debt of Pakistan stood at $49.163 billion on December 31, 2008 according to data released by the State Bank of Pakistan. The IMF assistance received recently is not included in the above figure. Pakistan’s official external debt has not gone down since 1999 although it has received record aid, investments, and remittances flows. It has gone up to $49 billion from $33.6 billion in 1999 despite receiving at least $10 billion in economic, military and development aid from the United States, over $6 billion in privatisation proceeds, and a relief of $1.6 billion in loan write-offs by foreign governments during the last seven years. The rescheduling of Paris Club debts provided an additional relief of $ 1.2 to $1.5 billion annually in terms of debt service payments. It appears that government’s debt management policy has fallen victim to political expediency and a false sense of achievement. A historic opportunity to restructure the high debt levels of the country has been lost.

Even after having received such generous assistance, Pakistan’s external debt to GDP ratio is 28 per cent - slightly worse than Africa’s 26.2 per cent, which also happens to be the average for all the developing countries. It is argued that the former Prime Minister Nawaz Sharif left a heavy external debt burden at 53 per cent of the GDP and the current levels represent a substantial improvement. The net debt flows (disbursements minus repayments) into Pakistan during 1990-1999 aggregated $5.4 billion compared to $1.1 billion during 2000-2006. However, post-9/11, Pakistan received generous foreign aid as well as much higher levels of foreign direct investment. Remittances averaged around $4 billion a year during 2003-2006 compared to an average of $1.5 billion in the 1990s. Pakistan has not been able to reduce the external debt burden in absolute terms or build up its foreign exchange reserves. In fact, it has become the fourth largest borrower of the World Bank and the fifth-largest recipient of American aid to foreign nations. This shows its continued reliance on foreign governments and multilateral institutions - despite declarations of economic sovereignty - and a failure to mobilise domestic resources to pay for the development expenditure. Leaving aside all the technicalities and vague statements, there has been no convincing explanation for not having used the privatisation proceeds to reduce the external debt in a completely transparent manner. Private banker Shaukat Tareen, currently the chief economic manager of Pakistan has declared that he would seek more IMF assistance in the forthcoming meeting of its Board. He expects approval of assistance exceeding $7 billion.

The terms and conditions of this borrowing have not been stated. It is also not clear if the Cabinet has approved the proposal. It is Mr. Tareen’s view that to sustain economic growth and meet other essential needs, it is necessary to borrow. This is theoretically correct. However, if the borrowing record is littered with corruption and wasteful spending, and major sectors of the economy (large agriculturists, stock brokers and property barons) do not pay any tax at all, Mr. Tareen’s argument becomes debatable. Faced with criticism he has indicated that property barons are likely to be taxed in the future. The International Monetary Fund (IMF) has projected the external debt stock of Pakistan to rise, temporarily, to around 32.5 percent of gross domestic product (GDP) during 2008-2011 due to significant increase in external financing from official creditors, including the Fund itself, to help Pakistan with recent balance of payments pressure. The IMF has cautioned that combined shocks to growth, current account deficits and decline in remittances could vault the end period debt stock to around 45 percent of GDP which would have far reaching implications for the national economy.

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