Death by debt: The News

By Dr Ashfaque H Khan
This is my fourth article on this subject in the last seven months. What prompted me to write yet another article on the same subject in a short span are the numbers pertaining to external debt and liabilities (EDL) and public debt released by different government agencies for the first half (July – December) of the current fiscal year. These numbers are worrisome and need to be brought to the notice of the general public.

It is well-known that high and rising debt burden constitutes a serious threat to growth and development. It is a major impediment to macroeconomic stability and thus to growth, employment generation and poverty alleviation. It is also a discouragement to foreign investment because it creates uncertainty about the government's policy and thus generates a high risk environment for doing business in the country. High and rising debt burden also puts pressure on exchange rate, thus causing sharp depreciation with attendant difficulties for price stability. This also becomes a source of discouragement for government to undertake wide-ranging structural reforms in the various sectors of the economy.

Pakistan has witnessed serious debt crisis in the 1990s and accordingly experienced deterioration in the macroeconomic environment, leading to deceleration in investment and growth and the associated rise in unemployment and poverty. The last two years have taken Pakistan back to the decade of the 1990s. Faltering of growth, persistence of large fiscal and current account deficits and sharp depreciation of exchange rate have already produced unsustainable debt burden. Accordingly, Pakistan has become heavily dependent on external financial support from the IMF, World Bank, Asian Development Bank, Islamic Development Bank and bilateral sources. Its excessive reliance on external financial support has compelled Pakistan to compromise on its national security.

It took six/seven years of hard work to bring the economy out of the difficulties of the 1990s. Pakistan's public debt was brought down from over 100 per cent of GDP in 1998-99 to 55 per cent by end-June 2007, the external debt reduced from 66 per cent of GDP to 28.2 per cent, debt servicing which used to be over 72 per cent of our total revenue declined to 35 per cent and debt servicing and defence spending which was over 100 per cent of total revenue was brought down to 54 per cent during the same period.

In short, the country's debt burden was reduced to one-half in just six/seven years. The reduction in debt burden released resources to be spent on people and infrastructure. Consistent with empirical evidence, the decline in debt burden led to the acceleration in economic growth, job creation and poverty reduction. Pakistan emerged as one of the four fastest growing economies in the Asian region; it created 13 million jobs and reduced the poverty by one-half during the period.

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