|
Time for right strategy to reduce external debt
February 11, 2011
Currently, Pakistan is paying about $3 billion on debt servicing annually. As Pakistan’s present foreign debt of $54 billion is increasing, debt servicing will be up by the same ratio. Unfortunately, the policy-makers of our country used to formulate short-term planning instead of focusing on next 20-years. It is high time that we started thinking beyond our nose. Pakistan is facing the worst disaster of its history. About 20 million of its population is badly affected by the recent huge devastation caused by floods. Under the prevailing critical circumstances, we have to think about coping with this severe debt domination. Pakistan's resources must now be directed at recovery from this disaster, and a debt burden cannot be allowed to impede recovery.
|
Foreign debt is the major problem of Pakistan's economy. The country’s economy is in bad shape with growth rate lowest in the region. Although there are many problems of Pakistan's economy, foreign debt and debt servicing is a major problem of the ailing economy. It becomes impossible for Pakistan to service its foreign debts or pay interest on foreign debts without taking more debts.
Increasing level of external debts is not good for any country and its future generation and their welfare unless these costly inflows are surpassed by visible benefits. Pakistan is already making huge repayments in shape of principal amount and interests.
Currently, Pakistan is paying about $3 billion on debt servicing annually. As Pakistan’s present foreign debt of $54 billion is increasing, debt servicing will be up by the same ratio. Unfortunately, the policy-makers of our country used to formulate short-term planning instead of focusing on next 20-years. It is high time that we started thinking beyond our nose.
Pakistan is facing the worst disaster of its history. About 20 million of its population is badly affected by the recent huge devastation caused by floods. Under the prevailing critical circumstances, we have to think about coping with this severe debt domination. Pakistan's resources must now be directed at recovery from this disaster, and a debt burden cannot be allowed to impede recovery.
Even before flooding, external debt was a heavy burden on the country. In 2009, the country owed $50 billion and the government consumed a third of its budget revenues to honour only interest payments in a country where 60% of people live below the poverty line. However, things were only going to get worse for Pakistan. Pakistan’s total debt-to-GDP ratio has crossed 61 percent this ongoing fiscal year, breaching the 60 percent limit set under the Fiscal Responsibility and Debt Limitation Act.
If the increase in foreign debt and liabilities remained in the same ration i.e. $1.3 billion in every three months then after a year an amount of $5.2 billion would be added every year. 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 reduced and every sector spending was on the rise.
Such an increase in foreign debt would put the country’s sovereignty in doldrums and usually international financial institutions and donor organisations tend to dictate the indebted countries as is the case of Pakistan. The country is already getting loans on strict conditions from international financial institutions. Pakistan has been facing the burden of mounting debt pressure. The same stems from escalating fiscal deficit of the country as compared to the budgetary estimates.
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.
The causes of rapid growth in external debt include inept use of borrowed resources in the form of wasteful government spending, and financing of current expenditure, and investing in low priority development projects, and poor implementation of foreign aided projects. The external debt burden of the country was reduced through different mechanisms like conversion of loan into Aid (grant), debt write-off and debt to development swaps.
Pakistan can create a safe exit out of the menacing debt trap by increasing her indigenous resources, for which there exist huge reservoirs in the shape of its human capital, unexploited mineral deposits, hydel power potential, and huge agricultural and industrial potentials.
In order to protect its future credit-worthiness, Pakistan like many other countries of the world has initiated certain restraining measures to limit inflationary pressures and to protect the competitiveness of its exports. However, since there is a substantial time-lag for these measures to work their way through the economy, its growth gets affected negatively from delays in their effectiveness.
|