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Debt Management in Pakistan

Introduction:
Effective management of debt has been a prime challenge faced by developing as well as developed
countries both having different implications. Pakistans debt dynamics has undergone substantial
changes in the last 4 to 5 years. Higher fiscal deficit led to accumulation of huge debt in absolute and
relative terms.
High and rising external debt burden:
- A serious constraint for development;
- A major obstruction to macroeconomic stability;
- Obstruction to growth and poverty reduction;
- A discouragement to foreign investment;
- A discouragement for government to carry out structural reforms in the various sectors of the
economy.
Most benefits are received by the donor country rather than the recipient country. Also, most of the aid
money is recycled back to the donor country (paying the companies, consultants, etc.). Conditionalities
are applicable on recipient countries, due to which they cannot freely choose policies best suited for
economic and social conditions.
Debt crises occurred due to the adoption of a market based monetary policy by Govt. of Pakistan in
1990-1991. World Bank - IMF put a conditionality that the GOP borrow at the market rate of interest
rather than concessional rate (from commercial banks/institutions)
This led to increase in size of domestic debt and the offer by the international financial institutions to
make credit available at concessional rates gave birth to the debt crisis. A large part of the debt
benefitted the ruling elite and was transferred abroad to buy property and assets in western countries.
Debt/ GDP Ratio:
Total debt as a percentage of GDP has risen rapidly during 1994-1995 to 1998-1999, and was almost as
large as the GDP in the latter year. In 1999-2000, the size of the debt exceeded the size of the GDP.
From then onwards, the Debt/GDP started declining and continued throughout the decade except for a
sudden reversal in 2008.
Foreign debt as a percentage of total debt rose continuously throughout the 1990s, and started
declining after 2001 onwards as an aftermath of 9/11/2001.
Debt Breakdown:
(Loans & Grants)

In 1960s, when Pakistan was closely aligned with the West, the great bulk of debt was on account of
Grants and share of grants rose in total more than 67% in 1961-62. From then onwards decline started
and was all time low at about 11% in 1969-70. The level of Grants was much lower in 1970s as
compared to 1960s.
In 1980s, share of Grants gained to the 1960s level due to Pakistans alignment with the West during the
first Afghan War. Due to cessation of hostilities, it led to decline in the share of Grants. It was all time
low at 3.5% in 1997-1998
In 2000s, with the 9/11 event, the share of Grant in the total started rising and peaked at 46% in 2005-6,
declining thereafter.
Debt Servicing:
Payment of principal and interest due on an existing debt
As a result of IMF imposed tight monetary policy, the country faced recession and serious crisis. Almost
60% of the tax revenues were used for debt servicing in 1994-95, rising to a little less than 90% by 1999.
It exceeded total taxes collected in the year 2000, rising to 123% by 2002, but maintaining a steady
decline for the next 6 years. But from 2007, it started increasing again, a trend which was maintained in
2008.
Debt servicing as a percentage of total expenditures started increasing from about 36% in 1994-1995, to
about 73% in 2001, declining thereafter.
Debt Servicing, GDP and Exports:
Large amount of revenues have been used for debt servicing.
In 1960s, debt servicing rose to more than half (52%) of our export earnings in 1969-70. Debt servicing
as a percentage of GDP was below 2% throughout 1960s; highest in 1968-69 and 1969-70 at 1.8%.
In 1970s / 1980s: Ratio remained high of Debt servicing as a percentage of Export earnings, although at
a slightly lower level as compared to 1960s. Debt servicing as a percentage of GDP crossed the barrier of
2% during 1970s, and stood at 2.5% of the GDP in 1979-80. It further increased during the 1980s, and
was all time high at 3.3% in 1986-87.
In 1990s, Debt servicing was almost as large as one quarter of our export earnings. Debt servicing as a
percentage of GDP further climbed during debt crises of 1990s, and was above 3% for most of the years
during this decade; Peak to 3.8% of the GDP in 1997-8.
In 2000s, Debt servicing as percentage of export earnings started declining, remained at a lower level
than1990s except in 2003-04. Debt servicing as a percentage of GDP declined to its 1960s level as an
aftermath of 9/11.

Socio-economic Political impact of Debt in Pakistan:


DEVELOPMENT CRISIS
Development crises occurred due to meager amounts allocated for development during the period.
Dismal amount spent on development during the 1990s. Development expenditure started increasing
from 2000 onwards, and continued to increase throughout the decade. Development crisis is reflected
in the form of scarcity of water, power, road network, telecommunication, education, and health
facilities.
GROWTH CRISIS
Non-availability of resources for investment is giving rise to serious recessionary tendencies. Rate of
growth of economy was quite impressive during the 1980s (apart from the Agriculture downturns which
is subject to the vagaries of weather). Rate of growth of GDP and individual sectors declined throughout
the 1990s.
Serious growth crises was faced by Pakistan because of its policies, and it reflected stagnating economy,
de-industrialization, unemployment, declining rear wages, increase in poverty, etc. Rate of growth of
GDP, Manufacturing and service sectors improved during the period of 2002-3 to 2006-7.
DISTRIBUTIONAL CRISIS
Growth and development crisis have given rise to distributional crisis. The rich are getting richer and the
poor getting poorer. According to ADB estimate, the total population living in the cities was 50% below
the poverty line; whereas, in rural Sindh the percentage was as high as 85%.
No attempt made in managing the socio-economic crisis. This is a political crisis, which owes its
existence to the debt crisis.
Debt Management Strategy:
External debt is the joint responsibility of the international financial institutions and the multi-national
banks, governments of the industrialized countries and the governments and ruling classes in the LDCs,
(GOP). The cost of debt servicing should therefore be shared b/w these 3 players. In Pakistan, none of
the 3 are bearing the cost of debt servicing. It is the middle, lower and poor classes that are bearing the
cost of debt servicing.

a) DEBT RESCHEDULING
The rolling over of debt payment to some future date that merely postpones the problem (Pakistan has
gotten its debt rescheduled in the past).

Major drawbacks:

Cost of debt increases since interest payments are generally added up for the intervening
periods.

Doesnt have a positive effect on the crises apart from worsening them over the years

It is void of the principle of quid-pro-quo, as the burden of debt servicing is borne by the people
who have not benefited from these debts

b) Unilateral Moratorium on Debt


Countries adopt wont pay because cant pay stance with regard to the servicing of their debts and
the principle that only a reasonable % of export earnings will be allocated for debt servicing. Done
unilaterally by the country concerned w/o consent of international donors and allows some discretion in
policy formulation. Amount of debt is maintained at present level and doesnt keep escalating as in debt
rescheduling
Major drawbacks:

Creditor countries may respond in terms of suspension of export supply and opening of Letters
of Credit (LCs) exports can be affected

c) Debt Servicing from Assets transferred Abroad


If a debt management strategy is announced that allocates a certain % of this looted money for debt
servicing, the entire amount can be serviced in a short period of time. It meets the quid-quo-pro criteria:
puts the burden of debt servicing on people who have benefited from this debt. Moreover, it removes a
big burden on the economy and can be very effective in tackling the crises
Recommendations:

Since there is a cause-and-effect relationship b/w the various crises, it is important to


concentrate on the root cause of these crises and then work through to the rest of them

An evaluation of different debt management strategies should be done to see which would
result in faster eradication of the debt burden

Considering the severity of the crises afflicting the state of Pakistan, it is necessary that the
countrys debts be written off

It is only through removing the debt burden that we can address the very serious crises
discussed, which have become worse with the passage of time

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