Pakistan's External Debt

External debt: a false sense of achievement

By Yousuf Nazar

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 $36.9 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. Is
the government's debt management policy as sound and successful as it claims or
a historic opportunity to restructure country's high debt levels has fallen
victim to political expediency or a false sense of achievement?

Even after having received such generous assistance, Pakistan 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. The
average external debt to GDP ratio of all emerging markets declined from
42.1 in 1999 to 26.2 per cent in 2006, underpinned by strong growth in the
global economy and record investment flows into the developing countries.

It is argued that the former Prime Minister Nawaz Sahrif 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.

Hence, the growth in the debt slowed down during the last seven years.
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.

Nevertheless, Pakistan's liquid foreign exchange reserves, after jumping to
$10 billion-level in 2002-03, have more or less stayed around that level on
average. The foreign exchange reserves of even Sub-Saharan countries
(excluding South Africa and Nigeria) doubled to $50 billion during the same
period. Brazil and Argentina repaid all of their $25 billion debt - by
utilising their foreign exchange reserves - to the IMF in early 2006 to rid
their countries of its influence.

In contrast, Pakistan has not 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.

Some policy makers argue that it is acceptable to borrow if the borrowing is
for productive purposes. That 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, property
barons, etc.) do not pay any tax at all, the proposition becomes quite
debateable and the motives questionable.

This is a critical issue for Pakistan's political economy because the
subject of external debt has been a highly political one for most of
Pakistan's history since it has relied heavily on the US and institutions
under the US influence for its external financing needs. So have many other
developing countries - though not necessarily to Pakistan's extent - in the
past but most no longer do. This type of aid has been associated with
corruption, waste and increasing debt burdens. It has even been viewed as a
payoff to the third world dictatorships for their support and aid in helping
the US in achieving its foreign policy objectives that have often clashed
with the national interests of the borrower countries.

For example, the recently proposed US law, aimed at punishing oil companies
that deal with Iran, will make it even more difficult to construct the
Iran-Pakistan- India gas pipeline. Pakistan must import natural gas from Iran
to meet an imminent shortage during the next few years. On the other hand,
recent moves in the US congress threaten to cut military aid to Pakistan if
it fails to 'do more' and stop the Taliban insurgency from its tribal areas.

The government claims that it no longer borrows from the IMF and does not
carry around a begging bowl. This is quite misleading because it has been
borrowing more and more from other multilateral institutions like the World
Bank (WB) and the Asian Development Bank (ADB). The borrowing from
multilaterals has outpaced the borrowing from the Paris Club since
1999-2000. Its share in total public and publicly guaranteed debt has
increased from 37.5 to 50.2 per cent in 2006.

Consequently, official sources still account for 90 per cent of Pakistan's
external debt, including the WB/ADB [48 per cent] and foreign governments
[38 per cent]. IMF's loans rarely exceeded 5-6 per cent of total external
debt as it normally provided the balance of payments support and not
long-term loans that constitute the bulk of our external debt.

The present government has criticised the previous governments for the
accumulation of almost $18 billion debt in the 1990s and increasing
Pakistan's debt burden. While it is true that the debt accumulation in the
1990s was large, critics of the civilian governments conveniently overlook a
key statistic: 77.2 per cent of the gross disbursements during 1990-1999
were utilised to repay the old debts. The debt-service to gross disbursement
ratio jumped to 82.8 per cent during 2005-2006. The continuing increase in
this key ratio throughout the 1990s and even during 2000-2006 indicates that
more and more of new loan disbursements were used to repay the past debts; a
significant percentage relating to the borrowings during the previous
military regime of General Zia-ul-Haq.

Pakistan's total external debt that stood at $8.7 billion in 1978, reached
about $22 billion (50 per cent of the GDP) by the end of the 1980s. That
Pakistan had to borrow more later in the 1990s just to service some of the
old debts indicates that the loans were not properly utilised as they did
not contribute to the development and therefore to the debt servicing
capacity. This raises serious questions about the whole wisdom of
politically motivated borrowings from the foreign governments and the
institutions under their control.

Pakistan's vicious cycle of borrowings from foreign governments and
multilateral institutions, graft, waste, and accumulation of more debt to
repay the old debts leads one to believe that the rulers have been putting
excessive burden on the people and mortgaging their future by borrowing more
and more while indulging in wasteful and unproductive spending while the
'big fish' get away with not only benefiting from the 'development projects'
financed by external borrowings but also with paying no taxes.

Pakistan's foreign (or hard currency) debt to total debt (that is, including
domestic debt) ratio of 47 per cent is high compared to an average of 28 per
cent for emerging economies. Given our long-term track record of using
foreign debt to indulge in wasteful expenditure, it would be in the best
national interest to set up a special fund (in a hard currency, be it dollar
or euro) to accumulate all the privatisation proceeds and use that for the
early retirement of our external debt. Some countries, like Russia, have set
up hard currency stabilization funds to provide for the rainy days.

Source: http://www.dawn.com/2007/03/12/ebr2.htm