Debt deadlock: is there a way out?

Post Source: The News on Sunday – The News International

Revenue generation or debt cancellation, or both? Policy-makers have to seriously think about how to handle the debt crisis


By Irfan Mufti


Pakistan’s current foreign debts have crossed $55 billion mark or equivalent to Rs4675bn. This amount is apart from Rs5500 billion (or Rs5.5 trillion) loans taken from different domestic sources. So, the total debt, both external and domestic, has crossed Rs10 trillion figures. With these figures each Pakistani is under debt in the range of Rs60,000 and paying the price of those loans that have never reached to him/her. Though the per capita rate of loans is slightly lower than other highly indebted countries of the world, ironically no clear investment or income plan has been made to guarantee repayment of these loans or rid the country of these debts. The interest rate of Rs10 trillion, which is almost 70 percent of the GDP, is being paid with new loans.

The domestic debt is increasing with at a fast pace. Domestic debt hit the mark of Rs5.50 trillion in December 2010 because of the present government’s borrowing policy. In December 2009, the domestic debt/liabilities stood at Rs4.447 trillion rupees which increased to Rs5.5 trillion by December 2010, showing an increase of Rs1.53 trillion in just 12 months. Out of the total $55 billion foreign debts $46 billion are from public and publicly guaranteed loans and $8.9bn of International Monetary Fund (IMF). The country had paid $1.13 billion loan in 2007-08, $2.5 billion in 2008-09 and $2.3 billion in 2009-10 along with the interest worth $982.6 million, $872.9 million and $775.4 million, respectively.

During the last two years, the World Bank (WB) and Asian Development Bank (ADB) had provided $47.2 million grants and a loan worth $4.2 billion to Pakistan. According to government sources, these amounts were disbursed in power, agriculture, infrastructure, education, health, poverty alleviation and environment sectors. Pakistan has so far received $1.68 billion aid and loans out of $2.33 billion committed by the countries after 2005 earthquake, which had hit most parts of Azad Kashmir and Northern Areas and claimed around 73,000 lives. The country has yet to receive $651 million as the amount was with donors and would be provided to ERRA through withdrawal applications. Similar situation exist for the pledged amount for relief, recovery, and rehabilitation after 2010 floods and till to-date only a fraction of this amount has been received.

Foreign debt stands out as the major problem of Pakistan’s economy with lowest growth rate among under-developed countries. In October 2010 State Bank of Pakistan reported that country had to pay loans $1.669 billion as debt servicing (interest) over the first quarter of fiscal year 2010-11. Scale of debt servicing increased by over 49 percent as compared to debt servicing made over the same amount of not too long ago.

In 2008, financial crises developed in Pakistan and forex currency market reserves almost finished, resulting from high valuation on oil. In those days the country had to borrow loan from IMF as several friendly countries refused to extend any major financial support. The IMF agreed for $11.3 billion but attached harsh conditions for reforming the economy. General Mushrraf’s regime secured that loan and signed on the dotted lines without consulting political leadership or evaluating the implications of that loan. The price is very high and the present government is still struggling to meet those conditionalities that include higher electricity tariffs and removal of subsidies from essential services. Now the country’s capacity to repay external debt is doubtful as any uncertainty in oil prices could erode the whole reserves.

The problem of rising debt is rooted in ways our institutions, ministries, and rulers work. Among several systemic reasons of this rising debt is low revenue receipts, increase in government spending, and misplaced economic priorities. Over-spending is instutionalised in most of the state and government ministries and departments. Most of the public institutions are being run on subsidies and none of the institutions has the ability or desire to meet their own expenditures. The government is providing an annual subsidy of Rs400 billion to different ministries and institutes. The treasury is facing an additional burden of Rs14 billion due to 12 percent increase in military pensions in 2007-2008.

The system of applying for more loans is not under any democratic control or scrutiny and is still under experts and bureaucratic controls, thus no disciplines or filters are applied anywhere in repayments or applying for more debts. Who takes care of the conditionalities attached to such loans? Who decides? Who evaluates these conditionalities and their implications on the society and economy of the country? All these and several other questions are unanswered.

In many cases of loans from WB, ADB, IMF and other consortiums the conditionalities are harsh and have serious implications on country’s economy and politics. People of this country need to know all the details as they are the one who ultimately pay back these loans though, one can argue, not a fraction of this money is spent on projects of their interests.

External factors also cause problems, such as international oil prices. There is an acute energy crisis in Pakistan and it depends upon the oil-powered or thermal power stations for generating electricity. If oil prices again raise it’ll cost a higher price where there are chances that reserves will erode quicker. The problem with Pakistan is that while it has internal resources to bridge the budgetary gap tax collection system is in a bad shape and tax to GDP ratio is lowest among under-developed countries. This is not the way to run an economy because fiscal slippages are the root cause of recurrent bouts of macroeconomic instability, high debt levels, excessive bank borrowing, a crowding-out of the private sector, inflation and a fragile external position.

Pakistan’s’ economy has mostly been dependent on foreign debt. Now it’s time we become less dependent on debts by ensuring our revenue in such a way that no need arises for foreign debts in the near future. It is easy to walk into debt but difficult to crawl out of it. The civil society has demanded for Pakistan’s debt cancellation because it is suffering from disasters, economic recessions and heavy cost of its involvement in war against terrorism. These factors are legitimate reasons for a country to demand debt write-off but it seems the developed world is not willing to give this country a chance to grow economically and clear its internal problems.

The cost will be bigger in case these logical demands are not accepted by our governments or international donors. Recent flood damages will also cost heavy toll on the ailing economy and will reduce country’s capacity to pay back its loans.

Similarly, the country needs strong political leadership that should decide to run the country according to the aspirations and priorities of its people and not on the dictates of external forces.

The writer is Deputy Chief of South Asia Partnership Pakistan and Global Campaigner



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