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Foreign debts burden

30 March, 2007

By Wasim Shahzad


Domestic currency debt jumped by Rs957 billion to Rs2.346 trillion in the first quarter of 2007 from Rs1.389 trillion in 1999
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In seven-and-half-years of the sitting government, Pakistan’s total public debt increased by Rs1.465 trillion to Rs4.411 trillion, showing a rise of almost 50 per cent from Rs2.946 trillion in 1999. And, it is still bad performer in global competitiveness when compared with India in 40 areas including business sophistication, technology application and market access abroad. Pakistan, however, is better ranked than India in government efficiency having less red-tape and influence of the powerful in policy making.

In other words, 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.

A ‘Debt Policy Statement’ issued by the finance ministry reveals that total domestic currency debt also jumped by Rs957 billion to Rs2.346 trillion in the first quarter of 2007 from Rs1.389 trillion in 1999, registering an increase of about 69 per cent. Likewise, the foreign currency debt went up by Rs508 billion to Rs2.065 trillion in the first quarter of 2007 from Rs1.557 trillion in 1999, up by 32.6 per cent in seven years.

The report says total public debt increased by 165 per cent since 1995 when it stood at Rs1.662 trillion. Its two components, domestic currency and foreign currency debt surged by 197 per cent and 136.5 per cent, respectively, since 1995.

"The coming years will see an increase in borrowing particularly in foreign currency component to finance the infrastructural development programme. The large infrastructure projects envisaged in the next decade will increase the debt burden if sufficient revenues are not generated from within the country," says the report.  The country’s total outstanding domestic debt reached Rs2.422 trillion by the end of November 2006, showing an increase of 36.5 per cent (Rs648 billion) since fiscal year 2002 when it stood at Rs1.774 trillion.

The report said the total external debt and liabilities increased by more than six per cent to $37.72 billion in the first quarter of 2007 from $35.47 billion in fiscal year 2003. Of this, public and publicly guaranteed debt rose by 13.4 per cent to $33.15 billion this year, compared with $29.23 billion in 2003. The external debt and liabilities at the end of fiscal 2006 were $37.26 billion.

This is an increase of $1.43 billion which represents a four per cent increase over the stock at the end of fiscal 2005.

The report, however, maintains that such a massive increase in overall stock of public debt should be seen in the context of gross domestic product and revenues because "the capacity of carry debt is dependent on the size of the economy as well as resources available to the government to service that debt".

On the basis of these parameters, the public debt at the end of fiscal year 1999 was about 629 per cent of total revenue and came down to 356 per cent of total revenue. Similarly, the total public debt was 100 per cent of GDP in 1999 and has come down to 50 per cent in the first quarter of 2007.

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.

The Competitive Support Fund (CSF) – a joint initiative of Pakistan’s finance ministry and the United States Agency for International Development (USAID) based in the finance ministry, said that India showed better performance in willingness to delegate authority, staff training, reliance on professional management, incentive compensation, regional sales, research & development and capacity for innovation.

India also outperformed Pakistan in efficiency of corporate boards, staff training, technology transfer, quality of management schools, local competition, buyer sophistication, supplier quantity, venture capital availability and degree of customer orientation. India also has better basic requirements for institutions, infrastructure, macroeconomic and health and primary education.

The areas wherein Pakistan has shown improvement include public trust in government, ethics and corruption, favouritism of government officials, efficiency, undue influence and interest rates. Pakistan also outperformed India in other areas such as hiring and firing practices, time required to start business, interest rate spread, real effective exchange rate, macro economy, quality of electricity supply, malaria prevalence and government surplus/deficit.

Pakistan's current account and trade deficits are "unsustainable" in the long run and will require adjustments in monetary or exchange rate policies, the CSF said. "Currently the deficits are being financed through one-off investment flows - this is unsustainable in the long run".

It also said that despite recent improvements in the poverty picture, nearly one-quarter of Pakistan's population continued to live below the poverty line, and reducing this figure constitutes the foremost challenge for the authorities.

It further said that the weak points in the private sector are related to corporate governance and modern management and motivation of the workforce.

Pakistan's energy supplies were highly dependent on oil imports, the cost of which accounted for a large share of the country's total import bill. In addition, national power demand is outstripping supply. This is a trend likely for some time, given that Pakistan's productivity capacity needs are projected to reach a level of 162,590 megawatts by 2030, from a level of 15,500 MW in 2005.

Only 55 per cent of Pakistan's population has access to electricity from the national grid.

"In fact, Pakistan has one of the lowest per capita consumption of energy in the world," the report added.

While the debt stock has increased significantly, Pakistan’s capacity to service it has also improved more significantly as size of the economy expanded. As such, total public debt of Pakistan which was equal to 100 per cent of its GDP in 1999 came down to 50 per cent of the GDP in the first quarter of this year.

Debt equal to 70 per cent of the GDP is universally regarded as a safe margin.

The public debt was equal to 629 per cent of the federal taxes in 1999 and has come down to 336 per cent by now and the debt burden has become less heavy. The paradox is explained by the fact that as the GDP growth increased particularly in recent years, the share of the debt burden in terms of the GDP went down — more so during the last three years.

But the underlying problem that global competitiveness should have increased Pakistan’s exports to service debts and result in higher revenues could not be resolved. The foreign direct investment described by CSF as one-off source could not be relied upon in the long run, reverting back reliance on debt seeking. The higher the debt, the larger the resources diverted to reducing the debt burden and heavier the interest rates and the options to choose less costly debt also become less.

And the major lenders tend to dictate their own terms, at times arbitrarily. Hence the minimum of loans should be taken and at the lowest possible rates of interest and with a long grace period. The foreign debt is not coming down substantially as new loans are taken when the old loans are repaid. In the fiscal year 2006, foreign debt of $3.1 billion was repaid, but new loans of $3.05 billion were taken.

The Debt Policy Statement issued by the finance ministry says that if new loans are not taken, the present external loans will take about 30 years to be repaid at a rate not exceeding $1.6 billion per annum –- a total of $48 billion. But large new loans will have to be taken for building the five large dams and rebuilding the infrastructure for industrial and commercial development particularly from the World Bank and the Asian Development Bank.

Although the dams are urgently needed for providing water, the government is taking long time in making the necessary arrangements. Anyway, once the finances are committed by the donors, construction of the projects should not be delayed.

It is equally necessary to complete the projects in time as delay can mean spending far larger funds.

Foreign loans carry an extra risk. If the rupee is devalued or is floated down or if the dollar becomes stronger in the international market, the rupee cost of the foreign debt goes up and the government has to mobilise more rupees to repay the old loans. At the moment, the government is buying dollars at almost Rs61 to service foreign loans obtained at Rs 9.90 for a dollar or a little more in the 1970s and 1980s.

Another dimension of foreign loans is political riders they come with particularly when they are large. We have to accept the political terms of such loans which can infringe on our sovereignty. That is more so when it is defence aid or strategic assistance. In the case of the US, which is a major donor in the military as well economic spheres, the political riders are too heavy and their leaders even threaten to cut the aid if their demands are not fully met.

If we have to accept very costly consultants and pay them heavily out of the loans, the net loans get reduced. And if the machinery for the project has to come from the lender states, that can be more costly than the one we can get from other sources. It was said in the past that almost 85 per cent of the US aid goes back to the US.

The domestic debt, unlike foreign debt may not seem to have a political dimension, but the fact remains that year after year, the debt servicing cost is going up. It rose to Rs301 billion last year from Rs247.7 billion the year before. The interest payments on domestic debt amounted to Rs190 billion.

There is nothing wrong with borrowing in the modern world, individuals and states do that. What matters is what you do with that money, whether you invest it judiciously and create safe avenues to service the loans and eventually repay that in full in time and the country eventually benefits from such large borrowing. One can only hope that this money is not going in the hands of few – contractors, civil and military bureaucrats and politicians.

Reader Comments:

Serving the interest of masters by taking huge loans and pushing generations into debts.

Foreign debts are given to enslave a nation of any importance.For that purpose people who are the most stupid,most corrupt and full of traits like treason and putting self above nation are put in the govt.Best bank of such people is army of any country.Then the leadership is enticed into signing huge loans for projects that are sure to fail and thus loans are taken to pay the installment and loans are rescheduled.In Pakistan such low life was Ayyb Khan who got the title of "Kutta" before retiring.I believe this was disgrace to an animal who is known to be loyal to one who feeds him.While this dictator and those who accept the dictates and desires of US/UK over their national interest can correctly be called "Khanzeers" AN animal who is greedy for money,sex etc.So today Pakistan is getting deeper and deeper into debts thanks to the leadership.For all those who want to understand the politics of enticing nations into taking huge loans for such useless projects like building Islamabad one should read a famous book called "COnfessions of an economic hitman" by John Perkins.You can also read an introduction on line.Type this:
Confessions of an economic hitman.This book was on NY Times best sellers list> I also suggest the paper Paktribune to do a book review on it.

Dr.Khan, United Kingdom - 30 March, 2007

Foreign Debts Creation is a Technology

Technique of foreign debt creation using hijacking Individual's wealth or stealing one group's wealth to multiply it worldwide is a live technology (ongoing).For this you would
Need Banks Looters Bank account money lenders and Interest Suud called Ribba.Ribba
Is forbidden in Islam. There is no Halal Riba. I learned to survive using this Technology.
Via profitability. My Profitability using defective Democracy helped me survive. Avoiding
Ribba or Halal riba called Banking I avoided debts. Foreign debts work on Ribba or Halal
Ribba. Halal ribba is a technology which did not work.So if Pakistan Halal Debt grew Rs 1 billion /year for each year of Pervez Musharraf in the office ie. 7 billion in 7 year.

If I go for Halal banking I am doomed.My problem of Deprivation is based upon
Their own failure Of Riba and Halal Banking.Muslim countries ‘ deprivation is based upon foreign debt.foreign Debt making is a technology Muslim Umma can come out of it.Leaders Of debt making now via Saudi Arabia IDB Malaysia Halal banking work jointly With Debt maker technologists.Muslim are victim of Kufr who bypassed Ribba
Of Islam(forbidden),Now Ayatollahs of Halal ribba being implicated by UK USA
Allied Navy Ships as partners of Foreign Debt.I do not using Credit cards as such
or riba /halal banking to avoid foreign debt of my own. Nor do I depended upon zakat or
welfare.


Be Zee, Canada - 01 April, 2007

Foreign Debt Dispute and Resolution

Halal Banking is a curse for which Muslim countries are in debt . Saudi Arabia IDB Malaysia Halal banking is work of Iran Iraq Dispute-Debt technologists who have virtually declared Islam as none valid with their commission and contract attached.
When Iran Ayatollah Rafsanjani was having wining and dining in Gold plates after
Overhrow of Shah Iran and after IRAN-Iraq war it is due to Halal Banking .Former
Mayor Ahmeddinejad claim that UK (or N America) is insisting that Iran is in foreign debt.

It really confirms That Islam is true anti Riba religion.Mayorism is Canadian
Victorian so is Debt and illicit Halal Banking in dispute with me right now
with their effort To wrap up Islam or the technology I used successfully.They use
illcit association illicit Banking wrong interpretation.I have live case in favour of Islam against OIC Banking or Riba group such as above associates and beneficiaries.


b_z, Canada - 01 April, 2007

India UK Canada Training Debt Degreere Dispute Judges Training

Even the low quality University or institution have started training the Indians
and Chinese of mall and courts building.Few million will be seen sitting in front of newly sold Computers Cars trucks and Tribunal judges court franchise with lawyer franchise dentist franchise so called Professional and Licenced (origin of franchise conflict).

Muslim not pays oil to free a slave but fees to use the Monopolist who is taking over on the basis of Debt.money and licensing to be subservient.Debt is you buy courts building
And cars trade on the assumption Oil distribution or free organ is forever on “IQRA”


zmb, Hungary - 01 April, 2007

Foreign debts

Foreign debts burden is not accumulated in seven year of Gen. Musharraf and PM Mr. Aziz. They are coming from the corrupt leadership of the past i.e. BB and Nawaz Sharif. When Nawaz was thrown out of power there was only $333m in the treasury and no country on this planet earth would lend Pakistan. Country was on the brink of bankcruptcy and lucky enough it has bounced back and today there is $13,50Billion in the treasury. Comparing the past and present governments this government has done better as seen by the performances and worldwide recognition. Pakistan has become a hub of business and so many companies from the financial sectors are moving into Pakistan to earn good profits being labour cost competitive and so is the rate of interest. An economy which is growing at the rate of 7% and its population more than 55% under 19 years of age has got a tremendous scope to become self reliant in few years time. Comparing with India would be wrong being two different size economies. If we say about the corruption its a lot in Pakistan and so is in other countries. Wherever you go there is corruption and money do changes hands. Mega projects started like Gwadar Sea Port and other Road works and industries set up are clear indications that economic policies are working and results have started to go to the lower masses. Building industry is on its highest boom in the history of Pakistan and many cement industries are set up to make Pakistan an exporting country as well. Wheat production this season is going to be a record and Pakistan will export as well. Just comapre two figures which is encouraging $333m or $13.50Billion. That answers the criticism.

mohammad, United Arab Emirates - 03 April, 2007

what?!

I love how easily everyone blames the government..
in the last 7 years the debt has doubled but look at the causes?
The interest rates in 7 years, count that with the loans pakistan had to take after the earth quake...pakistan is way behind india in many businesses. Look at the projects in gawadar, the new power plant and insutriAl area near multan, the uplifting of karachi etc...come on

uzair usman, United Arab Emirates - 05 April, 2007

Pakistan UMMA Have What Takes to Be Commendable

Foreign debt of USA in dozen Trillion dollar is different.Canada with 70-90
Bangldesh size resource economy land with 31 million population and a Trillion $debt is different.Despite movie style organized lawyers in New suit Boot Tie Look
Seem impresive but fees differential of $500/hr(Rs 250000/hr) and Rs500/hr with Pakistan GDP equal to Bangladesh reflect the difference in economy difference in debt or Bank Treasury Category.They have GDP percapita 10 times more.Only the look is expensive in Pakistan can be changed into reality if Pakistan can become leader of Umma .Why promoting China for Asia new world order and India for Saarc world order.They
Have common world order since drive in stuff fly over build high Rise Kaaba of own
Pre-Islamic stuff.Umma have what it takes for growth.


Z.Billo, Pakistan - 05 April, 2007

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