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Pakistan sinking in debt

By Ismat Sabir

President Asif Ali Zardari said that the key to Pakistan’s economic development is trade not aid. However, the president terms the assistance not as aid but as payment for damages that the country has suffered due to its role in fighting the war on terror. It was also renamed by President Obama’s administration as ‘Overseas Contingency Operation’.

It has been proved that aid alone has not been able to cure sick economies of the developing countries and they are under the aid trap, which is steadily increasing day by day. Their dependence on foreign assistance to meet the budget deficit is rising, which is one of the aid conditionality and also forces them to hire foreign experts; and at the same time aid also accounts for a major expenditure item in the budget as the allocations for interest payments and principal as and when it becomes due. Pakistan pays under the head of debt and debt servicing, inclusive of domestic debt, to about 30 percent of the budget expenditure.

The economic growth is an indicator of debt carrying capacity of a country. The total debt and liabilities increased 27.3 percent during July to March 2008-09 to Rs 6426.4 billion up to March 2010.

During the nine months, interest payments stood at Rs 551 billion, which was 41.8 percent of tax revenues and 30.5 percent of total revenues estimated for 2008-09 and as a percentage of total expenditure of budgeted it was 23 percent. The interest payments on domestic debt were about 4.5 percent of the projected gross domestic product (GDP) for 2008-09.

Definition: Gross external debt at a given point of time is the amount of disbursed and outstanding liabilities of residents of a country to non-residents. Countries use external debt in order to fill the gap between desired expenditure levels and domestically available resources. The governments also issue foreign currency debt in order to signal their commitment to stable exchange rates and prices.

At the end of fiscal year (FY) 2009, the debt burden per person rose to Rs 53,172 from Rs 48,563, showing an increase of 9.5 percent. The total foreign and domestic debt and liabilities of the country have increased to $11.5 billion to $109.8 billion in FY10 as against $98.3 billion in FY09. The total foreign debt, after receiving International Monetary Fund (IMF) trench of $3.53 billion, reached at $55.1 billion.

The total domestic debt reached Rs 3.759 trillion at the end of March 2009, showing a net addition of Rs 541 billion in nine months of the current fiscal year. The domestic debt stood at 28.7 percent of GDP, which was 31.3 percent at the end of June 2008.

It is to be noted that the country will start repayment of debt to the IMF from February 2012. Pakistan has to pay $400 million per installment in three years.

The IMF emergency loan package of $7.6 billion sanctioned in November 2008 helped to solve the problem of balance of payment and increased foreign exchange reserves. Moreover, IMF enhanced the amount of loan to $11.3 billion in July 2009.

During the 10 months, July-April 2010, the government received $2.399 billion from external resources, including $428.900 million in Tokyo pledges, from international donors and other countries. Purpose-wise disbursement was: $873.846 million for different Developmental Projects, $569.420 million for Budgetary Support, $2.268 million for Afghan Relief and Reconstruction Authority (RRA), $152.150 million for Earthquake, $51.520 million for Internally Displaced Persons (IDPs) and $321.682 million received as Short term loan.

International Development Association (IDA) was on top of the aid giving agencies extended $527.730 million, of which $11.760 million were for Earthquake, $303.270 million for Budgetary Support/Programme Loans and $212.700 million for Developmental Projects.

The second top foreign assistance provider was Asian Development Bank (ADB), who gave $426.890 million, of which $63.880 million were for Earthquake, $159.570 million for Programme Loan and $203.440 million for Developmental Projects. The third on the list of donors was Islamic Development Bank (IDB), which extended $321.682 million as short-term credit to Pakistan. It also provided $101.96 million for Earthquake Reconstruction and Rehabilitation Authority, projects $62.480 million and $25.900 million under Tokyo Conference.

The US provided $241.180 million, $44 million for IDPs, $47.180 million for projects. Under Tokyo pledges the US provided $150 million. China gave $212.286 million, $30.010 million for ERRA and $181.276 million for projects. Saudi Arabia provided $200 million under Tokyo Conference. Japan extended loans amounted $105.970 million; $52.970 million for projects and $53 million under Tokyo Conference.

The IDA provided $101.960 million, $13.580 million for earthquake-hit areas, $62.480 million for projects and $25.900 million under Tokyo Conference promises. The UK provided $0.610 million for projects and $94.930 million under the other heads.

The amount provided by International Bank for Reconstruction and Development (IBRD) was $65.490 million, for earthquake $31.160 million, for project 34.330 million. The government of Germany supported Pakistan by giving $29.030 million, under ERRA $0.070 million, IDPs $7.520 million and $21.440 million for projects.

The contribution of International Fund for Agricultural Development (IFAD) was $26.350 million, which were as follows: earthquake $1.690 million and for projects $24.660 million. The World Food Programme provided $18.930. The EU provided $12.260 million for programme loans and budgetary support.

Canada gave $5.090 million to spend on projects. Norway has given $4.380 million. Australia provided $0.020 million, Korea $0.310 million, Kuwait $1.120 million, OPEC extended $0.810 million, Switzerland $0.050 million for Projects and UNHCR extended $2.268 million for Afghan RRA.

A high and persistent current account deficit implies greater financing requirement by the country that compelled the government to seek multilateral and bilateral sources for its financing requirement and thus leading to the stock of outstanding external debt. The EDL as percentage of GDP increased from 28.1 percent at the end of June 2008 to 30.2 percent by end of March 2009, showing an increase of 2.1 percent, which was the highest ever rise in a single year for almost one decade.

The big chunk of Pakistan’s outstanding external debt is classified as public and publicly guaranteed debt and accounts for 78.9 percent of the total outstanding EDL stock. Out of the remaining amount 8.4 percent debt is owed to the IMF, which was a 3.1 percent of total EDL mainly due to disbursement of the first two trenches of the Stand-by Arrangement. Private non-guaranteed debt contributes 6.6 percent to the stock of EDL and another 4.3 percent contribution came from foreign exchange liabilities.

However, the opposition criticised the president and said he should spend his time in the office for the betterment of the people and the country instead of seeking assistance from abroad.

During the period under review main problems were large twin deficit, fiscal and current account, high inflation, depreciation of rupee that increases the foreign debt burden to about 23 percent as well as cost of production by 25 percent. On the domestic front, government borrowing from SBP fuelled inflation and short-term domestic debt.\08\04\story_4-8-2010_pg5_12

1 thought on “Pakistan sinking in debt”

  1. Main reason that Pakistan’s economy sinking is, confrontation with India, Pakistan spends millons or billions to compete with India Army, but government of Pakistan does not understand that Indian economy is huge around $1,500 billion US compare to Pakistan only $160 billion US. Indian economy is growing by 9% and 10.5 % next year, adding around $150 billion a year. If India spend 5 % of total GDP a year on army, Pakistan will have to spend 50% of total GDP to be equal. But then what about infrastructure and basic needs of country such as health care. Lots of countries are cutting their aid to Pakistan to make trade relationship with India, such as England. Bangladesh has just received $1 billion loan from India, if Pakistan keeping good relation with India, it could have gain a lots of trade opportunities with India. Its all about money at the end of the day. The stronger the India gets, and if it gets permanent seat in security council, More it will hurt Pakistan. By not playing cricket with Pakistan,and not picking Pakistani players for IPL India is punishing Pakistan about 18 million dollars a year, because any money Pakistan get which ever way, they will support terrorists against India.Huge uncertainty and terrorism,every day bomb blasts and poverty, FDI (foreign direct investment) is sinking as well as Pakistan’s economy.

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