Original Articles

Pakistan sinking in a sea of debt – by Shaukat Masood Zafar

During the previous couple of years, Pakistan’s economy is constantly falling into the debt trap, consisting of both domestic and foreign loans, causing financial hardship, joblessness, decrease in personal income and high cost of living for a common man, and putting debt sustainability indicator moving towards danger zone with every passing day.

The public debt has reached a critical level of more than US $105-billion out of which external debt is more than $ 55-billion and internal debt is equal to about $ 50-billions. Extraordinary high expenditures of the government are sinking the country into ever rising debts crossing 63.4 percent of debt to GDP ratio and breaching the 60 percent limit set by the government under the Fiscal Responsibility and Debt Limitation Act.

As a result of such a high debts, inflation has started climbing, pushed domestic interest rates on a very high side and the cost of debt servicing is growing up and up leaving meager funds to provide basic services, such as education, health, safe drinking water and housing etc. The statistics of debts are truly alarming rendering the country beyond debt servicing and debt retirement capacities having extremely detrimental impacts on growth, income equality, poverty and the debt burden. According to IMF, every Pakistani is likely to be under Rs.73, 832 of debt by the fiscal year 2015 whereas in 2005 it was only Rs.26, 649 rose to 51842 in 2010.

Most of the revenues are devoted to debt servicing and this high debt is causing hefty outflow of foreign exchange as Pakistan has paid a staggering amount of $5.6 billion on debt servicing during the last fiscal year which was 43 per cent of the overall official foreign exchange reserves of the country and 45 percent of the total budget. Pakistan has become so much dependent on external assistance that it seeks foreign loans to defer debt-service payments. Such a dependence on foreign loans has rendered Pakistan unable to withstand the vagaries of the international loan market.

The rising debt burden must be a cause of concern for the government because it can adversely affect on its efforts to develop economic and social infrastructure and maintain macroeconomic stability. The rising cost of debt servicing has squeezed out the development expenditure drastically causing high rate of unemployment. Rising debt and debt servicing burden on the economy has generated extremely negative impacts on the country which transforms from long-term, low cost to short-term/ high cost.

The possibility of the external debt becoming unmanageable will remain unless the government is able to reverse the economic slow down, enhance production, increase exports, and attract private investment in productive sectors simultaneously taking the following steps:

  1. Financial market being extremely sensitive, the statements of the ministers about the economy should be very responsible. Any misstatement can create multidimensional complex problems for the economy of the country.
  2. Putting together a credible and responsible team to handle the economy of the country is of paramount importance which needs to be done immediately as still there are the people in this team having no knowledge of ground realities.
  3. Fiscal and taxation system of the country should be reformed in real sense by introducing direct taxes uniformly applicable on poor and rich based on net worth instead of burdening only the poor by levying indirect taxes, increasing the tax net and reducing rate of taxes. FBR be made independent free of any political interference.
  4. Strict financial discipline may be exercised both at center and provincial level.
  5. Vigorous macroeconomic policies should be pursued to contain public debt (Both foreign and domestic).
  6. Present high volume of Government needs immediate downsizing with strict control over lavish non developmental expenditure.
  7. Transparent privatization of loss sustaining public entities should be on top priority simultaneously restructuring the other public sector corporations. Transparent appointment of their CEOs and Board Members should be through an independent Appointments Commission.
  8. The corruption, mismanagement and poor administration of the present rulers are a cause of all macroeconomic instabilities. It is direly needed to stop blaming previous government to be at fault and to take immediate solid measures to tackle the coming threats to the economy by immediately removing the above causes. However the main rope of all these issues is strictly tied with one hook which is high level corruption of our rulers and it are both a major cause and a result of poverty and it affects the poorest most. It undermines economic development by generating considerable distortions and inefficiency. Various circles are also criticizing and highlighting their corruption clearly but unfortunately there is no immediate action for its eradication. It is a challenge to every Pakistani to join in the anti-corruption war to make Pakistan the nation of our dreams.
  9. Improving the coordination between fiscal, monetary, external and debt policies can enhance Pakistan’s ability to manage its external debt portfolio within sustainable parameters.
  10. Firms from rich countries bribing rulers and officials from Pakistan to gain export contracts, exploiting natural deposits of oil, copper, gold, diamonds and the like and more particularly in the arms trade and in construction should now come to an end.
  11. Black economy may be curbed by making necessary adjustments in rate of taxes.
  12. These policies prescribed by international lending agencies such as the World Bank and IMF have received sharp criticism for exacerbating poverty through policies such as Structural Adjustment, rapid deregulation and opening barriers to trade before poorer countries are economic ready to do so. This has also created situations ripe for corruption to flourish. It needs immediate reconsideration.