EXTERNAL DEBT MANAGEMENT OF PAKISTAN

BAKHTIAR KHAN Department of Business Administration Gomal University Dera Ismail Khan (NWFP) Pakistan
ABSTRACT The accumulation of external debt is a common phenomenon of the Third World countries at the stage of economic development where the supply of domestic savings is low, current account payments deficits are high, and imports of capital are needed to augment domestic resources. The economic position of Pakistan is precarious with unsustainable external debts. Pakistan has actually failed in maintaining a balance between revenues and expenditures, which has resulted into immense fiscal crises. The debt problem is threatening our economic stability, sovereignty and also dignity. There are too many causes of huge external debts of Pakistan, but in this article I have discussed how government can manage the external debts to avoid threats of economic stability of the country.

INTRODUCTION Pakistans sovereignty and independent decision making capability have undoubtedly been adversely affected due to influence which the lending countries and international institutions have come to exert upon Pakistan towards achievement of their own vested interests. On the other hand the loans obtained were squandered away with out bringing about any improvement in economic resilience of the country. Pakistan economic woes are well known. The real issue is about resolving them. Three issues are unmanageable, at least for quite some time to come. They need long-term solution. The three issues are: 1. Foreign Debts. 2. High Fiscal deficit Table:1

3. Trade Deficit. Foreign Debts The debt system was inducted into in our economic system by the regime of Field Martial Ayub Khan in 1958. Different experts are in view that debt is not a bad thing provided that economy grows quick enough to provide the tax revenues needed to meet interest payments on time. That will increase capital inflow and will have positive effect on economic growth and standard of living of the peoples. The increase in external debt from $ 5 billion in 1988 to $ 38 billion today is directly tied to poor economic planning and its associated corruption, unlimited power of Executives etc. (Pervez, 1998)

Source: Annual Report of State Bank Of Pakistan, 2006

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High Fiscal Deficit Our fiscal management has been least impressive over past two decades. Fiscal deficit has persisted continuously manifesting lack of proper management under the civilian as well as army governments. Persisting fiscal imbalances have undermine the performance of various sectors of economy with increasing pressure on the BOP, unleashing inflationary pressure Trade Deficit The third long term issue is of bridging the trade deficit, which is close to $ 2 billion and persists over past a few years. It is crucial that Pakistan should have surplus foreign trade account. Achieving much of target is difficult because of a number of reasons such as high cost of import bill, . Table:2 Sr. No. Commodities 1 2 3 4 5 6 7 8 9 10 Petroleum crude Petroleum products Other Apparatus (Telecom) Iron & steel Palm oil Plastic materials Mobile phone Electrical machinery & apparatus Raw Cotton Textile machinery

and making economy dependent on large scale foreign short and long term borrowings resulting in ever increasing debt servicing till it reached unmanageable limits in late 90s. The three factors significantly contributed towards high fiscal deficit: 1. Heavy defense expenditures 2. Inflationary pressure 3. Debt management exports being mostly commodity oriented and having least value added content, uncertainty of unit cost of exports and instability of rupee vis-a-vis US dollar. The link between economic revival and higher exports is intrinsic program, which has got a new breathing as economic history of developing, and a developed country has clearly proved

% Change for value in million Rupees in November , 2006 over October, 2006 November, 2005 21.16 37.72 14.25 65.29 5.79 109.06 34.84 -11.22 -1.48 69.93 3.90 7.63 24.52 41.38 74.36 45.78 63.00 51.55 20.51 -39.36

Source: Web site of ministry of commerce Pakistan Balance of Trade Based on the provisional figures of imports and exports the balance of trade in November, 2006 was (-) 84,628 million in terms of Rupees and (-) 1,393,553 thousands in US dollars. The balance of trade figures cumulative from July-November, 2006 were (-) 327,052 million in terms of Rupees and (-)5,405,618 thousand in US dollars How to Manage? There are three approaches to solve the debt problem of Pakistan, when the government has not spent this amount of US$ 38 billion on the development of its people. Instead, most of this money has been embezzled by those who were in subsequent governments in Pakistan, floundered through bank debt default and spent on non-development expenditures like defense and debt servicing

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and the lifestyles of the policymakers and politicians. The first approach is not to pay back the debts. The president of Cuba, Fidel Castro is a strong advocate of this approach to liquidating debt of the developing nations. The theme was also echoed in the meeting of the Group of 77 in Havana at the end of the year 2000. This approach favours the recipient nation, but it does not favour the donor nation, therefore is strongly opposed by the advanced nations of the world. The Second Approach is of Moratorium on Debt. The basic philosophy behind the second approach is to freeze the debts for a minimum 20 years and this amount should be spent on the uplift of economic growth in the recipient nation. When required growth rates are achieved, the debt and interest should be paid back. This approach favours the advanced nations and donors, but does not favours the recipients of AID and money transfers, because even when required growth rates in the economy are achieved, they will go down when the interests on the debt would have been accumulated to amounts huger than the principal amounts and therefore become unplayable by the recipient nations even at higher growth rates. However, Government of Pakistan has used this option and some $12.5 billion has been rescheduled with Paris Club creditors for a period of 38 years, for ODA and NonODA, with grace period of 15 years and 5 years respectively during 2002-2003. (Qais, 2001) The Third Approach is Debt Retirement. This approach is considered the middle path, which is being taken by most of the developed nations including Pakistan. The basic object of this approach is to write off a bigger part of the debt through mutually decided criteria and norms. Government of Pakistan has also obtained commitments

from several bilateral creditors to either cancel or swap them for social sector spending for up to $1.5 billion. Pakistan has gained estimated relief of $1.2 to $1.5 billion annually. Pakistan faces grave debt problems, which threaten the economic future of the country. Pakistan foreign aid commitment and debt burden have continued to grow over time. The composition of aid has changed rapidly over the Plan periods, with decline in grants and grants like assistance. Debt service payments on outstanding debt have grown rapidly in absolute terms, and as a percentage of export receipts, foreign exchange earnings and GDP( Burney, 1988). The growing indebtedness of Pakistan has increased debt-servicing liability and significantly reduced the net inflow of foreign resources. The ever-growing external debt may have disastrous consequences for the country and need proper management. High and growing debt burden is the major cause of a sharp slow down Pakistan economic growth and low investor confidence. Pakistan needs on integrated economic revival and debt reduction strategy. The twin goals of this strategy should be: (a) reduction in debt burden and (b) significant increase in growth rate. Reduction in Debt Burden: Government has started privatization of state owned enterprises for reduction of the country debts. Government has raised some Rs.136316 million till to May 2004 from privatization, but how it is used, no detail is available. The strategy developed by the researcher is based on the basic philosophy of privatization. There is a lot of land owned by the Government and is continuously distributed among retired generals and judges. Government can use this land for reduction of external debts developing towns for overseas Pakistanis. Pakistan faces an acute housing shortage. The current estimate of the housing backlog is about 6 million (Haider and Haider, 2005). The annual construction of housing is about

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300,000 units whereas the estimated demand is about 570,000 units. There are 3829180 Pakistanis (BE&OE, 2007) working abroad and wish to have own houses in their own country. A proper plan with help of overseas foundation can help the Government in debt reduction strategy. The researcher prefers this strategy on the basis of following points: In this strategy ownership of Government property will not transferred to foreigners like in privatization of State owned enterprises. This will increase capital inflow. Plots owners to construct houses will need to transfer their foreign exchange 2-No. Of Units 100000 100000 200000 200000 600000 3-Land required per Unit 1 Canal 10 Marla 7 Marla 5 Marla

savings to Pakistan. This will increase demand for Pakistani rupees, which will stabilize the exchange rate. Increase in capital expenditures will increase the GDP of the state. Increase in job opportunities.

Total Numbers of Oversea Pakistanis: 3829180 Houses Required 570000 Units Total Land Required Categories of Overseas Pakistanis:

1-Categories Category A Category B Category C Category D Total

4-Averaged price** $130000 $ 80000 $ 35000 $ 16600

Total 2*4 $13000000000 $ 8000000000 $ 7000000000 $ 332000000 $ 28332000000

Table: 3 Division of Overseas workers in four Categories ** Average price mean the prices of plots in different cities will be different, therefore I have used average prices of one canal in Islamabad, Peshawar, Lahore and Karachi. Table: 4 Collection through townships scheme for over seas Pakistanis in Us Dolores Categories A B C D Total Table: 5 Advances Categories A B C D Total No. of Plots 100000 100000 200000 200000 600000 Advances $30000 $20000 $5000 $3600 Total $3000000000 $2000000000 $1000000000 $ 720000000 $6720000000 No. of Plots 100000 100000 200000 200000 600000 Reg. Fee In $ 1500 1000 500 300 Total in US$ $150000000 $100000000 $100000000 $ 60000000 $410000000

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Table: 6 Monthly Installments Category A B C D Total Each Installment $500 $300 $150 $65 1015 No. of Installment 200 200 200 200 No. of Plots Total in $ 100000 100000 200000 200000 Total in $ $50000000 $30000000 $30000000 $13000000 $123000000

Total collection Gross Collection: 2833.2 million US $ From registration: 41 Million From installments 12.3 Million . Total Collection: 2886.5 Million Us $ Collection in first year From registration: 41 Million From installments 12.3 Million Advances 672.00Million . Total 725.3 Million Less exp 25.3 Million*** . Net Balance 700 Million US . $**** *** Total estimated expenditures on the development of several numbers of townships in different cities. **** Total net collection for the first year Privatization: The second strategy which government can use for reduction in external debts is privatization. Privatization means making an economy more private, is a complex one, encompassing a wide range of options to reach political and economic goals. The objective is to achieve higher living standards through improved resources allocation. That means more private ownership, more private management, more competition and a minimized state role in economic activity. Research has shown that privatization leads to improved performance of divested companies and privately owned firms tend to outperform public sector ones. This has been proved in industrial and middle-income countries. Privatization in Pakistan has been a disappointment. Despite the euphoria surrounding all the previous

four democratically elected governments privatization programs, vested interests coupled with poor market judgement have resulted in the failure of the privatization process. With out any proper law of privatization or constitution of regulatory body to deal with the potential problems consumer could face with a private sector operator in charge of management. Government is needed to make clear that privatization is for national interest not for vested interest then the objectives can be achieved. Export: To reduce the burden of external debts we need to increase export and minimize the gap between imports and exports. Pakistan needs to develop an export culture by laying emphasis on quality and competitiveness. We think Export Promotion Beauru is the main hurdle in export promotion, because there is no comprehensive policy toward increase in export of the country. We should encourage the private sector as well to participate in export activities. The main areas in development of export policy need to study are: How to change import culture. Inducing peoples to use country made products. Development of export oriented industries. Search of markets for Pakistani products. Proper introduction of Pakistani exportable product on media. Increase in numbers of products.

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Improving quality and reducing cost of export articles. Etc.etc. After the consideration of above mentioned points Govt. can develop export policy which will helpful in increase of export and decrease of import to minimize the current account gap. Developed Financial sector: The existence of an efficient and well functioning financial sector is important for the effective operation of all economy. The borrowing and lending activities of this sector ensure that corporations in the real sector of the economy have access to funds they need in order to conduct their investment and generate output, exports and jobs. Developed Financial Sector is the backbone of economic development. Developed Capital markets attract the foreign investors and increase the capital inflow. The main objection of foreign investors is inside trading, no proper disclosure, and different types of risks. Government can improve the efficiency of capital markets to remove the above mention drawbacks in our capital markets. The proper regulation will help to encourage the foreign investor which will not only increase capital inflow (in foreign currency) but will help to stabilize the exchange rate and management of external debts. Table: 7

Banking sector need proper restructuring. The nationalized banks of the country are facing more then Rs.300 million bad debts because of Government intervention. Market efficiency suffered as it often does when competition is disallowed. We should deregularize all the banks to increase competition and competition will increase efficiency. Bankers will try to introduce new products to pull savings of the peoples. Increase in savings will increase in investment and increase in investment will increase growth rate. Corruption No doubt it is difficult to eliminate corruption totally, but we can minimize if proper law, rules and regulations are adopted. In Pakistan different agencies are established for stopping corruption, but unfortunately the most corrupt peoples in Pakistan are belong to these agencies. FIA, Anti-Corruption, Custom, Police Judges etc. are considered the most corrupt in Pakistan. It needs proper restructuring, and there must be one autonomous body must free from Government influence. This body must have judicial powers to take actions against all corrupt peoples, whatever the status of the corrupts are. Army Officers, Judges, Politicians and all bureaucrats should be accountable to this body (Bardhan,1997)

Under progress Politicians 248 52 174 Bureaucrat 361 53 305 Businessmen 38 12 25 Armed Forces 16 4 12 Others 64 5 56 Total 727 126 572 Source: National Accountability Beauru of Pakistan (Feb.2001) Details of Investigation Authorized Completed CONCLUSION Pakistan now ranks among the most indebted of the lowest income nations

Closed 22 3 1 3 29

Total 248 361 38 16 64 727

(HIPC) of the world. One should not have any doubt that Pakistans present and future debt situation is very grim, bringing an extreme pressure on the already fragile

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economy of the country. There is very little being done to reduce this debt burden. In reality new debt agreements are being signed in order to run the day to day business of the government as well as to pay back old liabilities. Any substantial government policy, particularly to run the economy and to service the debt is practically non-existent or chaotic Foreign aid is considered useful, provided it helps to overcome bottlenecks in the way of economic development of a country. Based on basic financial principal Dollar today is better then Dollar tomorrow, because of future value. It will maximize the value of economy. This fact is proved by different economies, like china and some other countries but in case of Pakistan the result is not positive because of improper use of foreign aid. The first thing which is considered before making decision of borrowing for any project, is generating of cash flow, which is used for payment of interest and installments of the borrowed money. Pakistan has borrowed money with out having proper analysis using financial tools and techniques, ignoring calculation of cost and return of the debts. After comparison between debts growth and economic growth rates of Pakistan we draw the conclusion that debt growth rate is higher then economic growth rate, thus result is debt burden. Further delay in management of external debts will have deteriorating consequences. Therefore, we recommend that Government should take urgent actions suggested in the

paper for management of external debts; otherwise, we are not away from default. REFERENCES Annual Report State Bank of Pakistan, (2006). Bardhan P (1997). Corruption and Development: A review of issues. Journal of Economic Litrature. 35 (3) : 1320-1346 Beauru of Exchange and Employees Pakistan (2007). Overseas

Burney N (1988). Determinant of Debt Problem in Pakistan and its Debt Servicing Capacity. Pakistan Development Review Haider M, Haider I (2005). Urbanization and Sustainable Development in South Asia Chapter 10 pp 245 National Accountability Beauru of Pakistan (Feb.2001) Qais A ( 2001). Pakistan debt position and the question of debt retirement Justice and Peace Commission (Major Superiors Leadership Conference of Pakistan) Lahore. Pervez T (1998) . The Debt of the Nation. Pakistan Development Review. 37(4): 331353. Web site of ministry of commerce Pakistan, downloaded June 5, 2007