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June 15, 2016

Inclusive development


June 15, 2016

Pakistan has accumulated debt over decades of reliance on International Financial Institutions (IFIs) as a policy choice, characterised by weak governance and an enervated democratic structure.

We fell into a debt trap in the 1970s, when the government started borrowing to cope with the impact of high oil prices. Since then we have suffered from a large external debt that continues to plague socioeconomic development in Pakistan. The response to this debt crisis has been to continuously obtain bailout loans from the International Monetary Fund (IMF).

In a country where 45 percent of the population lives below the poverty line and 60 percent faces food insecurity, the additional burden of debt servicing means more miseries for future generations. The impact of the mounting debt burden is detrimental to the middle and lower classes of Pakistan.

Pakistan spends just 2.5 percent and 3 percent of its GDP on education and health respectively, the lowest in South Asia. The cost of debt servicing has crippled the national capacity to invest in human development. As a result, Pakistan has become one of the lowest ranked nations – 146th out of 187 countries – on the HDI index.

External borrowing can arguably reduce poverty when invested in productive projects of revenue generation for improving the lives of people. In recent times, foreign debt has been used for budget financing, non-productive (non-priority) projects and consumption rather than investment for social development. Pakistan suffers from the so-called ‘Dutch Disease’ – the elite benefit from kickbacks and lack of accountability while the poor lose any all opportunities. Thus repaying the debt has increased inequality, and a sense of injustice and instability in Pakistan.

IMF loan programmes to Pakistan – including the most recent one – have demanded the increase of sales taxes. Throughout the 1980s and 1990s, sales tax increases were coupled with a reduction in taxes on imports. Sales tax rose from seven percent in 1980 to more than 30 percent today. The combined impact of these regressive changes saw the tax bill for the poorest families rising by seven percent; while for the richest the tax bill reduced by 15 percent.

It is against this backdrop that the civil society in Pakistan started to articulate an important national debate on debt cancellation in the aftermath of the 2010 floods. The debate resonated well when Pakistan was hit hard by the most devastating floods of its history. Debt-ridden Pakistan was unable to allocate resources to help its own people hit by natural disaster. The debate, which turned into the Pakistan Debt Cancellation Campaign (PDCC), needs to be broadened to include the following parameters.

Cancelling the external debt of Pakistan will give the country the breathing space it needs to address the complex social and economic development challenges it now faces. In addition to meeting the challenges of incessant natural disasters, the country needs to promote inclusive economic growth, improve public service delivery, meet regular debt service payments and plan long-term social and economic development. The setbacks induced by the continued spell of disasters and terrorism complicate these challenges and reinforce the compelling case for debt cancellation

This debt cancellation, however, does not automatically lead to prosperity and economic development. It is, therefore, important to advocate institutional reforms, widening of the tax net, improved governance and accountability and transparency of resource allocation and equitable distribution. The financial resources earmarked for debt repayments could instead be invested into healthcare systems, education, agriculture and critical and productive infrastructure etc.

Pakistan continues to suffer from weak institutional capacities for policy implementation and public-sector management. This calls for incentivising performance-based institutional management, reprioritisation, equal distribution of resources, and overcoming corruption so that the country can effectively use the policy space provided by debt cancellation.

This will strengthen public financial management systems and pave the way for inclusive development with some promise of prosperity for the poor and lower class of Pakistan…a defendable sunset clause for debt cancellation.

The writer is a freelance columnist based in Islamabad. Email: [email protected]




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