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June 26, 2019

‘Pakistan is in firm grip of debt trap’

Top Story

June 26, 2019

ISLAMABAD: It was year 2001. A high-level body of financial experts, called “The Debt Reduction and Management Committee”, had warned, “There is little doubt that Pakistan is in the firm grip of a debt trap.”

It added, “The country is caught in the vicious circle of high debt payments leading to stagnation in investment and growth, with low growth, in turn, limiting the capacity to service debt and reduce debt burden.”

The Debt Reduction Committee headed by Dr Pervez Hassan, a Pakistani economic expert who retired from the World Bank as Vice President was appointed by the Musharraf government to examine in detail the critical issue of massive foreign, and domestic debts and suggest measures to overcome the financial crisis which had practically crippled the national economy.

The 2001 report is the reflection of 2019 situation and proves that no improvement has been made and Pakistan continues to face the same economic challenges, which it was facing 18 years back. Political instability, frequent change of economic policies and governance issues continue to threaten Pakistan and its economy in a situation. The reading of the 2001 report and 2019’s precarious economic situation, however, endorse the idea of having charter of economy for a political consensus on economic policies. The very failure to achieve the objectives set by the report, shows that no government or political party could alone put the country’s economy on right track. It requires a collective effort for a unified stance.

The Debt Reduction and Management Committee, as per its term of reference, had come out with a debt burden reduction strategy — a short-term plan of action covering four years from July 2000 to June 2004 and a long-term plan terminating in 2010.

The Committee had concluded that since the debt problem had risen because of poor economic decision, postponed reforms and poor governance over a sustained period, there was no easy remedy for debt burden reduction.

The Committee had stressed the need of economic revival, sizeable increase in revenue generation and exports as a priority No 1 of this programme. According to the 4-year strategy, which had been developed over some basic assumptions, the debt scenario would completely change by the year 2004 and the debt burden would come down to internationally recognised sustainable level of 300 percent of government revenues from 625 by June 2004. According to the report by the year 2004, Pakistan would have a surplus revenue budget besides having a foreign reserve of about $5 billion and meeting the debt liabilities of about $20 billion.

Admitting that there is little doubt that Pakistan is in the firm grip of a debt trap, the report had discussed the inherent dangers and wondered if Pakistan can break this vicious circle. “Certainly, if it tries hard and remains on the course of reform and adjustment. But the past record is not encouraging.”

The report had warned that the consequences of not dealing effectively with debt problems would be disastrous for the economic and political future of the country. Worst-case scenarios are easily imaginable, where rising debt burden would lead to: i) Further slow down in growth. ii) Large scale printing of money (if revenues do not rise), leading to a rising rate of inflation. iii) Consequent free-fall in the value of rupee. iv) On the external side, default or technical default, triggering economic isolation and forcing reliance on economic controls. v) Adverse impact on flows of trade and technology.

According to the report, “The present burdens of both public and external debt are totally unsustainable. Currently it is not possible to meet our external debt service obligations without seeking debt rescheduling from the Paris Club and exceptional assistance from the IMF, World Bank and ADB. On the domestic side, even though the fiscal position now shows a primary surplus, huge interest payments on rupee debt are keeping government internal borrowing requirements and real interest costs high. Clearly, the external debt burden needs to be brought down so that Pakistan does not need exceptional financing from the international financial institutions (IFIs) and periodic rescheduling from the Paris Club. Similarly, it is desirable that real, if not nominal, growth in government domestic debt, come down to zero in order to relieve the pressure on domestic interest rates and capital markets.”

It added, “Since, the debt problem has risen because of policy failures on a broad front and over a sustained period, there is no quick fix for debt reduction. The satisfactory resolution of debt problems will take both time and aggressive policy actions. Moreover, desirable though it is, the reduction of debt to sustainable levels cannot be the only economic goal. There is also an urgent need to revive economic growth. As mentioned earlier, the slow down in growth is on the one hand a major consequence of the sharply rising debt burden and, on the other hand, compounding the debt problem by adversely affecting debt service capacity.”

According to the report, in order to free itself from the debt trap, Pakistan needs an integrated economic revival and debt reduction strategy. The twin goals of this strategy should be (a) a notable reduction in debt burden, and (b) a significant increase in the growth rate over the medium term.

“In the short-run of two to three years, some difficult trade-offs between debt reduction and economic growth will be unavoidable. But the Committee is confident that with strong financial discipline, forceful structural reforms and improved governance, economic growth can be revived to a sound 5.5 percent per annum by 2003-04. At the same time, real external debt burden can be reduced by 25-30 percent and the need for exceptional assistance from the IMF and Paris Club rescheduling phased out by 2004. In the second half of this decade, economic growth can recover to over six percent per annum while public debt burden can be brought sharply down by 2010.

For growth revival and debt reduction, the report recommended an integrated economic revival and debt reduction strategy with the following eight interrelated elements: i) Reviving economic growth notwithstanding financial constraints, by focusing on improvements in factor productivity through both structural reforms and improved governance. The most promising sectors for expansion are agriculture, manufactured exports, and oil and gas. ii) Improving debt carrying capacity through growth in exports, remittances and other foreign receipts, and growth in government revenues. iii) Reducing the rate of future borrowing by reducing the fiscal and current account balance of payments deficits, and reducing the large losses of state owned enterprises that augment the budget deficit. iv) Working towards an agreement with IMF for Poverty Reduction and Growth Facility (PRGF) for 2001-2004, which will also ensure: (a) exceptional financing needed from other multilateral organisations, (b) debt rescheduling from bilateral sources, and (c) reasonable risk rating in international financial markets. v) Bringing down the real cost of government borrowing, especially domestic borrowing vi) Accelerating the process of privatisation and private sector development. Improving the climate for domestic and foreign investment, increasing attractiveness of foreign private investment flows especially for export-oriented activities, and reducing incentives for flight of capital abroad. vii) Improving the effectiveness of government expenditure especially the use of borrowed resources, specifically through elimination of government borrowing for non-development expenditure and more effective use of foreign aid. viii) Adopting a medium and long-term debt strategy with clearly defined goals of debt burden reduction and putting into place debt management and monitoring systems to effectively review and monitor progress on debt including on contingency management in the context of a rolling medium-term macroeconomic framework.” It was a 76-page report.

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