Rising debt level and its consequences

By Majeeda Aqeel

For the last two years, Pakistan’s economy is falling continuously into the debt trap, consisting of both domestic and foreign loans. The common people have been the chief losers in terms of financial hardship, joblessness, decrease in personal income and high cost of living. The statistics are truly alarming. According to the International Monetary Fund (IMF) country report 2009, Pakistanis would be under Rs73, 832 of foreign debt, if the total population of the country reached 180 million by the fiscal year 2015. In 2005, a single Pakistani owed Rs26,649 while the figure rose to Rs46,648 in 2009 as shown in the table below.

On 20th November 2008, the IMF declared Pakistan to be on its way to economic growth and prosperity. But Pakistan could not maintain its position for a long time and then again fell into the debt trap. Domestic debts have been increased from 55 per cent of GDP to 58 per cent, while foreign debts increased to 30 per cent from 28 per cent of GDP. The total external debt is likely to rise by more than 43 per cent over the next five years, from $50.76 billion early this year to $73 billion in 2015-16. According to a report released by the (IMF), the debt will increase by $6.4 billion to $57.1 billion by the end of the current fiscal year and is estimated to increase by $7 billion to $64 billion by the end of the next fiscal year. IMF declared that during the last 10 years, Pakistan has seen a more than 60 per cent increase in its external debt, which has surged from $33.35 billion in 1999 to nearly $55 billion this year. Similarly in accordance with the State Bank of Pakistan (SBP) data, domestic debt rose to Rs3.967 trillion by end of FY-09 from Rs3.358 trillion by end of FY-08, with an increase of Rs609 billion. Foreign debt increased to $50.76 billion from $39 billion by end of FY-09.

____________________________

FOREIGN DEBT PER PAKISTANI

____________________________

Year    Rupees

2005   26,649

2006   28,075

2007   30,429

2008   36,931

2009   46,648

2010   55,396

2011   61,889

2012   66,552

2013   70,405

2014   73,832

____________________________

Source: IMF country report, Pakistan Economic Survey 2009

____________________________

It raises many questions and clearly indicates that the rise in public debt would not be without problems for managers of the national economy and stakeholders.

This rise in public debt has an impact on tax-to-GDP ratio and fiscal deficits. As said by the IMF, 'the public debt of the ten leading rich countries will raise from 78.0 per cent of GDP in 2007 to 114.0 per cent by 2014.' A few economists of the IMF are of the view that 'debt would not be temporary and the governments even after the end of recession will be running budgets tight enough to stop their debt from rising further.'

The Asian Development Bank (ABD) will have the single largest share in the external debt, which according to Pakistani analysts will increase from $9 billion to $15.8 billion in 2015, by more than 75 per cent in five years. Similarly the World Bank debt will increase by 29 per cent from $12 billion to $15.5 billion by 2015. Bilateral debt is likely to increase by 96 per cent from the current $16 billion to $31.28 billion in 2015-16. The analysis is based on the prediction that foreign debt, which is 27 per cent of GDP would enlarge to 34.3 per cent in 2011-12 and then start subsiding, to reach 31 per cent in 2015-16. The predictions may alter if fundamental assumptions for economic growth, interest rate and external trade are not satisfied. Pakistan will repay over Rs500 billion debts taken from the IMF by 2013.

Keeping in view the fact that Pakistan’s gross domestic product (GDP) is expected to grow at only 3 per cent per annum during the next three years, it is not difficult to predict that the country will find itself under great pressure of the international creditors for the next five years to come. And then it would not be easy for Pakistan to defy any cruel conditions imposed on its economy, whose size in GDP terms stands at $185 billion or Rs15.45 trillion as of today. The war on terrorism alone has cost Pakistan more than $40 billion while the aid received to combat terrorism was $11 billion only. The consequences of this war to the economy include loss of productivity, declining foreign investment and loss in the export level. For all practical purposes, the national economy is badly conditioned with loans from international banks as no foreign direct investments are coming, despite the fact that Pakistan has a great potential in a number of sectors, particularly power generation, oil and gas, mining and infrastructure development. Even the domestic investment has been disappointing because of dire pressure from militancy and terrorism. Now that this threat has scaled down to a meaningful extent, the government must address this vital issue of lack of investment from within the country and abroad. This should be its number one priority because this factor alone guarantees national development and would pull out the economy from its present state and would aid in lessening the hurdles of the common people. Mounting of foreign debts is threatening and this needs to be reduced from the workings of financial institutions and fiscal management.

A wise approach is needed to put the economy back on high growth of more than 7.0 per cent of GDP to solve the issues of debt servicing, combating inflation, unemployment, poverty alleviation and to finish foreign debts by the end of 2013.

The opportunity and the time too fully benefit from the IMF package is passing by swiftly. The government should take radical steps to get to the bottom of the many problems it is facing. To make progress in the economy, corruption should be reduced. This would be the key to economic growth and development of the country as it would reduce uncertainty that prevails nowadays. The cost of production and consequently the prices of goods would be lessened and ultimately the common man would get some relief.