Foreign Debt is the major problem of Pakistan’s Economy. Economy of Pakistan is in worst shape with growth rate lowest in the region. Although there are many problems of Pakistan’s economy but foreign debt and debt servicing is an important problem of ailing economy. It becomes impossible for Pakistan to pay foreign debts servicing or interest on foreign debts without taking more debts.
On October 2010 State Bank of Pakistan reported that country had to pay $1.669 billion as debt servicing (interest) during the first quarter of fiscal year 2010-11. Size of the debt servicing increased by over 49% compared to the debt servicing made during the same period of last year. The country paid $1.193 billion as debt servicing in the first quarter of last fiscal.
In 2008 financial crises developed in Pakistan and foreign exchange reserves almost finished due to high price of oil. At that time country had to borrow loan from IMF. The IMF agreed for $11.3 billion but attached harsh conditions for reforming the economy. Now the country’s ability to pay off external debt is doubtful as any uncertainty in oil prices could erode the entire reserves.
Pakistan had to pay a total $5.641 billion as debt serving in the fiscal year 2009-10, which accounts for almost more than 33% of the entire foreign exchange reserves of country. The total foreign debt and liabilities of Pakistan has reached $58.512 billion, while it was just $47 billion a couple of years ago.
Another problem is oil prices for Pakistan. Now there is acute energy crisis in Pakistan and Pakistan depends upon the oil powered or thermal power station for the generation of electricity. If oil prices again raise it will cost Pakistan more money and there are chances that reserves will erode more quickly.
The shortfall in balance of trade was more than $11.4 billion during last year, which kept pressure on external payments. Despite $8.9 billion remittances sent by the overseas Pakistanis, the country had to face current account deficit last year.Pakistan’s long-run debt-servicing capacity is extremely low, primarily due to low savings and productivity. It is further observed that with the current state of savings and productivity, Pakistan has to choose between sacrificing growth and prolonging the unsustainable position of continuously growing debt burden.
How to pay back debt:
The problem with Pakistan is that although it has internal resources to bridge the budgetary gap but tax collection system in Pakistan is worst in the world and tax to GDP ration in Pakistan is not only lowest in the region but lowest in the world. There is only one way to get out of this vicious circle of debt and that is to generate enough income from internal resources to pay off the debt servicing and debts. For this purpose government has to increase its tax net and especially the wealthy people in Pakistan are not paying taxes. If government fail to generate income from indigenous resources then they have to take more loans to pay previous loans.
Problems of Balance of Payment deficit and depleting foreign exchange reserves can be overcome by buying foreign exchange from overseas Pakistani workers rather than accumulating foreign loans on tough terms. Cost of this purchase is far less than the interest paid on foreign loans and involves no repayment of principal.
Overseas workers remittance in real terms is almost equal to entire exports of Pakistan. If re-routed from Hawala to Banking Channels, it has the potential to convert the Balance of Payments to surplus, increase our Forex reserves, avoid taking further foreign loans and payoff Pakistan’s foreign debt in real terms through our own sources. Total cost to the Government at present exchange rate shall amount to 2.25% in the form of incentives to banks and remitters. This shall be the cost of buying USD from overseas workers. It still will be far less than interest paid on the IMF loans of around 4 % p.a. repayable in USD. In addition, the obvious advantage is that there is no repayment of principal amount. Hence, no exchange rate risk involved at the time of repayment as well. All these payments by government in the form of incentives will remain in Pakistan’s economy, (unlike loan installments to IMF, which are outflows from our economy). The part that will go to overseas Pakistanis will be distributed among their families in Pakistan, hence will have a positive impact in the form of increase in per capita income, which will be further circulated in local economy, effecting employment growth and increase in revenue generation for national exchequer. The remaining amount paid to banks in the form of commission will go towards meeting the cost of developing systems, resources, network growth, advertisement, etc. The overall effect of growth and profitability of the local banks will lead to strengthening of our financial sector, increase in employment and improvement in revenue generation for national exchequer. This shall also help in curbing smuggling and under-invoicing, as cost of un-official outward remittances through Hawala will go up.
Pakistan must improve its saving rate by continuing and even further refining the ongoing process or tax reforms, down sizing of the public sector and privatization of public sector enterprises. Pakistan needs to improve its overall productivity in the economy, especially in the public sector. The privatization process needs to be accelerated for the sake of minimizing the cost of losses in the public sector and improving productivity rather than revenue generation. Pakistan also needs to manage its debt in a better way. There is utmost need for enrichment of the intellectual capacity in the public sector institutions responsible for debt management. These institutions also need to be reformed thoroughly and given sufficient autonomy.
Pakistan has to be selective in choosing among the alternative aid and loan packages. External borrowing has to be target specific and the targets have to be specified in the light of a social welfare function that assigns due weight to social as well as economic considerations such as growth enhancement, promotion of equity and social justice and eradication of poverty. External borrowing must be undertaken within the framework of economic plans rather than making the planning exercise contingent on the availability of external resources.