Because of piling up of loans taken by Pakistan in the past, liability of debt servicing has increased manifolds for Pakistan nowadays, because of which, a major chunk of new external loans is consumed in debt servicing of external loans. This results in decreasing trend of real, foreign aid for Pakistan.
Growth Rate
At present, debt to be paid by Pakistan has increased manifolds, and Pakistan has to spend a lot of its foreign exchange in payment of loan installments and interest on it and debt servicing has become a serious issue for Pakistan. According to a recent policy statement by Finance Ministry, released in parliament, the total value of Pakistan's debt is 58.1 percent of its Gross Domestic Product (GDP). According to Fiscal Responsibility and Debt Limitation Act, the total value of Pakistan's debt, shouldn't exceed 60 percent of its GDP, in any case. Presently, the value of internal and external debt of Pakistan is close to the highest level. This is an alarming situation. The government should take effective measures for increase in tax revenue, in order to decrease its dependency on external debt.
It has further been mentioned in the statement of Finance Ministry, that value of debt has reached 8100 billion rupees, in the fist quarter of 2009-10, and a loan of 495 billion was taken in this period. Reasons of this are, delay in release of coalition support fund by the United States, marked devaluation of Pakistani rupee and decrease to lowest level of tax GDP ratio. Pakistan's debt has increased rapidly, during the last two years.
Debt Burden
According to report of the International Monetary Fund (IMF), Pakistan's debt will further increase in next five years. In order to lessen pressure on local currency due to increasing debt of Pakistan and bleak situation of balance of external payments, it is being apprehended that Pakistan's economy will entangle again in the vicious circle of loans, when new loans will be needed for payment of service charges of previous loans. But according to some economic experts, Pakistan's debt is still within bearable level as per GDP ratio.
According to IMF figures, Pakistan's external debt will touch 57.1 billion dollar mark, by the end of this year. There will be an increase of 12.3 percent (7 billion dollars) in next year and external debt will reach the value of 64 billion dollars, while in 2015-16, volume of our external debt will be 72.6 billion dollars. Increase in Pakistan's debt is mainly due to increasing deficits of fiscal and current payments.
The Government is compelled to take more internal and external loans to fill these gaps. Between 2000 and 2007, average deficits of fiscal and current payments were 3.8 percent and 0.7 percent respectively, and external debt was reduced to 28.1 percent of GDP, but value of external debt was 40 billion dollars and foreign exchange reserves were 16.4 billion dollars, but in 20007-08 the external debt increased to 30.4 percent of GDP.
Foreign Exchange Reserves
There was a sharp increase in oil and commodity prices during 2008.Foreign investment shrunk and foreign exchange reserves started eroding and in a few months reduced to 4 billion dollars, while rupee was devalued more than 25 percent. Fiscal and current payment deficits started increasing sharply. Previous government, due to vested interests, didn't pass on the increase in oil and commodity prices to the consumers and stability of economy was put at stake. In order to stabilize the economy, government took 7.6 billion dollar loan from IMF in July 2009.
There was sharp increase in external debt during the last two years and an increase of 20 billion is expected in next five years. According to IMF observation, Pakistan will not face any difficulty in payment of service charges of external debt. In 2010-11, external debt will be 34.1 percent of GDP, after that it will start falling and will reduce to just 31 percent in 2015-16.
Yearly increase in external debt, basically, is due to availability of scheduled loans of IMF and payments. External debt will start stabilizing, when government will pay the standby loan of IMF. Pakistan will not spend more that 2 billion dollars per year in next five years, on service charges of these IMF loans, because loans taken from other sources are long term and on concessional rates. If exports are frozen and economy doesn't show significant growth, then external debt can cross the bearable limits.
Minimizing Fiscal Deficit
Our basic problem is that, from day one, we are spending more than our income. Neither did our rulers take any serious measures to increase the revenue of government, nor did they formulate any strategy to control non developmental expense. Incumbent government is towing the same line, as the previous government.
Neither has it been able to impose tax on agriculture nor has it been able to convince the resourceful and powerful businessmen and industrialists to pay taxes honestly. Instead government cuts the development expense to minimize the fiscal deficit, resulting in negative impact on efforts for development of social and economic infrastructure and increase in poverty and unemployment.
It is important that government should review its income and expense policies on emergency basis and bring in the tax net, all sectors of economy, abolishing all tax exemptions and nondevelopmental expense should also be reduced. If exports are frozen, government fails to control the slowing economy and private investment doesn't take place in economic sectors, then there will always be a chance of external debt crossing the tolerable limits.
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