Pakistan: Economy
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External debt
As in 2022
January 20, 2023: The Times of India
To understand how we got to this predicament, let’s back up a bit. When Pakistan became part of the war against al-Qaida and their Afghan Taliban protectors, much of our external debt owed to the west was written off. So, we were left with considerably reduced debt repayments and our foreign exchange requirements shrank.
Our primary need for foreign exchange after 2002 was to finance our current account deficit (CAD), which is the excess of imports over exports and remittances. As we accumulated CADs every year, our debt increased every year.
Remember, because we don’t run current account surpluses, and hence never earn net foreign exchange, we only borrow foreign exchange from one source to repay another and our debt is never repaid and only grows. Hitting the brakes
After General Pervez Musharraf’s government in 2007-08 ran Pakistan’s highest CAD, the incoming Pakistan People’s Party (PPP) government had to reduce this deficit by slowing the economy down. But once the economy slowed, our foreign exchange borrowing requirements came down and the economy more or less stabilised.
Because Pakistan’s economy wasn’t doing well and we weren’t in an International Monetary Fund (IMF) programme, the world wasn’t willing to lend to us and our foreign exchange borrowing didn’t go up much. However, after five years of drift we were in the midst of a debilitating power shortage by 2013.
Enter the Pakistan Muslim League (Nawaz) or PML(N) government, and two things happened. One, we entered into an IMF agreement and, two, an agreement was reached with China on the China-Pakistan Economic Corridor (CPEC). Now we could get investments and borrow from China for power plants and other infrastructure and borrow from international bond markets to pay for our CADs. The CPEC borrowing, however, was the right thing to do as we really needed power, road and gas infrastructure.
The problem, however, was that as we doubled our power producing capacity in those years, we didn’t double our industrial production or exports during those five or the ensuing four years.
So today, whereas our debt-servicing requirements for those power plants and gas and road infrastructure have increased, our ability to pay hasn’t. This doesn’t mean it was wrong to set up power plants. It means we didn’t utilise the power from these plants well. Rather than set up factories, we built more malls and shaadi halls.
It should be pointed out that since most power and gas came online near the very end of the PML(N)’s tenure, it couldn’t really have industrialised. However, even within those five years, as a result of a fixed exchange rate, Pakistan’s export-to-gross domestic product (GDP) ratio took its sharpest downward turn in our history. Therefore, the money borrowed from commercial banks and Eurobonds was spent on financing CADs.
From 2018 onwards, the Pakistan Tehreek-e-Insaf (PTI) government tried to reduce the CAD but never appreciated the connection between the current account and fiscal deficits. During its four years, the tax-to-GDP ratio fell significantly and we ran the largest budget deficits in our history. The PTI government added 78% of all debt incurred in the previous 71 years and thus ensured we would run not just large fiscal but also large CADs.
Tough times ahead
It is important to understand how budget deficits cause CADs. When our government runs a deficit, it has to borrow to finance it. This money can only either come from the surplus of local private savings over investment or from abroad. But since there is no surplus of local savings, money to finance our fiscal deficit comes from abroad in the shape of imports financed on credit — giving rise to the CAD.
Another thing the policymakers must understand is that now it’s not enough to reduce the CAD to get out of problems. With large debt repayments, we will either need to borrow more (thus requiring a healthy economy) or earn foreign exchange through exports.
How do we get out of this predicament? The answer remains simple but very difficult: we cut the fiscal deficit to below the growth rate, export more to bring the current account into balance, privatise to pay off debt and improve economic efficiency, and bring in considerably more foreign investment to improve our competitiveness.
Privatisation requires courage and consensus that our leadership has lacked; foreign investment requires, above all, peace and security that our civilian and military leaderships have failed to provide for more than two decades; exporting more requires a shift from the import substitution model and an understanding of economic reasoning that, unfortunately, most of our policymakers have lacked over the years.
Finally, cutting deficits will mean reducing all current expenditures to below the inflation rate, taxing the untaxed, such as retail and wholesale trade, a fixed tax on agricultural land, a reduction in federal money given to provinces, etc. These are all hard steps but necessary for growth.
But look at the hardship our no-growth economy is causing. Only one out of 36 people on this earth is a Pakistani but one out of 10 uneducated children is a Pakistani. Our children are twice as likely as the world average to be stunted and three times as likely to be wasted. The hard part should not be to make difficult reform decisions. It should be to realise that tonight millions of kids in Pakistan will go to sleep hungry.
YEAR-WISE DEVELOPMENTS
2007
Source:
Dawn, Oct 21 2007
By Our Correspondent
As many as 37 per cent of the working-age population in Pakistan is 24 years old or younger, says a World Bank report released.
The World Bank development report for 2008 [???; astrology] also shows a total of $308 million of foreign direct investment in the country in 2000, which increased to $2.2 billion in 2005.
Long-term debt was $29.7 billion in 2000, which increased to $31 billion in 2005.
Total debt service as percentage of exports of goods, services and income was 25.2 in 2000 and 10.2 in 2005.
Official development assistance and official aid was $692.4 million in 2000, which increased to $1.7 billion in 2005.
Workers’ remittances and compensation of employees totalled $1.1 billion in 2000, $4.3 billion in 2005 and $5.4 billion in 2006.
According to World development indicators database of April 2007, Pakistan’s GDP in US dollars was $73.3 billion in 2000, which increased to $128.8 billion in 2006.
The annual GDP growth rate is shown as 4.3 per cent in 2000, 7.3 per cent in 2005 and 6.2 per cent in 2006.
The annual inflation, GDP deflator, is shown as 23.8 per cent in 2000, 8.7 per cent in 2005 and 10.3 per cent in 2006.
Agriculture is shown as 26.2 per cent of the GDP in 2000, 22.2 per cent in 2005 and 20.5 per cent in 2006.
Industry is shown as 22.6 per cent of the GDP in 2000, 26.5 per cent in 2005 and 26.7 per cent in 2006.
Services and miscellaneous are shown as 51.2 per cent of the GDP in 2002, 51.3 per cent in 2005 and 52.9 per cent in 2006.
Exports of goods and services are shown as 13.6 per cent of the GDP in 2000, 15.5 per cent in 2005 and 15.5 per cent in 2006.
Imports of goods and services are shown as 14.8 per cent of the GDP in 2000, 19.3 per cent in 2005 and 24.4 per cent in 2006.
Gross capital formation is shown as 17.4 per cent of the GDP in 2000, 18.1 per cent in 2005 and 20 per cent in 2006.
Revenue, excluding grants, is shown as 14 per cent of the GDP in 2000, 12.8 per cent in 2005 and minus 13.3 per cent in 2006.
Cash and surplus deficit is shown as minus 4.1 per cent of the GDP in 2000, minus 3.2 per cent in 2005 and minus 3.8 per cent in 2006.
It takes 24 working days to start a business in Pakistan.
Market capitalisation of listed companies is shown as 9.0 per cent of the GDP in 2000, 41.3 per cent in 2005 and 35.3 per cent in 2006.
Military expenditure is shown as 4.1 per cent of the GDP in 2000 and 3.3 per cent in 2005.
Only 24.3 per thousand people had mobile phones in 2000, which increased to 115.9 per thousand in 2005.
Only 2.2 per thousand people had access to the internet in 2000, which increased to 67.4 in 2004.The World Bank also notes that the population growth rate in Pakistan reduced from 2.4 per cent in 2000 and 2005 to 2.1 in 2006.
Infant mortality rate also reduced from 85 per thousand live births in 2000 to 79 in 2005.
Prevalence of HIV for population aged between 15 and 49 remains at 0.1 per cent.
Primary school completion rate is 63.2 per cent. Enrolment in primary schools is 87.3 per cent of the relevant age group. For secondary schools it is only 26.9 per cent and reduces to a depressing low of 4.6 per cent for high school and colleges.
Ratio of girls to boys in primary and secondary education is 75.4 per cent. Adult literary rate for people aged between 15 and above is shown as 49.9 per cent.
Of a total surface area of 796.1 thousand square kilometres, only 21,160 square kilometres were shown as forest areas in 2000, which further reduced 19,020 square kilometres in 2005.
Agriculture land increased from 35 per cent of the total surface area in 2000 to 35.1 per cent in 2005.
As many as 89 per cent people have access to improved water sources.
In urban areas, 89 per cent of the population has access to improved sanitation facilities.
Energy use as kilogram of oil equivalent per capita remains 463.2 and electric power consumption kilowatts per capita is shown as 373.5.
Energy imports cover 26.3 per cent of total energy use.
