barkat ali bukhari

7/28/2019 Barkat Ali Bukhari

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The Journal

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79

IMPACT OF AID FLOW IN THE LAST DECADE (1989-99)

ON PAKISTAN ECONOMY: A CASE STUDY

Barkat Ali Bukhari *

1. Introduction

There is something really vicious about the debt trap entangling Pakistan.

On the one hand, every thinking Pakistani is mindful of the sinister jaws

of the debt monster and all around, there is emphasis on self-reliance, andon the other, the government of Pakistan expresses jubilation on the issuance

of certificate of good housekeeping by IMF because that clears the hurdles

coming in the way of issuance of next tranche by the International Financial

Establishment. That speaks volumes about the contradictory perceptions

of the ruling elite and the independent thinkers which are always in minority.

In this background, the case study of the aid flows in the last 10 years (1989

to 1999) becomes very crucial. As every new tranche released by the World

Bank/IMF adds to the debt burden as well as the miseries of the commen

man by way of harsh conditionalities imposed in return, one wonders as to

whether a study of the past behavior of power-haves of our country can

throw some light on the ills of the system; and whether there is any ray of

hope at the end of the tunnel, or not? The precise questions which come

to mind are.

a) Did all those who held office in Pakistan raise its external debt tounmanageable heights forcing it into a debt trap and making it essential

to call for rescheduling of repayments from time to time? Or

b) Did the international aid agencies bring us to this pass? Or

c) Was it the excessive borrowing and reckless spending by those in office

in the 1990s reponsible for this sorry plight, as the resident Director

of the Asian Development Bank in Pakistan asserts?

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* The wr i ter is a Civi l Servant (Customs Group) and holds the degrees of Masters in Engl ish and

Bachlor s in Law. The ar ti cle was presented as Term Research Paper dur ing his parti cipati on

in the 73rdAdvanced Cour se held here in 2002.r d


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2. Understanding the Topic:

2.1. The statement Aid flow in the last 10 years has been wasted? endswith a question mark. Thus, it is not a hypothesis. Rather it is a question putto the thinking minds.

2.2. What constitutes foreign aid has remained controversial. Two differentviews are prevalent nowadays about this. The first view considers all foreignresources such as loans, credit, grants, direct private investment, technicalexpertise etc that facilitates and consolidates the process of growth, as

constituting foreign aid. The second view is somewhat restrictive as it regardsonly those foreign resource transfers as foreign aid, which carry an elementof concession. The concession may take the shape of lower rates of interestor longer period of repayment or a grace period or an outright grant. Forthe present article, the restrictive meaning of the term is assumed. Thedifference between a loan and a grant is also to be understood. Whereasloans incur a liability on recipient to pay back, at future date with or withoutinterest, the loans thus taken, grants have no repayment liability. They just

create a moral obligation on the recipient. At times, loans are on market rate,and sometimes these have very soft conditions of repayment.

2.3. The period last 10 years in the topic means FY 98 to FY99, whichis very significant in the sense that it covers eight civilian governments betweentwo military-controlled regimes. Out of these eight two stints, each go thePakistan Peoples Party under Ms Benazir Bhutto and Pakistan Muslim Leagueunder Mian Nawaz Sharif and four care-taker regimes of Mustafa Jatoi, MoeenQureshi, Balakh Sher Mazari and Malik Meraj Khalid. The period under study

is characterized by high political instability, frequent policy shifts, intermittentbouts between opposite political parties involving horse-trading as well aspolitical victimization. Continuous struggle for dominance between variousorgans of state e.g. President, Parliament, Judiciary and Executive was anotherstriking feature of the period. The two extreme points being military ledregimes, that threat of martial law always loomed large on the heads ofso-called democratic regimes in between; the military, almost always, playingthe role of a power broker.

2.4. The word waste does not mean wasted in spendthrift way only. Itbasically signifies that the aid received during this period could not be putto its proper use. Now, what is a proper use for aid received is anothermillion-dollar question? While repaying the previous debt is always considereda proper use, it remains important to know as to what use the original aid

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was put to. Our study, therefore, will not necessarily be limited to the

confines of 10 years referred to in Para 2.2. It will cut across differentregimes of economic history of Pakistan.

3. Genesis of Aid:

3.1. The genesis of aid goes back to the independence of the Asian andAfrican countries from the colonial masters. While launching struggle forindependence, the movement leaders promised positive change after

independence (one is reminded of the famous Lahore Resolution of 1940which promised a homeland, for Muslim majority areas of the erstwhilesub-continent, wherein the Muslims could lead their lives in accordancewith the religio-socio-economic principles of Islam), without realizing post-independence problems of the infant state. As they achieved their cherishedgoal of independence, the masses started asking for the promised privileges,which were not forthcoming. To overcome this unforeseen situation, theleaders started looking around for help. Finding it as a golden opportunity,the ex-colonial masters jumped in to further their markets, which they hadlost as a result of independence of these colonies. Showing concerns forthose countries, the donors started with big chunks of grants. But purposelythey kept these grants confined to food and other consumer goods. At times,some cash was also doled out, but it was always kept so little that no capitalformation could take place. It was in fact the beginning of Pauperizationprocess. In early thirties to late fifties, the ratio of grants to loans was80:20, but in late eighties the ratio changed to 20:80.

3.2. Foreign economic assistance to Pakistan started in early 1950s. Thedisbursed and outstanding external dept at the end of June 2000 was estimatedat $25.5 billion that was 39.4 percent of GDP and about 306 percent ofexport earnings.

4. Composition of Aid/Terms of Loans:

4.1. The composition of aid over the years has considerably changed from

grants and grant-like assistance to hard-term loans. The share of grant likeforeign assistance in total commitments was 80 percent during the first five-year plan (1955-60) but dropped to 46 percent during the Second Plan(1960-65). It continued to decline thereafter, averaging 31 percent duringthe third plan (1965-70), and 10 percent during the fourth plan (1970-75),However, due to the relief for Afghan refugees, grants share increased to

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about 22 percent during the 5th plan (78-83) and 6th plan (1983-88). Itremained at 16 percent during seventh plan (1988-93), and again went downto 15 percent in the year 98-99.

4.2. The terms of loan and credits have significantly become harder overthe years. The terms and conditions were soft during 1960s as comparedto the same in the early years i.e. 1950s. During the 80s and the first 9years of the 1990s, these terms heve become harder and harder. The rateof interest averaged at about 4.6 percent during the 1950s; it declined to

3.3 percent during the 1960s and the 1970s but increased to 4.8 percentand 4.4 percent during the 1980s and the first nine years of the 1990srespectively. The repayment period of the loans during the 1950s was 21years with a grace period of 2 years, which improved to 30 years with agrace period of 7 years during the 1960s, but reduced to around 25 yearswith a grace period of 6 years during the 1970s. In 1980s the averagerepayment period remained at 28 years with a grace period of 7 years, whichdeclined to 22 years including a grace period of 6 years during the first 9

years of 1990s.

5. Sources and Types of Aid:

5.1. The major sources of foreign aid to Pakistan have been the Consortium,Non-consortium and Islamic countries. Among these the Aid-to-PakistanConsortium formulated in 1960 (now renamed as Pakistan DevelopmentForum) remains the largest source of economic assistance to Pakistan by

providing almost 84 percent of the total aid. Of this 46 percent was bilateral(Paris club and other than Paris club) and 38 percent on multilateral basis.The members of non-consortium provided 8 percent while Islamic countriesprovided 5 percent of the total foreign aid. Relief assistance to Afghanrefugees was 3 percent.

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4.6%

3.3%

4.4%

4.8%

1950s:

1960s & 1970s:

1980s:

1990s:

Box.1:Rate of Interest during various Periods


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5.2. From qualitative point of view foreign aid can be classified intotwo types, namely, tied and non-tied aid. Tied aid is that whichcarries implicit or explicit conditions and strings. It may be tied to sourceor utilization or to both. This reduces the utility of the aid for the recipientcountry. Aid is tied to utilization when it can only be used for specificprojects or products. More than 90 percent foreign aid received by Pakistanhas remained tied. Un-tied aid, on the other hand, is aid, which is neithertied to source nor to utilization. The cash foreign exchange loans advancedby some Islamic countries of OPEC (notably Saudi Arabia and Iran) provide

best examples of un-tied loans. In the 1970s the ratio of the un-tied aid wasup to 40 percent of the total aid.

5.3. From the operational point of view, foreign aid received by Pakistanhas been of four types:-

a) Project assistance: which is confined to specific development projectsmainly in public sector;

b) Commodity assistance: which is in the form of specific commoditiesranging from industrial spare parts to consumer goods. It may go topublic as well as private sector;

c) PL480 Commodity assistance: which was extended by USA during1950s to provide surplus agricultural commodities to different countries.Payment for this could be made in local currency as well; and

d) Technical assistance: which means transfer of technical know-how inthe form of experts and trainers along with capital transfers from therich countries.

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Box.2:Sources of Aid:

84%46%

38%

08%

05%

03%

Aid to Pakistan Consortium:

Bilateral:

Multilateral:

Non-consortium:

Islamic countries:

Afghan assistance:


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6. Philosophy of Aid:

6.1. It is important to be understood that loans whether hard or soft are tobe repaid and should be addressed as such. Even out-right grants are to beviewed skeptically as these also ential a certain quid-pro-quo and are largelyadvanced by the donors to promote their foreign policy objectives. Any countrywhich remains oblivious of the above implications of foreign aid, finds herself,sooner or later, completely submerged in high indebtedness endangering herpolitical independence, and ushering in an era of economic colonialism.

6.2 . In order to assess whether aid flow in the last 10 years was utilizedproperly or not, it would be appropriate to discuss the philosophy of aidkeeping in mind the theoretical view-point, donors viewpoint as well asview-point of the Government of Pakistan.

6.3. At the theoretical level, the rationale of foreign aid is explained interms of the dual gap analysis. Dual gap refers to the saving-investmentgap and export-import gap. These two gaps are important constraints on

economic growth in developing countries. The saving-investment gap equalto the difference between the savings required to achieve a target rate of growth(or S ) and the savings, which can be guaranteed domestically (S):

Saving gap = S - S

The export-import gap also known as the foreign exchange gap refers tothe difference between the import ratio required (or M ) and the import ratioactually feasible (or M):

Foreign exchange gap = M - M

The process of growth will be exchange constrained if import-export gapexists, and is more formidable of the two. On the contrary the developmentprocess will be investment constrained if saving-investment gap is morechallenging of the two. Foreign aid will primarily be needed to fill the biggergap and its role in bridging or narrowing down the smaller gap will only besecondary and peripheral.

It may be concluded that the foreign aid is basically needed to supplementthe domestic saving for enhancing the capacity to invest in development-oriented activities.

6.4. Donors point of view cannot be more appropriately found than in thedocuments of the World Bank. The World Bank Report 2001 says that

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liberalization, stabilization, privatization and poverty relief are intrinsicto TRANISTION (from centrally planned to market economy), but they arenot enough to create vibrant market economies. Building on the early gainsof transition will require major consolidating reforms, to develop strongmarket-supporting institutions, a skilled and adaptable workforce, and fullintegration into the world economy. Another important document inthis respect is Human Development Report 1990. It gives insight into theWorld Banks concept of development at a point wherefrom our study starts.The Human development Report, 1990 defines Human Development as

a process of enlarging peoples choices. The definition goes on to say thatat all levels of development, the three essential ones (choices) are forpeople to lead a long and healthy life, to acquire knowledge and to haveaccess to resources needed for a decent standard of living. Yet anotherviewpoint is that of the former President of America, Bill Clinton:-

people of developing nations have their responsibilities as well tonarrow the gap between rich and poor, by ensuring that governmentinstitutions are open and accountably, honest and effective, havewidely shared growth, uproot corruption and solve social problems.There is limit to what wealthy nations can do for people, who willnot take necessary steps to make their own societies work.

6.5. And now the official view of the Government of Pakistan. FederalBureau of Statistics, in 50 years of Pakistan Economy maintains,

Developing countries being unable to generate sufficient domesticsaving for economic growth have to seek finances from abroad tosteer countrys economy towards self-sustained development in thelong run. Pakistan has, thus also been relying on foreign economicassistance since its begining to augment its domestic resources,needed for development plans.

And the Economic Survey of Pakistan (1999-2000) says,

the foreign economic assistance since early 1950s has largelysupplemented the scarce domestic resources and made positive

contribution towards sustaining higher economic growth and developingthe countrys infrastructure base.

6.6. The key word used in official documents of Government of Pakistanis sustained development. The dictionary meanings of this word areto keep in existence over a long period. When coupled with developmentit would means development that exists for a long time to come. But there

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is another aspect as well. Internationally sustainable development meansdevelopment that meets the needs of the present without compromising theability of future generations to meet their needs. Therfore, when referringto sustained/sustainable development, we need to assess its worth keeping inview the fact whether burden has been transferred to future generations or not.

6.7. Up till now we have been discussing the theoretical aspect of the issue.Still we do not know as to what was the quantum of aid, which flowed intothe economy of Pakistan during the period 1989-90 to 1998-1999. Lets attemptto guage the quantum.

7. Quantum of Aid:

7.1. According to Economic Survey of Pakistan, external debt at the end ofJune 89 was $14190 million, which grew to $22633 million at end June 1999.Thus an increased burden of $8443 million was transferred to the posterity.The gross disbursement during July 1989 to June 1999 was $24119million. Short term loans of $6572 million are in addition to this.

8. Measuring changes in development:8.1. Despite the inflow of such a huge amount of external assistance, theposition on ground has not improved much. It has rather deteriorated.

8.2. The official viewpoint that foreign aid is obtained in order to boostinvestment is not corroborated by the situation on ground. According toMr. Shahid Javed Burki.

During the first 40 years of its independence, Pakistan was able tonet-in about 8 percent of savings in the form of remittances and foreign

aid. These domestic and foreign savings combined gave us an investmentrate of about 20 percent a year. These savings were invested in thecountry efficiently. The incremental capital out-put ratio for the first40 years is estimated at 3.3, meaning thereby that Pakistan had to invest3.3 percent of its GDP in order to produce an increase of one percentin its GDP. This efficiency was because of: i) a very well developedphysical infrastructure; and ii) efficient administrative and legal systems.These coupled with reasonably sound governance, Pakistan was able

to generate a growth of some 6 percent a year in GDP. After 1989,Pakistan at best could have 3 percent of GDP. The physical infrastructureinherited from the British is maltreated; institutions that supported thegood governance have collapsed. All this has led to increased economicinefficiency and to a dysfunctional state, GDP growth rate having comedown to 4.2 percent.

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Notwithstanding the possible criticism against some of the assertions of Mr.

Burki, the decreased share of foreign resources in the national savings from8 percent in the 1980s to 3 percent in the 1990s shows that the aid receivedduring the period 89-90 to 98-99 has not been used for investment for capitalformation.

8.3. The above conclusion is further strengthened by a study of the basicHuman Development indicators in respect of Pakistan in the years at thestart as well as the end of the study period. A comparative picture emergesas follows.

* Human Development Report, 1990.** Pakistan Economic Survey, 1999-2000.

The small improvement in the indicators is owing to Social Action ProgramProjects II & I. SAPP-I with an out-lay of Rs.127.4 billion was started in1993 with the help of World Bank, the Asian Development Bank, theNetherlands and the UK. Donor assistance amounted to 25 percent of the total

outlay. The project was completed in the end of 1996. SAPP-II started inJanuary 1997 with a total out-lay of Rs.498.8 billion for five and a half years.The donor assistance was Rs. 101 billion (22 percent). The emphasis areasof the program were: elementary education; primary health; population control;the rural water supply and sanitation; and population welfare. Had this projectbeen implemented sincerely and effectively, the fate of rural areas could bechanged totally, but wishes of the donor agencies did not come true, andbecause of the massive mismanagement of funds, the program had to be

abandoned before the target date on the insistence of the World Bank.8.4. The prevalence of poverty in the country further strengthens onesdisbelief about the aid having been spent productively. In the year 1990,as many as 22.11 percent Pakistanis lived below poverty line (earning of$1 per day). This ratio had shot up to 32.6 percent by 1998. It is clearfrom the above figures that the aid in the years 1989 to 1999 was not utilizedeffectively for poverty reduction.

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30 (primary&secondary)

1987*

58

30 (1985)

Life expectancy

Adult literacy rate

School enrollment

HDI indicator 1999**

62

45 (1996)

63.6 (primary only)

** All developingcountries

64

80 (1995)

85.7 (primary: 1997)


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9. Tracing the Usages:

9.1. One wonders as to what usages the aid was put to, if it was neitherutilized for investment nor social welfare of the people. The study is tediousas well as baffling.

9.2. The study of gross disbursements and net receipts of foreign aid showsthat a major portion of the aid flows never saw the treasury of State Bankof Pakistan. The figures tell the following story.

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Year

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

Gross aid

2202

2045

2366

2437

2530

2571

2555

2231

2800

2382

Servicing Net receipts

970

729

853

789

784

529

419

(34)

447

852

1232

1316

1513

1648

1746

2042

2136

2265

2353

1530

Source: Economic Survey of Pakistan.


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9.3. It is obvious from the above table that in the 1990s the increasedliability of external debt servicing has resulted in squeezing the net inflowof foreign aid. Only 15.71 percent of the aid flows landed in the statetreasury. The remaining 84.30 percent went back in the pockets of thedonors. Thus, in the words of S.Akber Zaidi, those institutions and countrieswhich have lent us money over the last few decades have reaped greatrewards from their investments. They are like the money lender or landlord,and Pakistan, the indebted peasant; where just to survive and pay off someof our earlier debt, we are having to borrow, increasing further our debt

liabilities in the process.

9.4. After debt servicing, the errant behavior of the successive governmentsplayed havoc with the paltry sum received in the state coffers. The 1990swere the years of the politicians, which in fact began, with the generalelections of 1988, which ushered in Benazir Bhutto as the prime minister.They felt obliged to spend more and more to please the voters and getre-elected. In this race many un-productive schemes and programs were initiated.The allocative type of development planning wherein MNAs, senators. MPAswere allocated funds for development schemes in their respective prominence.These grants were not spent in transparent way. The infamous taxi schemestarted by Mian Nawaz Sharif was a great failure. The taxis vanished tooquickly from the roads and some of them ended up in Afghanistan andCentral Asian States, or become private cars. And some were ultimatelysold to government employees. The scheme greatly disturbed the loaningpolicy of the banks. Islamabad-Lahore motorway which started in 1991 withan estimated cost of Rs. 28 billion, ended up costing Rs. 40 billion in 1998

due to the vacillating policies of the successive governments. The plan wasoriginally to involve the private sector on BOOT (build, own operated andtransfer) basis but ultimately the entire cost was borne by the publicexchequer. Obviously, no lessons were learned from this mega project, asthe Islamabad-Peshawar motorway was also revived with estimated cost of36 billion.

9.5. The disastrous Power Policy of Benazir Government in the year

1994. The IPPs policy damaged the economy in two ways. One, the tariffallowed under the Thermal Power Generation policy 1994 was burdensomefor the budget as well as balance of payments, as the payment to IPPs isto be made in foreign exchange. Secondly, with power demand lower thanthe projections, over-capacity has proved an additional burden on theeconomy. Resultantly, in 96-98, WAPDA was faced with an excessivegeneration of about 2000 MW during peak hours (5:00 pm to 11:00 pm),

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and about 4000 MW during off-peak hours (11:00 pm to 6:00 pm). However,

capacity payments for 60 percent of the installed capacity of about 4000

MW, continue to be made to the IPPs. Further to that, the IPPs use

Furnace oil, annual spending on import of oil is around Rs. 265 billion, 35

percent of which is consumed in electric power generation. This heavy

and unnecessary expenditure is effecting adversely every sector of the

national economy in general and the balance of payment in particular,

resulting in trade deficit, which has to be, financed through short term

foreign loans.

9.6. The second highest expenditure, in case of Pakistan, has been on

defense. This expenditure was more than twice as high as the world standard

in 1997. The figures tell as follows.

Source: Pakistan Economic Surveys.

9.7. In the case of defense, however, Islamabad has no choice but to be mindful

of its relationships with India. The armed forces of two countries have come

dangerously close to war several times__Siachin, Operation Brasstacks, Nuclear

explosions in May 1998, Kargil, post September 11 and so on. There appears

to be a planned effort on the part of some hidden hand to keep the already

fragile economy of Pakistan under pressure all the time. The defense expenditure

coupled with debt servicing/interest payments have reduced the development

expenditure from 25 percent in 1990-91 to just 14.4 percent in the year 99-

2000.

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Year

90-91

91-92

92-93

95-96

96-97

Defense as % of current expend.

33.0

32.6

31.9

28.2

27.8

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9.8. For the last many years current expenditure has remained more thanthe total revenues of the country, as is evident from the following table:-

(Billion Rs.)

Source: Economic Survey of Pakistan.

The table amply explains the disposal of the amounts of foreign aid, whichwere left after debt servicing.

9.9. The changed and politically motivated role of the financial institutionssince 1988 has also played a negative role in the economy of the country.Political necessities have always been over-ruling the economic principlesin Pakistan. However, this phenomenon reached abnormal proportions duringthe period 1989 to 1999. Politically motivated non-guaranteed loans frombanks resulted in huge stocks of stuck-up debts. The quantum of these debts

increased from Rs. 39 billion in 1988 to Rs. 221 billion in 1999. Thewritten off portion of loans is not even known. The drain on nationaleconomy due to bad debts resulted in acquisition of short-term loans tobridge the gap.

9.10. Another revealing feature of the Pakistan economy in the 1990s isthe increase in the proportion of short and medium term loans, which isprobably responsible for the large annual repayments made each year as

debt servicing. In 1990-91, short-term and medium term loans were a mereten percent of outstanding external debt to official creditors. This amountmore than doubled in 1998-99 when it was 22.2 percent. This practiceof relying on short term loans was necessitated because of mismanagementof funds reported above.

9.11. Successive regimes in Pakistan since 1988 have always been ready

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Year

1995-96

1996-97

1997-98

1998-99

Current

423.9

457.9

529.9

553.4

Total revenue

380.3

388.2

430.0

476.2

Deficit

(43.6)

(69.7)

(99.9)

(107.2)

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to accept the stiff conditionalities of the IMF and the World Bank to getmedium term aid packages approved by the donors. And after the governmentgot first tranche or the second, it forgot all about their commitments to thedonors. Hence Pakistan came to be known in IMF circles as one-tranchecountry. SAF (Structural Adjustment Facility) in 1998, ESAF (ExtendedStructural Adjustment Facility), EFF (Extended Fund Facility) in 1994 allmet with the same fate. Such acts on the part of the government over-burdened the economy without any returns.

9.12. Half portion of the period under study is covered by the 8th Five-year plan (93-98). The plan started with the slogen of good governance. Itemphasized on transparency, accountability, merit, mitigation of the heritageof collusion, and promised decisive actions against defaulters of taxes, bankloans and utility bills. Public-private partnership was to be promoted in allthe activities, with possible cost sharing and BOT arrangements. The outcomeat the end of the Eighth plan was, however, more instability andless growth.

10. Conclusions:

10.1. The above stated factors clearly show the mismanagement of economyin the 1990s but it would not be out of place to go a little beyond in theearlier periods, and dig out the reasons that aggravated the debt crisis. Thesame are identified as:-

a) The debt burden might not have become so acute if Pakistanhad not devalued its currency so heavily bringing it to Rs. 61 toa dollar (currently) from Rs. 9.90 when the rupee was de-linkedfrom the dollar in 1982.

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Box.3:Tracing the usages of aid/loans in 1990s

Debt servicing: 84% of disbursements

Islamabad Lahore Motorway: Rs. 40 billion

IPPs: 4000 MWs spare electricity.

WAPDA to pay @ 60% of capacity.

Rs. 92 billion extra annual charges for oil imports

Defense expenditure: about 27.8% of GDP

Current expenditure 1995-1998 gap=Rs. 320


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b) The easy availability of food grains under grants and soft loansin 1950s and 1960s led us to accord low priority to agriculturedevelopment. It resulted in continued reliance on imported foodgrain and edible oil, which has been a major head of expenditureand reason of trade deficit.

c) Heavy budget deficits resulting from narrow tax base, run-awaygovernmental expenditure, in-efficient public enterprises, forcedsuccessive governments to borrow internally as well as externally.

d) Capital flight is another factor. Influential elite of the countryhave built substantial overseas assets. A huge amount of hardcurrency, $ 100 billion according to one estimate has left theborders of Pakistan in the last two and half decades.

e) Pakistans exports have not picked up as desired. As againstexports, the demand for import is inelastic; resulting in persistenttrade deficits, which necessitate negotiations of short term and

medium term debt to foot the bill;f) Corruption is yet another endogenous factor. According toDr. Mahboob-ul-Haq, corruption in Pakistan causes losses rangingbetween Rs. 100-Rs. 200 billion annually.

10.2. The debt profile of the country, the debt servicing level, the budgetas well as trade deficits and the stuck-up bank advances clearly suggest thatthe country is entangled in debt trap, as its total debt has risen to a level,

which is equivalent to its GDP. Who is to blame? Mr. I.A.K. Lodhi, in hisarticle Why blame the IMF and the World Bank? has rightly suggestedthat instead of IMF bashing we must realize that it is our own misdeedsa) mismanaging development loans and grants, b) spending on non-developmentexpenses, c) wastage on projects which were not viable and d) on politicalloaning, which have brought us to this explosive situation. The habit ofliving beyond means, inward oriented trade policies, lack of financialdiscipline, missed opportunities and failure to diversify exports, are more

to be blamed than any external factor.

11. Way Forward:

11.1. The causes of debt Trap having been identifies, it is time to discussthe options available for debt management as well as the strategy to kickstart the economy. Four options for debt management and five-prong strategy

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of the government has come forward in this regard.

11.2. Regarding debt management the following four theories have comeforward, namely:-

a) Based on Noam Chomskys quotation of example of thecancellation of Cubas debt by Spain, Dr. Shahida Wizarat is of theview that Pakistan should repudiate its debt. In this way the countryshall be able to get rid of a very big debt burden. According to herthe repudiation of debt serves the principle of quid-pro-quo, as thepeople of Pakistan have not benefited from these debts. Such astrategy might lead to seizure of Pakistani assets held abroad, butin view of the small amounts involved, the costs are likely to beminimal.

b) According to Qais. Aslam, Pakistan should plead the case fordebt retirement on the basis of HIPC (high indebted poor countries)of the world criteria of the World Bank through a mutually agreed

formula and approach.

c) According to Tariq Waseem, Pakistan should ask its donors i.e.Paris Club and other to write-off the debt as a reward to Pakistansstand against terrorism and its role as a frontline state as was doneby the US-led coalition in case of Egypt in 1991 Gulf war. Accordingto him Pakistans case is stronger than Egypt.

d) The Debt Reduction and Management Committee (DRMC) setup by the government under Dr. Pervez Hassan has suggested tothe government to arrange for fresh loan of $ 10 billion to avert thedefault like situation.

11.3. The government has instead gone for debt rescheduling. The ParisClub has rescheduled its share of 12.2 billion and has given many concessionswithout declaring Pakistan highly indebted country. According to Dr. Ishrat

Hussain, Government of Pakistan has five-pronged strategy to deal withthe current debt situation, namely:-

a) Substantial reduction in bilateral debt-stock. U.S. is veryreceptive in this regard. There are some hurdles which when removed,Pakistan can obtain significant debt relief as well as flow of newconcessional money.

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b) Better access for our exports to foreign markets;

c) Low interest, concessional loans under Poverty Reduction andGrowth facility;

d) Pakistan will not foot the bill for the war against terrorism; and

e) Resumption of bilateral assistance, which was stopped by theUS in 1991 and by Japan in 1998.

11.4. The policies of the federal government regarding debt managementare viewed by the economists with skepticism. The reliance on export

earnings is somewhat fallacious. The present reserves of about $ 5 billion

are not the result of large increase in exports or a dramatic rise in home

remittances. Instead that is the money gained from the US and others for

budgetary support. If exports do not pick up appreciably, the foreign

exchange reserves built up in recent months would be wiped out after three

years when repayment of the resheduled loans begins after the current

reprieve given to the country by the Paris Club expires on 30th June,

2004. It is however, an opportunity fallen in the way of Pakistan to improve

its economy in the intervening period. It is imperative that positive steps

are taken to build the economy on sound footings by mobilizing the internal

resources and motivating the general public to save more and at the same

time the money which has been saved as a result of reduced repayments

to the IMF and other donors is invested in projects of public interest with

discreet planning.

11.5. With a proper framework of economic policies based on correct

assessment of the nature and dimension of our problems as well as our

achievements and failures and supplemented by improvements in economic

management and governance, we can certainly reach a stage where we can

sustain growth of 6 percent per annum without the support of extraordinary

bilateral economic assistance by 2010-11. This would, however, necessitate

the articulation and implementation of a coherent development strategy for

promoting positive interactions of growth with savings, investment and

exports.

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Zafar Iqbal, Managing the Economy, Dawn Business Review, March 18-24, 2000.Sultan Ahmed,Excessive Borrowing,massive spending:dailyThe Dawn, Jan28,2000.M. Aslam, Dr, prospective on Development Planning in Pakistan: Bilal Books, Lahore 1992.Khan, Mahfooz Ali, Debt Crisis & Foreign aid syndrome Pakistan Journal of Economics andManagement, Jan-April, 2002.Economic Servey of Pakistan, 99-2000 (P-128).Ibid, page-135.Ibid, page-135.Ibid, page-133.M. Aslam, Dr, Prospective on Development Planning in Pakistan:Bilal Books, Lahore, 1992.

M. Aslam, Dr, Prospective on Development Planning in Pakistan:Bilal Books, Lahore, 1992.M. Aslam, Dr, Prospective on Development Planning in Pakistan:Bilal Books, Lahore, 1992.From Plan to Market, World Development Report, 1996 (P-85).Human Development Report 1990, Oxford University Press, Boxl.l.Bill Clinton, Speech made at World Economic Forum, Devos, J anuary 2000, reported byPakistan Horizon April-July 2000 (P-142).Federal Bureau of Statistics, 50 Years of Pakistan Vol.I, Summary: June 1998 (P-57).Longman Dictionary of Contemporary English, Hong Kong edition, 1993.Wanyama Grass-root orginization for sustainable development ... Regional DevelopmentStudies Vol.7, 2001 (P-57).Authors calculations based on figures from Pakistan Economic Surveys 93-93,97-98 and 99-2000.

State Bank of Pakistan report of various year, quoted by S. Akber Zaidi in the article, Whatare we paying for our loans, Pakistan Journal of Public Administration, NIPA, Karachi, November2001 issue.Burki, Shahid Javed, Managing Pakistans Economy: International obligations vs. internalcompulsions, Pakistan Horizon, April-J uly, 2000 (P-18).daily the Jang Sunday Magazine: March 24, 2002S. Akber Zaidi: What we are paying for our loans. Pakistan Journal of Public Administration.Pervez Tahir: Economic Policy Continuation: A Critical view of the Eighth Plan 1993-1998

The Lahore Journal of Economics, Vol.5, No.1 (P-129)Munawar Baseer, Pakistan power sector daily The Nation March 11, 2002.Aamir Kabir, Emerging energy crisis and Options Dawn Economic and Business Review,

March 4-10, 2002.Dr. Mahnaz Fatima: Defence Spending cut-opposite view, Dawn January 15, 2001.Pakistan Economic survey 99-2000 (P-64).Siddiqui Dr. Shahid Hassan: Financial Sector Restructuring, Lecture delivered at NIPA.S. Akbar Zaidi: What we are paying for our loans. Pakistan Journal of Public Administration.Pervez Tahir: Economic Policy Continuation: A critical view of the Eighth Plan 1993-1998

The Lahore Journal of Economics, Vol.5 No.1 (P-129).Sultan Ahmad, Excessive Borrowing, massive spending: daily TheDawn, Jan 28, 2000.Aftab hmad Khan: Role of Foreign aid in Pakistans development daily The News.Dr. Shahida Wizarat: An alternative external debt management strategy, Pakistan BusinessReview, April 2001.

Khan Mahfooz Ali, Debt Crisis & Foreign aid syndrome, Pakistan Journal of Economics andManagement Jan-April, 2002.Qasim Aslam, Pakistans debt position and the question of debt retirement, The Lahore Journalof Economics, Vol.6, No.2, July-Dec, 2001.

Tariq Waseem, How is Pakistans case for debt write-off stronger than Egypts ? MonthlyVision, March 2002.An interview with Dr. Ishrat Hussian, The Herald, November 2001.Aftab Ahmed Khan: Role of Foreign aid in Pakistans development daily The News.

REFERENCES:

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1.2.3.4.

5.6.7.8.9.

10.11.12.13.14.

15.16.17.

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