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PRESENTATION ONPRESENTATION ON
Debt, Growth and Poverty Debt, Growth and Poverty Reduction: Reduction: A Case of Pakistan A Case of Pakistan
By
Dr. Ashfaque H. KhanDr. Ashfaque H. KhanPrincipal & Dean Principal & Dean School of Social Sciences & School of Social Sciences &
Humanities (SHumanities (S33H)H)National University of Sciences & National University of Sciences & Technology, IslamabadTechnology, Islamabad
Oct 12, 2013Oct 12, 2013
At: Centre for Policy Studies (CPS), CIITCOMSATS, Islamabad
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Economic growth is the single most important factor influencing poverty
A stable macroeconomic environment is essential for a sustained high economic growth
Empirical evidence suggests that macroeconomics instability has generally been associated with poor growth performance and the associated rise in poverty
The persistence of large fiscal and current account deficits and the attendant rise in public and external debt have been the major source of microeconomic instability in many developing countries.
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Summary
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Existing Empirical Evidence
Rising public debt and economic growth exhibit negative relationship
Reinhart and Rogoff (2012) found weak relationship between government debt and long term economic growth under 90% of debt/GDP ratio. Negative relationship becomes stronger beyond 90% of debt/GDP ratio.
Balassone et al. (2011) found a negative and non-linear relationship between public debt and growth, with growth declining substantially when the debt to GDP ratio exceeds 100 percent.
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Summary
Overwhelming empirical evidence suggests four things
Relationship between public debt and economic growth is negative
Relationship is non-linear
There exists bi-directional causality between these two variables
Higher public debt affects growth negatively through investment
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IS DEBT CREATION BAD FOR THE ECONOMY?
Borrowing domestically or abroad is a normal part of economic activity.
As long as the borrowers can earn a higher economic/social rate of return than the cost of invested funds, creation of debt is not a burden.
Debt-servicing problems arise when the debt carrying capacity of the country does not increase commensurate with the increase in its debt servicing liabilities.
(The debt carrying capacity is defined as the ability of a country to service its external liabilities within an orderly and stable macroeconomic framework)
(Continue…)
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IS DEBT CREATION BAD FOR THE ECONOMY?
Short-term borrowing for longer-term projects can lead to serious cash flow problems.
Countries most often run into difficulties because the borrowed funds are directed toward wasteful or low economic return projects.
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Pakistan sustained a very large budget deficit in the 1990s and During 2008-12
Overall fiscal deficit (% of GDP)
Source: Ministry of Finance
* Including earthquake related expenditure
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• Current Account Deficit remained high in the 1990s despite low economic growth.
• Current Account Deficit widened recently on account of strong economic activity and rising oil and commodity prices. The same has improved in 2008-09 on account of collapse in oil and commodity prices.
Current Account Deficit (% of GDP)
Source: SBP
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TRENDS IN PUBLIC DEBT (Rs. Billion)99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 2010-112011-122012-13
a) Debt Payable
(Rs)
1576 1728 1715 1852 1979 2152 2322 2601 3266 3852 4651 6014 7638 9521
Debt payable ($) 27.5 27.8 29.9 30.6 31.2 32.1 33.9 36.4 40.7 46.4 50.0 54.6 53.2 47.9
Exc. Rate
(E.O.P)
52.5 63.4 60.1 57.7 57.9 59.7 60.2 60.4 68.3 81.4 85.5 86.0 94.5 99.1
b) Foreign Debt
(Rs)
1442 1761 1795 1766 1810 1913 2041 2201 2778 3776 4270 4694 5030 4747
c) Total Debt (a +
b)
3018 3489 3510 3618 3789 4065 4363 4802 6044 7629 8921 10709 12668 14268
GDP (mp) 3826 4163 4402 4823 5641 6500 7623 8673 1024
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12724 14837 18063 20091 22909
Total Revenue 513 553 624 721 806 900 1095 1298 1499 1851 2078 2261 2566 2969
Total Debt as %
of:
- GDP 78.9 83.8 79.8 75.0 67.2 62.5 57.2 55.4 59.0 60.0 68.1 59.3 63.0 62.3
- Revenue 588 631 563 502 470 452 398 370 403 412 429 474 494 481
• Total stock of public debt in 60 years (1947-2007) stood at Rs. 4802 billion but
we added Rs. 9466 billion in just six years (2008-13) Source: Ministry of Finance
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TRENDS IN EXTERNAL DEBT AND LIABILITIES
External Debt and Foreign Exchange Liabilities External Debt and Foreign Exchange Liabilities (Billion $)(Billion $)
•We added $1.6 billion in external debt in 8 years (2000-07) but added $19.6 billion in just 4 years (2008-11)
Source: Ministry of Finance
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MACROECONOMIC CONSEQUENCES MACROECONOMIC CONSEQUENCES OF UNSUSTAINABLE DEBTOF UNSUSTAINABLE DEBT
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Serious threat to development
Major source of Macroeconomic instability
Lower Economic Growth
Rise in Unemployment
Rise In Poverty
Raises the Risks of a Fiscal Crises
Keeps Borrowing Cost High
Discourages Private Sector Investment
Major source of discouragement for foreign investment
Keeps pressure on exchange rate
Major constraints for the government to undertake counter cyclical policies to revive economic growth
WHY SHOULD WE WORRY ABOUT RISING DEBT BURDEN
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LOSS OF FINANCIAL SOVEREIGNITY
Pakistan became the prolonged user of IMF resources.
Economic Policy making circles around IMF/IFIs Programs.
Influence of IMF and IFIs in policy making increase substantially.
We went to the IMF in November 2008; IMF Program remained suspended since May 2010 and until the completion of the program in September 2011.
Pakistan Entered in a new program with the IMF in early Sep 2013
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Barring two years the real GDP grew at an average rate of 3.8% p.a in the 1990s
Source: Various Issues of Economic Survey
Growth recovered during 2002-07 to an average of 6.8% p.a.
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Significant Reduction in Unemployment
•Unemployment declined … •13.5 million jobs created in seven years
•Source: Economic Survey 2006-07
•Source: Labour Force Survey, FBS
Labour Force Survey
Employment (in
millions)
Number of New
Employment (in millions)
FY 97 35.16 -
FY 00 37.32 2.16
FY 02 39.64 2.32
FY 04 42.24 2.6
FY 06 47.37 5.13
FY 07 49.68 2.31
FY 08 50.75 1.07
FY 09 52.71 2.0
FY 10 54.05 1.34
FY11 54.68 0.63•We need to create 3.5- 4.0 million jobs per year in the next 10 years for new entrants
7.8
8.3
7.7
6.2
5.3 5.25.5 5.6
6
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
1999-002001-022003-042005-062006-07 2007-082008-092009-102010-11
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Percent of people living below the poverty line reduced
Area1998-99
2000-01
2004-05
2005-06
2007-08
Overall 30.6 34.5 23.9 22.3 17.2
Rural 34.7 39.3 28.1 27.0 20.0
Urban 20.9 22.7 14.9 13.1 10.0
Source: Center for Research on Poverty Reduction and Income Distribution (CRPRID)
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Percent of people living below the poverty line reduced
0
5
10
15
20
25
30
35
40
1998-99 2000-01 2004-05 2005-06 2007-08
30.6
34.5
23.922.3
17.2
34.7
39.3
28.127
2020.9
22.7
14.913.1
10
OverallRuralUrban
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Progress is reflected in the ratings momentum on Pakistan
Moo
dy’s
S&
P
B+
B-
CC
CCCCCC-
SD
B-
B
Outlook: stable
Outlook: Negative
B+
B2
B3
Caa1
B3
B2
Aug, 2009
Aug, 2009
31
B1
CCC
CCC+
B
B2
B3
B-
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Ratings Scale
STANDARD&POOR’S
Moody’s InvestorsServices
Investmentgrade
NonInvestmentgrade
AaaAa1Aa2Aa3A1A2A3Baa1Baa2Baa3
( Long-Term ) ( Long-Term )
AAAAA+AAAA-A+AA-BBB+BBBBBB-
Ba1Ba2Ba3B1B2B3Caa1Caa2Caa3Ca
BB+BBBB-B+BB-CCC+CCCCCC-
Pakistan’s Ratings in 2007
Current Ratings
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What Needs to be Done?
– Newly Elected Government must bring a strong economic team
– Political Leadership must provide full support to the team
– No Room for Business-as-usual Policy
– Extraordinary situation Demand Extraordinary Measures
– Financial Discipline is the key to success
– Strike a balance between stabilization and Growth
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Undertake wide-ranging structural reforms
– Taxation side
– Expenditure side
– Accelerating Privatization
– Power Sector Reform
– Circular Debt Issues
– Correcting the Manufacturing defects of the NFC
– Strengthening of Infrastructure
– Strong Linkages with Private Sector
Challenging Time Ahead but Surmountable
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THANK YOUTHANK YOU