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Tuesday, March 16, 2010

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Death by debt
Dr Ashfaque H Khan This is my fourth article on this subject in the last seven months. What prompted me to write yet another article on the same subject in a short span are the numbers pertaining to external debt and liabilities (EDL) and public debt released by different government agencies for the first half (July December) of the current fiscal year. These numbers are worrisome and need to be brought to the notice of the general public. It is well-known that high and rising debt burden constitutes a serious threat to growth and development. It is a major impediment to macroeconomic stability and thus to growth, employment generation and poverty alleviation. It is also a discouragement to foreign investment because it creates uncertainty about the government's policy and thus generates a high risk environment for doing business in the country. High and rising debt burden also puts pressure on exchange rate, thus causing sharp depreciation with attendant difficulties for price stability. This also becomes a source of discouragement for government to undertake wideranging structural reforms in the various sectors of the economy. Pakistan has witnessed serious debt crisis in the 1990s and accordingly experienced deterioration in the macroeconomic environment, leading to deceleration in investment and growth and the associated rise in unemployment and poverty. The last two years have taken Pakistan back to the decade of the 1990s. Faltering of growth, persistence of large fiscal and current account deficits and sharp depreciation of exchange rate have already produced unsustainable debt burden. Accordingly, Pakistan has become heavily dependent on external financial support from the IMF, World Bank, Asian Development Bank, Islamic Development Bank and bilateral sources. Its excessive reliance on external financial support has compelled Pakistan to compromise on its national security. It took six/seven years of hard work to bring the economy out of the difficulties of the 1990s. Pakistan's public debt was brought down from over 100 per cent of GDP in 1998-99 to 55 per cent by end-June 2007, the external debt reduced from 66 per cent of GDP to 28.2 per cent, debt servicing which used to be over 72 per cent of our total revenue declined to 35 per cent and debt servicing and defence spending which was over 100 per cent of total revenue was brought down to 54 per cent during the same period. In short, the country's debt burden was reduced to one-half in just six/seven years. The reduction in debt burden released resources to be spent on people and infrastructure. Consistent with empirical evidence, the decline in debt burden led to the acceleration in economic growth, job creation and poverty reduction. Pakistan emerged as one of the four fastest growing economies in the Asian region; it created 13 million jobs and reduced the poverty by one-half during the period. Sharp reduction in debt burden resulted in continuous improvement in credit ratings by Standard and Poor's and Moody's. Improvements in sovereign credit ratings encouraged Pakistan to enter international capital and equity markets. Whenever Pakistan floated sovereign bonds those were over-subscribed by multiples. The IMF staff wrote "the large and sustained decline in the external debt-GDP ratio was one of Pakistan's most remarkable macroeconomic achievements of recent years". Comparing Pakistan with those countries which sought exceptional assistance from the IMF, the IMF staff wrote "this level of external debt is significantly lower than those of countries that have had exceptional access arrangements from the Fund in recent years." (See 'Pakistan Assessment of Risks to the Fund and the Fund's Liquidity Position', IMF, November 20, 2008). In the same document, it is written that "at the 2005 Board Discussion of Pakistan's ex-post assessment, Directors highlighted the dramatic change in ownership of economic policies in Pakistan compared to earlier periods, and emphasised that steadfast implementation of sound

policies and broad-based structural reforms were mainly responsible for Pakistan's economic recovery". This was Pakistan two years ago. Today, the country is drowned under debt. The recently released numbers pertaining to debt are scary. Public debt increased from Rs7542 billion in end-June 2009 to Rs8470 billion in end-December 2009. In other words, Pakistan added Rs928 billion in public debt in just six months. Exchange rate depreciation alone contributed Rs181 billion in the rise of public debt in six months. Since end-June 2007, Pakistan has added Rs3656 billion in public debt, in which, the contribution of exchange rate depreciation is estimated at Rs1165 billion or 32 per cent. It is disturbing to note that in the last 60 years the total stock of public debt stood at Rs4814 billion and in just two and a half years, we added Rs3656 billion in public debt to stand at Rs8470 billion by end-December 2009. This is nothing but a massacre of the country's economy by the current political leadership. External debt and liabilities stood at $55.7 billion by end-December 2009 increased from $52.3 billion in end-June 2009. In other words, Pakistan added $3.342 billion in external debt in just six months of the year. For the information of our readers, Pakistan added $2.6 billion in external debt in seven years but in the last two and a half years, it added $15.3 billion to stand at $55.7 billion. It pains me when political leaders misguide their own people by telling lies. It pains me even more when the so-called experts particularly the Panel of Economists led by Dr Hafiz Pasha and Economic Advisory Group led by Shaukat Tarin misguided political leadership by distorting facts. Is this the service to the nation? Is this what patriotism is all about? Why these experts have not presented these facts which I have just narrated above? Why did the political leadership hide the facts from the people of Pakistan but told the truth to the IFIs? I leave this to the readers to judge on the basis of facts.

The writer is director general and dean at NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

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