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Pakistan's dependence on foreign loans by 21st century.

Pakistan's Dependence on Foreign Loans by 21st Century

Our dependence on foreign loans has risen to an unprecedented level. This tendency has raised concerns about the viability of our strategy towards foreign borrowing. It is posing problems for sustainable growth. The issue has been identified several times by the previous regimes as well as by the present government. In the 1970's Pakistan's foreign debt grew at an average rate of over 11 per cent per annum. At present, our foreign loans have reached $14 billion. An important feature has been that since the mid 1970's our debt service payments have increased at a much faster rate, as compared to the outstanding debt. The previous Governments continued to claim that foreign dependence would be reduced substantially. We have been listening to this since 1960's. Similar claims have also been made in the Seventh Plan. However, foreign loans are increasing with the passage of time. In 1974-75, debt servicing was 25 per cent of our exports which increased to 38 per cent in 1984-85. Our external debt was 27 per cent of our GNP, in 1981-82, which increased to 31 per cent in 1985-86. Our demand for foreign loans is increasing by 15 per cent per annum. Our foreign loans grew by 11 per cent per annum during the 1970's. It is to be investigated whether we will be reaching a crucial level of foreign dependence, if the present trend to borrow continues. Let us have a general overview of our historical pattern of foreign borrowing and capacity to repay the same before we make our forecast for the year 2000.

Our foreign loans, as percentage of GNP, are about eight times in 1985-86, those of 1960-61. However, these were even greater in 1975-76. The amortization payment, as percentage of disbursed loans, was 3 2 per cent, which increased to 39.5 per cent, an increase of more than twelve times during this period. Similarly, debt servicing and interest payments, as a percentage of export receipts, have doubled during the same period. It indicates that our reliance on foreign resources is increasing rapidly, although it is not very severe at this stage. Let us now view the international perspective of foreign dependence.

We have analyzed about one hundred countries and picked up two major groups consisting of 27 which are burdened with foreign loans. There are thirteen countries which have accumulated foreign loans more than 100 per cent of their GNP. These are: Mali, Togo, Madagascar, Zambia, Mauritania, Bolivia, Yemen PDR, Coto, Ivoire Nicaragua, Paraguay, Costa Rica, Chile and Israel. The second group of 14 is of those who have foreign debt more than 60 per cent of their GNP but less than 100 per cent. These are: Malawi Niger, Benin, Senegal, Liberia, Egypt, Papua New Guinea, Honduras, Dominicon Rep., Peru, Ecuador, Syria and Malaysia. As compared to these, Pakistan'a loans are only 31 per cent of GNP.

Foreign loans may not pose any serious problem as long as a country has the capacity to repay the debt and continue its accelerated growth of the economy. To view the repayment capacity, we have picked up only two variables, although there are several others which may be made a part of the discussion. We have viewed the debt servicing as a percentage of GNP and exports. Out of the aforementioned, only eight countries were paying more than 10 per cent of their GNP as debt servicing. These are: Togo, Mauritania, Yemen PDR, Papua New Guinea, Costa Rica, Chile, Malaysia and Israel. They have reached a critical point where they are already facing hardship in repaying the debt or will be facing a danger to their economic growth. Other countries had debt services less than 10 per cent of their GNP. As compared to them, Pakistan is paying only 3.2 per cent of its GNP as foreign debt.

The real danger of foreign dependence may be seen more clearly if we look at their foreign exchange capability. It should be noted that data for only 19 countries, out of the 27 mentioned above, is available. There were 17 which were paying more than 15 per cent of their export receipts as debt servicing. There were about 10 whose one-third of their export receipts was washed away by debt servicing. Pakistan also falls in this category, about 30 per cent of our exports earnings go to debt servicing. Although, our debt as a percentage of GNP is not very high, our ability to earn foreign exchange is limited when we look at our export receipts.

Our forecast is based upon our normal historical pattern of foreign borrowing, which is assumed to be generated from our current account deficit. The projections are made for the expected demand for foreign loans and debt servicing which will be generated as a result of this indebtedness. We have assumed that the amortization period of public loans will be 30 years and 20 years for private loans.

The table reveals that our outstanding debt Rs. 160,105 million in 1987-88 will increase to Rs. 573,535 million by the year 2000-01 and to Rs. 1,153,740 million by the year 2007-08. It indicates that our outstanding debt will be seven times that of 1987-88. Similarly, our debt servicing will increase by more than nineteen times during the same period. In other words, the growth of debt servicing will be increasing at a rate of sixteen per cent per annum whereas, it is expected that our GNP will grow at the rate of 8.12 per cent per annum. Thus the debt servicing will be growing 8 per cent faster than our GNP.

The burden of debt servicing may also be viewed as its share in our GNP. The table also shows that in 1987-88, debt servicing was 1.1 per cent of our GNP, which will increase to 5 per cent by the year 2000-01 and to 6.6 per cent in by 2007-08. In other words, the same, as percentage of GNP, will be six times that of 2007-08 as compared to that of 1987-88. It does indicate an alarming increase in the burden of debt servicing. The increasing burden of foreign loans may also be viewed as per capita debt outstanding. At present, our population is estimated at 104 million, which is expected to become 185 million. On the other hand, our real per capita debt outstanding which is Rs. 1,496 will increase to Rs. 3,783 in 2000-01 and to Rs. 6,243 in 2007-08. Thus, it will grow at the rate of over 7 per cent per annum. In other words, real per capita debt outstanding will be four times greater than that of 1987-88. It does show that the foreign dependence will be increasing rapidly if proper alternative policies and domestic resources are not mobilized. It should be noted that although at the moment Pakistan is not undergoing heavy indebtedness as compared to other developing countries, our analysis reveals that in the next century it will join the second highly indebted nations in the world. Its foreign outstanding loans will exceed sixty per cent of its GNP. (Our analysis is related to the real debt outstanding). Similarly, its debt servicing will also make it a part of the same group of countries. We have not analyzed the policy options which could be adopted to change this tendency. [Tabular Data Omitted]

In short our analysis reveals that Pakistan's foreign debt is mounting rapidly, although it is not one of those developing states which have accumulated foreign loans to a crucial level. However, the tendency of foreign borrowing does indicate that it is on way to joining the group of second highest foreign indebted countries by the turn of the century. Similarly, the increasing burden of foreign loans and debt servicing could also lead to bottleneck in its economic growth. As a result, the per capita debt outstanding is also growing speedily. Therefore, it is necessary that appropriate economic policies be introduced to cope with the adverse situation.
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Author:Chaudhary, M. Aslam; Mustafa, Ghulam
Publication:Economic Review
Date:Sep 1, 1990
Previous Article:KCCI memorandum for revision of tax measures.
Next Article:Elections - 1990.

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