Heavily Indebted – Journal


PAKISTAN’s debt and external liabilities have grown rapidly in recent years. The government is forced to borrow heavily from outside sources – including multilateral and bilateral creditors and commercial lenders – in order to meet its external debt repayment obligations, as well as to finance its budget, development and imports.

Its growing need for dollars has forced the country to periodically knock on the doors of the IMF over the past three decades, to the detriment of economic growth, to avoid potential defaults on foreign bonds and to strengthen foreign exchange reserves. With the scarcity of cheaper and smoother bilateral and multilateral flows, the government is increasingly dependent on costly foreign commercial debt. In November alone, it was forced to borrow $ 1.1 billion from commercial lenders, bringing total debt flows in the first five months of the current fiscal year to $ 4.5 billion . According to the Ministry of Economic Affairs, new debt inflows so far represent 37pc of the annual budget estimate of foreign borrowing of $ 12.4 billion for the full year.

There are several reasons why Pakistan has become a heavily indebted nation. The exponential growth in the level of external debt shows that the country has not been able to attract sufficient long-term non-debt-generating flows such as FDI or to increase its exports, which remain blocked between 23 and $ 24 billion per year, to meet its external needs. account requirements. The extremely low level of formal domestic savings as reflected by bank deposits means that the government would have to depend on foreign savings to finance its fiscal operations as well as for balance of payments support. For example, almost 87%, or $ 3.9 billion, of the total loans taken in the past five months were for balance of payments or budget support. Likewise, the failure to reform the tax system and increase revenue collection is a major factor behind the government’s heavy domestic and external borrowing.

The fact that Pakistan’s external debt continues to accumulate and that it has to borrow more dollars to pay off its old loans suggests that the country is in fact trapped in debt. Since July 1, 2018, the government has accumulated $ 23.6 billion in external debt. External debt increased by $ 10.7 billion in the last fiscal year and by $ 8.4 billion in 2018-19, with debt servicing becoming the biggest budget expenditure.

According to official data, the government repaid $ 2.45 billion in the first four months of the current fiscal year against repayment estimates of $ 10.4 billion for the whole year – this, despite the debt relief granted by bilateral lenders to countries like Pakistan due to Covid19. This shows that the government will continue to borrow more money to pay off its old loans while accumulating more debt. It is not sustainable for any economy, let alone a fragile economy. The government should put its house to attract FDI, stimulate exports, increase tax revenues and encourage domestic savings to escape this trap.

Posted in Dawn, le 19 December 2020


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