January 21, 2002	Monday	Ziqa’ad 6, 1422

As a major reward for its unstinted support to the US-led coalition in their “war against terrorism”, Pakistan has secured a impressive rescheduling of its external debt.

The country has recently reached an agreement with the Paris Club, for a “stock re-profiling” of $12.5 billion debts owed to its member countries. The arrangement provides a repayment period of 38 years with a grace period of 15 years on loans given by them under official development assistance, which constitutes two-third of the total debt. The rest one-third has been restructured for a period of 23 years, with five years grace period.

No doubt it is an exceptional landmark even by exceptional standards. Re-profiling of this huge debt is no joke. The fact is that Pakistan has achieved something what even HICPs ( highly indebted poor countries) could not.

In the meanwhile, we have been able to secure some fresh loans too. The IMF has approved a Poverty Reduction and Growth Facility (PRGF) worth $1.3 billion. The money will be disbursed in equal quarterly tranches next three years. The first tranche of $109 million has been transacted. Add to this the new loans from the Asian Development Bank for the agriculture sector and judicial reforms. These financing arrangements are believed to lessen the strains on our “balance of payments”.

While it would certainly be carping to criticize the above-mentioned arrangement, the question that comes to mind is how much will it be possible to reduce dependence on foreign assistance and put our economy on track to self-reliance. Finance Minister Shaukat Aziz describes the rescheduling “beyond expectations” and “something amazing and incredible”. He may be right in assuming that Pakistan got almost what it asked for. Our government had requested a restructuring for 40 years with a grace period of 16 years.

But this mega-offer brings with it some challenges as well. Resource allocation is the foremost of them. Our external debt has escalated during the decade of 90’s reaching $38 billion recently. Standing at 105 per cent of the GDP, it is six times more than our yearly revenues and almost four times higher than total exports. Based on different cash flow assumptions and projections, the financing gap till year 2004 is estimated at around $8 to 9 billion. Yet through these agreements with the Paris Club, the IMF and the ADB, as according to Finance Minister himself, no more than $2.7 billion, will be saved in the same period. Where the remaining $6 to 7 billion come from to fill the black hole? It would really be too early to celebrate. Some key elements regarding the management of external debt effectively are to keep it within the desired limits, obtain the best available terms for financing and to ensure their most productive use. Unfortunately, external debt management in our country has not been characterized by these elements in the past. Loans were often used to cover fiscal deficits, caused not by productivity enhancing investment but by higher non-development expenditures.

It has often been pointed out that the debt burden increased in the past as resource allocation was not followed up by effective implementation and close monitoring of development projects. Despite various debt management strategies it has continued to rise. Though the new loans have been obtained on the concessional terms, the critical task remains to enable the economy acquire the capacity of repaying all outstanding loans without depending on that very source any further.

There are reports that government has assured the Asian Development Bank of some major steps for the release of $350 million loan for agriculture. These include abolition of subsidy on wheat, closure of provincial food departments and an end to price control system. Downsizing in the country’s prestigious institutions involved in agriculture research has also been reportedly committed with the ADB.

Experts see these measures as “devastating for agriculture sector” in the years to come. It has always been a problem with our financial managers that to obtain some handy cash in the form of loans they committed steps, which later proved harmful for the economy. Mr. Aziz and his team are repeating this blunder once again. One fails to understand why the government is bent upon obtaining more loans on such harsh conditionalities. Such loans would certainly wither the benefits that have come in our way in the form of debt rescheduling by the Paris Club.

Though the first tranche of the PRGF worth $109 million has been received, the IMF says that future flow of funds depends on the implementation of conditions agreed upon. The government will have to ensure fiscal transparency and good governance to keep receiving uninterrupted flow of dollars, the fund adds. For instance, the fund has given a deadline for the sell-off of the PTCL and the UBL. The government is required to get rid of these by May 31, 2002.

There are certain other macroeconomic targets which the GoP and the IMF have mutually agreed to achieve during three years period of the facility. These include achieving the GDP growth rate of 3.7, 5 and 5.2 per cent for next three fiscal years. Similarly, budgetary revenue will have to be increased up to17.6 per cent and budgetary expenditure is projected to come down to 20.8 per cent from current 21.9 per cent in FY-04. Fiscal deficit is projected to scale down from current 5.3 of GDP to 3.2 per cent in FY 2003-2004. These are by no means easy targets. So the new facility for poverty reduction and growth, despite being need of the time, remains an implementation test rather than any success to rejoice.

It is pertinent to note here that rescheduled bilateral loans, which stand at just less than one-third of total amount owed by us, were the only portion where Pakistan had some hope for a write-off. The rest are multilateral and commercial loans. Doesn’t it mean that real relief in the form of write-off,if there was any, is out of question now?

The economic management team is celebrating this success saying that all has been possible because of its economic reform programme. No doubt the completion of the SBA worth $596 million with the IMF, was first ever such feet accomplished by any government. But even a lay man is aware of the fact that this generous mood of our creditors is largely the result of our strategic support offered to the west, the US in particular, in their war against Taliban and Al-Qaeda. Had we not opened our door for the coalition, the situation could have been much more different. Thus the reward offered does not indicate that all is going well on all economic fronts.

The government’s commitment to its economic reform agenda notwithstanding, the progress in this regard may certainly be hampered by post-September 11 scenario. Our exports, foreign investments and industrial production have all suffered in the aftermath of attacks on the World Trade Centre. The economy is expected to remain in the limbo in near future as well, as the war like situatio