March 4, 2002	Monday	Zilhaj 19, 1422

DURING his recent visit to the United States, President Pervez Musharraf was asked several searching questions including the one on the country’s external debt.

One of the journalists asked him to explain the outcome of the massive $45 billion debts that the military government of General Zia obtained. The President doubted the figure of $45 billion but did not say much about the purposes for which the loans were used.

In my judgment the question was pertinent but not based on facts. I believe the answer could have been given with greater clarity. This article would attempt to briefly explore the various purposes for which funds were borrowed and the extent to which they appear to have been misused or misspent.

One thing is quite clear. If we had used all the borrowed funds in high priority projects and programmes that yielded returns greater than the cost of funds, and in the process had crunch and beg for reprofiling or rescheduling from the Paris Club. Obviously, this was not done. Then what went wrong?

According to the last Economic Survey, total disbursed amount of external loans and grants from FY 1951-52 to 2000-2001 was $ 53.6 billion, of which $ 34.1 billion (63.6 per cent) was for projects. The rest were non-project funds in the following amounts and proportion of the total: non-food-, $8.26 billion (15.4 per cent); food, $ 7.2 billion (13.5 per cent); balance of payments support, $ 2.03 billion (3.8 per cent) and general relief funds, $ 1.98 billion (3.7 per cent).

In the early years, the increase in public investment was really dramatic. Public sector fixed investment sharply increased from 1.5 percent of GDP in 1949-50 to 5.8 per cent in 1959-60. Most of it went into economic infrastructure such as ports, roads, electric power and telecommunications. A substantial part also went into land development schemes such as the Thal Project, Taunsa Barrage, Warsak High Canal and Guddu Barrages, all of which laid the basis for improved growth in the 1960s.

In the 1960s foreign assistance financed public sector development including Indus Basin Replacement works, Tarbela Dam, Fertilizer Production units, etc fixed capital formation was quite large in the 1970s but went into widely dispersed areas of activities. Public development expenditures registered a steep rise from 4.9 per cent of GDP in 1971-72 to 11.7 per cent in 1976-77 as a result of the Indus Basin Works, economic and social infrastructure such as roads, electric power, nuclear power plant at Chashma, education, health as well as the many politically motivated public works programmes, prestigious sports complexes, the highway on the right side of Indus, etc. In general, normal procedures of review were bypassed and capacity constraints led to cost increases and leakages.

In the 1980s, despite the fact that the shortages of infrastructure were emerging, growth of public investment slowed down. However, during the 6th Plan (1981-82/1985-86) and the 7th Plan (1986-87/1990-91) more than $12 billion was borrowed from aboard. During this period, the real growth in defence expenditures, 9.2 per cent p.a., was unprecedented. The increase in development expenditures was rather small, 3.2 per cent p.a. In the 1990s again more than $12 billion flowed in, most of which was used to pay back previously contracted loans.

During 1988-97, actual growth in government expenditures, other than interest payments, was minimal— 1.3 per cent per annum. During this period, not only the public sector investment as a proportion of GDP came down, its effectiveness suffered because of political pressures on the choice of projects with low priority, weakened institutional capacity to evaluate and organize project and personalised decision making as a result of which the Planning Commission was bypassed for big projects like Motorways, IPPs,the People’s Work Programme, etc. Also several large projects of dubious economic value such as the Karachi Transit Project and the Sindh Tameer-e-Watan Programme were launched.

All in all, an unsatisfactory use of external resources, and serious mis-governance are clearly indicated when we realize that:

a) the resources obtained did not satisfactorily build or maintain all the economic infrastructures that remains in poor shape even today;

b) the poverty has jumped to dangerous levels; every third household in the county is trapped in poverty. Today, we have 10-12 million more people below the poverty line than the total population of this part of Pakistan in 1947.

c) all social indicators related to education, adult literacy, nutrition, safe water supply, sanitation services, etc. are in terrible shape;

d) overall economic growth has decelerated steadily from 6.1 per cent per annum in the 1980s to 5.1 per cent and 4.1 per cent during 1990-1995 and 1995-2000 respectively.

e) despite a healthy, over 4 per cent per annum, growth in the last 20 years, the agriculture sector is still subject to wide fluctuations because of its undue dependence on weather conditions despite having one of the largest irrigation system in the world.

f) large-scale manufacturing growth rate decelerated from over 8 per cent p.a. in the 1980s to less than 5 per cent p.a in 1990-95 and a pathetic 2.7 per cent during 1995-2000. This has contributed to massive unemployment. The manufacturing sector that has been developed is neither an efficient import substitutor nor a dynamic export promoting force;

g) most of the state owned enterprises (SOEs) are running huge losses and have become a major drain on the treasury.

While no serious attempt has been made to broadly assess the effectiveness of development expenditure it is necessary to find out where the loans went. This article is an initial step in that direction. However, this is one of the areas of resources utilization and debt management that warrants substantial further work. We need to learn clear lessons from the past so that we are not condemned to repeat history, at a huge cost, once again. The recently created fiscal space will be wasted if the mistakes made in the past are overlooked.