April 3, 2003	Thursday	Muharram 30, 1424

KARACHI, April 2: A well-known private research organization Social Policy and Development Centre (SPDC) has proposed the utilization of a part of over $10 billion foreign exchange reserves for retirement of external debt and cleaning of the infected balance sheets of the Nationalized Commercial Banks (NCBs).

Retirement of external debt will further reduce debt servicing liability and create fiscal space for higher level of public investment. Cleaning of NCBs’ balance sheets will facilitate further lowering of interest rates to boost private investment.

The SPDC report “Pakistan’s External Debt Burden: Causes, Remedies and Complexities,” researched jointly by Technical Adviser Asad Saeed and Consultant Ejaz Rashid make it abundantly clear that a proactive growth and development strategy is the only option to attain a sustainable level of debt servicing.

In a presentation, Asad Saeed, however, concedes of determining “some rational level” of the foreign exchange reserves to be maintained for meeting contingencies while setting aside resources for development and growth.

“The medium and long-term issue should be to revive growth and investment in the economy and to create a dynamic export base in the country so that the need for external debt is minimized,” the report stresses.

The SPDC report is a virtual indictment on the prescription offered by the government’s Debt Management Committee’s report. Headed by Dr Pervez Hasan, the DMC report’s strategy is to achieve debt reduction through macroeconomic stabilization rather than through growth and investment.

“Since 1997, Pakistan has been under a heavy dose of stabilization and the results have been that investment has collapsed, the Incremental Capital Output Ratio (ICOR) — a standard

SPDC for using reserves method for investigating investment efficiency, has further deteriorated while growth has taken a nosedive,” the SPDC report observes. Consequently, poverty and unemployment have both increased at a much faster rate.

“Neither theory nor any empirical evidence suggests that stabilization will always necessarily lead to economic growth,” the SPDC report asserts.

The SPDC report notes with sarcasm the optimistic assumption of the DMC report that revenue GDP ratio will increase from 16.8 per cent to 17.6 per cent of GDP in 2004. “The incentive to pay taxes will only be encouraged if credibility is established with respect to transparency of public expenditures,” it remarks and make a pointed reference to the “most flagrant case of lack of transparency is witnessed in the military budget”. Military budget is said to be 24 per cent of total budget plus 4 per cent spread in other heads. “Military budget is a one line item in the demands for grants document,” it says and point out that even when there is an elected parliament, this one expenditure head is not debated and duly approved like other public expenditures.

Quite a few targets set by the DMC report has remains unachieved particularly the realization of $3 billion of privatization proceeds and reduction of net external debt burden to the sustainable level of 20 per cent of foreign exchange earnings by mid 2005.