PAKISTAN’s official external debt has not gone down since 1999 although it has received record aid, investments, and remittances flows. It has gone up to $36.9 billion from $33.6 billion in 1999 despite receiving at least $10 billion in economic, military and development aid from the United States, over $6 billion in privatisation proceeds, and a relief of $1.6 billion in loan write-offs by foreign governments during the last seven years.

The rescheduling of Paris Club debts provided an additional relief of $ 1.2 to $1.5 billion annually in terms of debt service payments. Is the government’s debt management policy as sound and successful as it claims or a historic opportunity to restructure country’s high debt levels has fallen victim to political expediency or a false sense of achievement?

Even after having received such generous assistance, Pakistan external debt to GDP ratio is 28 per cent - slightly worse than Africa’s 26.2 per cent, which also happens to be the average for all the developing countries. The average external debt to GDP ratio of all emerging markets declined from 42.1 in 1999 to 26.2 per cent in 2006, underpinned by strong growth in the global economy and record investment flows into the developing countries.

It is argued that the former Prime Minister Nawaz Sahrif left a heavy external debt burden at 53 per cent of the GDP and the current levels represent a substantial improvement. The net debt flows (disbursements minus repayments) into Pakistan during 1990-1999 aggregated $5.4 billion compared to $1.1 billion during 2000-2006.

Hence, the growth in the debt slowed down during the last seven years. However, post-9/11, Pakistan received generous foreign aid as well as much higher levels of foreign direct investment. Remittances averaged around $4 billion a year during 2003-2006 compared to an average of $1.5 billion in the 1990s.

Nevertheless, Pakistan’s liquid foreign exchange reserves, after jumping to $10 billion-level in 2002-03, have more or less stayed around that level on average. The foreign exchange reserves of even Sub-Saharan countries (excluding South Africa and Nigeria) doubled to $50 billion during the same period. Brazil and Argentina repaid all of their $25 billion debt - by utilising their foreign exchange reserves - to the IMF in early 2006 to rid their countries of its influence.

In contrast, Pakistan has not able to reduce the external debt burden in absolute terms or build up its foreign exchange reserves. In fact, it has become the fourth largest borrower of the World Bank and the fifth-largest recipient of American aid to foreign nations. This shows its continued reliance on foreign governments and multilateral institutions - despite declarations of economic sovereignty - and a failure to mobilise domestic resources to pay for the development expenditure. Leaving aside all the technicalities and vague statements, there has been no convincing explanation for not having used the privatisation proceeds to reduce the external debt in a completely transparent manner.

Some policy makers argue that it is acceptable to borrow if the borrowing is for productive purposes. That is theoretically correct. However, if the borrowing record is littered with corruption and wasteful spending, and major sectors of the economy (large agriculturists, stock brokers, property barons, etc.) do not pay any tax at all, the proposition becomes quite debateable and the motives questionable.

This is a critical issue for Pakistan’s political economy because the subject of external debt has been a highly political one for most of Pakistan’s history since it has relied heavily on the US and institutions under the US influence for its external financing needs. So have many other developing countries - though not necessarily to Pakistan’s extent - in the past but most no longer do. This type of aid has been associated with corruption, waste and increasing debt burdens. It has even been viewed as a payoff to the third world dictatorships for their support and aid in helping the US in achieving its foreign policy objectives that have often clashed with the national interests of the borrower countries.

For example, the recently proposed US law, aimed at punishing oil companies that deal with Iran, will make it even more difficult to construct the Iran-Pakistan-India gas pipeline. Pakistan must import natural gas from Iran to meet an imminent shortage during the next few years. On the other hand, recent moves in the US congress threaten to cut military aid to Pakistan if it fails to “do more” and stop the Taliban insurgency from its tribal areas.

The government claims that it no longer borrows from the IMF and does not carry around a begging bowl. This is quite misleading because it has been borrowing more and more from other multilateral institutions like the World Bank (WB) and the Asian Development Bank (ADB). The borrowing from multilaterals has outpaced the borrowing from the Paris Club since 1999-2000. Its share in total public and publicly guaranteed debt has increased from 37.5 to 50.2 per cent in 2006.

Consequently, whilst the government has made progress in raising money from the international capital markets – a welcome and positive development - official sources still account for 90 per cent of Pakistan’s external debt, including the WB/ADB [48 per cent] and foreign governments [38 per cent]. IMF’s loans rarely exceeded 5-6 per cent of total external debt as it normally provided the balance of payments support and not long-term loans that constitute the bulk of our external debt.

The present government has criticised the previous governments for the accumulation of almost $18 billion debt in the 1990s and increasing Pakistan’s debt burden. While it is true that the debt accumulation in the 1990s was large, critics of the civilian governments conveniently overlook a key statistic: 77.2 per cent of the gross disbursements during 1990-1999 were utilised to repay the old debts. The debt-service to gross disbursement ratio jumped to 82.8 per cent during 2005-2006. The continuing increase in this key ratio throughout the 1990s and even during 2000-2006 indicates that more and more of new loan disbursements were used to repay the past debts; a significant percentage relating to the borrowings during the previous military regime of General Zia-ul-Haq.

Pakistan's total external debt that stood at $8.7 billion in 1978, reached about $22 billion (50 per cent of the GDP) by the end of the 1980s. That Pakistan had to borrow more later in the 1990s just to service some of the old debts indicates that the loans were not properly utilised as they did not contribute to the development and therefore to the debt servicing capacity. This raises serious questions about the whole wisdom of politically motivated borrowings from the foreign governments and the institutions under their control.

It is therefore fair to ask whether any cut in aid from the foreign governments would be of real significance from a development perspective and particularly in a global economic environment when the private capital flows (through foreign direct investments and international capital markets) have become the dominant source of financing to the developing countries. As a group, they reduced their total external debt to the foreign governments and multilateral institutions (WB, IMF, ADB, etc.) through net repayments of $48 billion in 2006 whilst attracting a staggering $502 billion in net private capital flows.

Pakistan’s vicious cycle of borrowings from foreign governments and multilateral institutions, graft, waste, and accumulation of more debt to repay the old debts leads one to believe that the rulers have been putting excessive burden on the people and mortgaging their future by borrowing more and more while indulging in wasteful and unproductive spending while the ‘big fish’ get away with not only benefiting from the “development projects” financed by external borrowings but also with paying no taxes.

Pakistan’s foreign (or hard currency) debt to total debt (that is, including domestic debt) ratio of 47 per cent is high compared to an average of 28 per cent for emerging economies. Given our long-term track record of using foreign debt to indulge in wasteful expenditure, it would be in the best national interest to set up a special fund (in a hard currency, be it dollar or euro) to accumulate all the privatisation proceeds and use that for the early retirement of our external debt. Some countries, like Russia, have set up hard currency stabilization funds to provide for the rainy days.

However, this would be just one among a series of measures needed to reduce dependence on foreign debt. We must cut imports and reduce the rapidly deteriorating current account deficit that has prevented a build-up of foreign exchange reserves since 2003. We must also strive to increase the tax- to- GDP ratio from 10 per cent (one of the lowest) to 17 per cent within the next five years instead of making far-fetched 10-year plans.

The world today is experiencing unprecedented economic growth with huge pools of liquidity seeking investment opportunities. If Pakistan can reduce its macro imbalances by reducing foreign debt and mobilising domestic resources, it can attract a much greater level of foreign direct investment and achieve greater economic freedom. Shall we rise to the challenge or we will once again squander away a historic opportunity?

The writer is a former head of Emerging Markets Equity Investments, Citigroup.