There has been no end to Pakistan’s debt grief despite debt relief and fiscal reform considered essential for alleviating the pain from Pakistan’s growing debt burden. Despite rescheduling, debt servicing increased as a percentage of expenditures from 37 per cent in FY 1990-91 to 53 per cent in FY 2000-01.

The benefit from rescheduling was not very significant as it made a difference of only about 2-3 percentage points maintaining the above ratio at the 1997-98 level. Debt-servicing as a percentage of expenditures increased during the last decade as the shares of expenditures on defence, social services, economic services, and subsidies declined during the same period.

According to the GOP’s Debt Reduction and Management Committee (2001), the nominal public debt burden has grown from 66 per cent of GDP in 1980 to over 100 per cent in 2001. It was 400 per cent of revenues in 1980 and increased to 610 per cent by 2001 from a level of Rs155 billion in 1980 to Rs 802 billion in 1990 further swelling to Rs3200 billion by mid-2000. Comparatively, India’s public debt to revenue ratio is 385 per cent, Mexico’s is 220 per cent and Chile’s is 60 per cent.

While the size of public debt is generally linked with the size of fiscal deficit, fiscal reform over the least decade has not been able to contain Pakistan’s public debt. In fact, public debt ballooned as above despite focus on fiscal reform. The proponents of fiscal reform would argue that the solution is not less but more fiscal reform. This is an issue that will be examined in a later portion of this articles.

As for external debt, it increased from less than US$ 10 billion in 1980 to $20 billion in 1990 and further to over $43 billion in May 1998 before the foreign currency accounts were frozen. According to the SBP Annual Report, 997-98, Pakistan’s ratio of external debt to exports of goods and services (including workers’ remittances) was at 256.1 per cent during 1997-98. It was higher than 135.8 per cent of LDCs and 186.7 per cent of South Asia and exceeded the prescribed debt sustainability normal limits. Also, it was only better than 340% of the Heavily Indebted Poor Countries (HIPC) for whom the G-8 group of developed countries launched a major debt relief initiative. Pakistan’s ratio of external debt and foreign exchange obligations to foreign exchange earnings rose from 200 per cent in 1980 to 260 per cent in 1990 and further to 360 per cent in 1998. Even after freezing the FCY accounts, this ratio remained close to 300 per cent in 2000. Debt-service payments on medium- and long-term debt (before rescheduling) as percentage of foreign exchange earnings increased from 18% in 1980 to 23.3 per cent in 1990 and further to 40 per cent compared with 21 per cent India, 9 per cent for Bangladesh, 7 per cent for Sri Lanka, 13 per cent for Indonesia, and 10 per cent for Egypt.

Reverting to the issue of dealing with public debt reduction through reduction in fiscal deficit, emphasis on an increase in the tax-to-GDP ratio has been the cornerstone of Pakistan’s fiscal reform policy throughout the decade of the 1990s. This has been hotly discussed and debated with two points of view emerging on the subject. According to one view, it is this deflationary policy that has fed back into continued fiscal deficits and thereby rising debt burden. The other view, emanating from an affinity for the donors’ community, laid continued emphasis on an even more intense effort at tax and fiscal reform. Those who hold this view also like to draw comparisons with other LDCs, albeit selectively. Let us, therefore, examine the issue further by extending the above latter line of reasoning.

With over 50 per cent of Pakistan’s public debt in foreign exchange and fiscal deficit further compounding the external debt problem, it would be worthwhile to compare Pakistan’s external debt position with some other neighbouring countries’. According to World Development Report, 2000-01, Pakistan’s external debt had reached 41 per cent of its GNP in 1998 compared to India’s at 20 per cent of GNP in the same year and Sri Lanka’s also at 41 per cent of its GNP.

With comparable external debt-to-GNP ratios, Pakistan’s overall deficit-to-GDP ratio at 6.3 per cent in 1998 was better than 8.0 per cent for Sri Lanka in the same year. This shows that external debt-to-GNP ratio is not so exclusively dependent on the overall fiscal deficit-to-GDP ratio as is made out to be in Pakistan’s policy emphasis.

Further, while both India and Nepal had overall deficit-to-GDP ratios lower than Pakistan’s and Sri Lanka’s in 1998 at 5.2% and 4.7% for the former group respectively; interestingly, their tax-to-GDP ratios were also lower than the countries’ they are being compared with.

India’s and Nepal’s tax-to-GDP ratios stood at 8.6 per cent and 8.8 respectively in 1998 compared to Pakistan’s at 12.6 per cent and Sri Lanka’s at 14.5 per cent in the same year. Higher tax-to-GDP ratios with higher deficit-to-GDP ratios and lower tax-to-GDP ratios with lower deficit-to-GDP ratios should provide food for thought to those who advocate more intense fiscal reform in Pakistan to reduce fiscal deficit- and to increase tax-to-GDP ratio for the purpose.

Another interesting feature of the above comparison is that while Pakistan’s and Sri Lanka’s overall deficit-to-GDP ratios increased in 1998 as compared to their 1990 levels, the same ratio for India registered an improvement over the same period by 2.3 percentage points even though India’s tax-to-GDP ratio decreased by 1.3 percentage points over the same period. Clearly, emphasis on improving only the tax-to-GDP ratio for fiscal deficit reduction needs to be revisited in Pakistan.

On the side of expenditures, while Pakistan’s current expenditure-to-GDP ratio improved from 19.8 per cent in 1990 to 18.8 per cent in 1998, it remained higher than India’s ratio at 14.2 per cent and 12.8 per cent in the above two years respectively. While Pakistan’s development expenditure has declined steadily from 7.6% of GDP in 1991-92 to 2.8 per cent in 2000-01, its expenditure on social services is not even available in the World Development Report, 2000-01.

However, India’s social services expenditure as a percentage of its total expenditures increased from 8.1 per cent in 990 to 9.2 per cent in 1998 compared to Pakistan’s at 5.1 per cent in 1994-95. Also, India’s subsidies and other transfers were 40% of total expenditures in 997 compared to Pakistan’s at 8 per cent in the same year down from 20 per cent in 1990. Pakistan’s deficit position did not look up despite such a rigorous implementation of creditor mandated structural reform. Further India’s value addition by state owned enterprises (SOEs) remained at 13.4 per cent in both the years of 1990 and 1997 whereas Pakistan’s figures for this indicator are not available in the above cited report perhaps due to a mandated market reform including emphasis on privatization.

While the debt’s strain on India’s revenues and forex earnings is already compared above with that on Pakistan, Pakistan’s military expenditures as percent of GNP declined from 7 per cent in 1992 to 5.7 per cent in 1997 whereas that of India increased from 2.5 per cent to 2.8 per cent over the same period. While India’s ratio increased, Pakistan’s ratio remained higher than India’s. Notwithstanding the higher absolute amount of Indian defence expenditure, Pakistan’s debt-servicing and defence expenditures do take their tool in terms of fiscal imbalances. It is, therefore, important to ponder if Pakistan has reached the limits of pushing the tax and fiscal reforms to the limits and to the extent of their being counterproductive. It is equally important to determine whether solution to Pakistan’s fiscal woes lies in the line being toed since the commencement of IMF’s and World Bank’s structural adjustment around the turn of the decade of the 1990s. Or, whether a major departure is now needed in the direction of relationships with the neighbourhood so as to contain Pakistan’s defence outlay further and channelize the resources thus freed towards development and social sectors. Foreign policy as well as Pakistan’s domestic and foreign economic policies are closely and visibly intertwined. The Kashmir policy needs to be rethought voluntarily before it is done under duress as had to be done for our Afghanistan policy this fall. As for the ever-increasing debt-servicing burden, it has not eased despite two rescheduling. Pakistan’s debt remained unsustainable until a very major turn of world events on September 11, 2001. As Pakistan rationally chose to be a key player in the world’s anti-terrorist coalition, Pakistan’s economic stability assumed significance in contributing to global peace. So, while Europe offered market access for peace, the Paris Club offered a reprofiling of the $12.5 billion bilateral debt on December 13, 2001, instead of a mere rescheduling. The reprofiling package is for 38 years with no debt-servicing payments in the first 15 years. This would eventually amount to a 30 per cent write-off and $2.7 billion in cash flow savings during the next three years. The government claims to have achieved debt sustainability and, according to the federal finance minister, an “exit from external debt problem”. How Pakistan uses this relaxation is yet to be seen. For, there has been hectic additional external resource mobilization from virtually every bilateral and multilateral quarter available after September 11.

Since yet another IMF’s $1.3 billion facility has been made available under a new name of Poverty Reduction and Growth Facility (PRGF), the same old policy package of structural and fiscal reform is likely to be pushed although garnished with a concern for poverty and social sectors. The add-on features will be more in form than in substance if the essence of the package is the same. The outcome is likely to be no different from what it has been in the past if the essence has not changed much. It is, therefore, exceedingly important to think, discuss, debate, and conclude whether the old recipe will enable a permanent exit from the debt problem or whether it merely provides for a postponement of the issue for a comparatively longer time. If the latter be the case, then clearly transformational change in the country’s strategy is required on all fronts alike including geostrategic, economic, and political failing which no new chapter in Pakistan’s economic history will have been written. In that case, it will only be a cut and paste from the past that we have been engaging in intensely for the last one decade.

Fayaz File Name: Debt26 Output - EBR 125 cm