Be it an individual or a state, prudence demands that the budget-income and current expenditure-must at least balance with a surplus being a preferred option. However, if one borrows funds for making investment in productive assets to earn profit and, thus add to income, one makes material progress and moves up the ladder in the society.

And if one borrows to meet current expenditure, one treads a path of penury. Like an individual, the budget of a state is no different. The states which manage their budgets with prudence, make progress and prosper while the states which cannot strike a balance in their budgets and borrow to meet their current expenditure, their future is sealed with 'lender' interfering and tormenting them all the time.

Unfortunately, Pakistan is one of those states which chose this path. Pakistan came into existence on 14th August, 1947 under most adverse circumstances with a broken agrarian economy and having no industrial base and institutional set-up to run the state and its economy.

With sheer dedication, commitment and faith, Pakistan built up the base without any technical or financial "foreign assistance" between 14th August, 1947 and June, 1952.

In subsequent years, infinite somely small borrowings were made with outstanding stocks of foreign debt of US$ one million in 1952-53, $10 million in 1953-54 and $24 million in 1954-55. The domestic borrowings were also kept in safe limits with the stocks in 1954-55 standing around Rs3000 million.

In our quest to break the barrier of backwardness and move up the ladder from under-developed status to developing status and ultimately to developed status, we started borrowings for financing our five-year development programmes, beginning with the First Five-Year Plan (1955-60) and ending with 8th Five-Year Plan (1993-98) and, thereafter, our Annual Development Programmes.

In the initial years of our development era, borrowings were kept within sustainable limits and servicing capacity of the state. However, during this long journey of development, we lost our path.

Debts both domestic and foreign were contracted at will and in complete disregard to the purpose, outcome and capacity of the state to repay. This trend of unbridled and care-free debt accumulation is set out in the table below.

The above table clearly indicates that the public debt was accumulated at an accelerated rate between two decades of 1980s and 1990s touching the peak level of 93.9 per cent of GDP in 99-2000.

This unbridled spree of borrowing was resorted to despite warnings contained in the government's own document of 8th Five-Year Plan which espoused self -reliance by stating that "it should be conceived in terms of build-up of internal sources of strength and growth in the economy.

This would be reflected in (i) improved saving-investment ratio (ii) sustainable levels of domestic and foreign debt and (iii) avoidance of persistent or large deficits in the external accounts".

As stated earlier, borrowings for raising one's income by making an investment in productive assets and earning profits thereon can hardly be decried. In other words, the use of borrowings- whether for productive or for unproductive purpose - is a fundamental determinant, and not the stocks of debt, of justification of these borrowings.

Unfortunately, Pakistan borrowed funds in 1980s and 1990s and largely expended them in meeting its current expenditures with only a 'residual' amount finding its way into development. This had a direct adverse impact on the budget and balance of payments on account of serious erosion of debt servicing capacity of the state.

The borrowings meant to finance development were diverted to meet mounting non-development expenditure which increased by leaps and bounds. Had the borrowings been invested in development, revenues would have increased via taxation of incremental production of goods and services. But, revenues remained almost stagnant, showing only a nominal increase. Thus, the gap between revenues and expenditure widened. This trend is reproduced in the table below. Consolidated federal govt and provincial govt revenues, expenditures and fiscal deficit

A rising imbalance in the budget was met from additional borrowings both domestically and internationally. As a result, debt servicing became a major burden on the budgetary resources. This is given in the table below.

Reckless borrowing and build-up of public debt had impinged very heavily on our budgetary resources with debt servicing (interest plus payment of principal) claiming 73 per cent of our revenues in 1998-99.

As public debt consisted of domestic and foreign borrowings with share of foreign debt stock constituting about 45 per cent in the total, servicing of this portion required resources of rupees in the budget, payable in foreign exchange.

A large chunk of foreign borrowings having been used up for un- productive needs of meeting recurring expenditure instead of employing in productive use for augmenting production of goods and services for exports, current account deficit in balance of payment continued to grow with resources hardly available in foreign exchange for servicing of the foreign debts.

This forced the government to borrow more from abroad to service these debts. Current account position and foreign borrowings over time are given in the table below. The situation that was obtaining in 1998-99 was ominous with unmanageable fiscal deficit and an extremely precarious balance of payment position.

This threatened default in servicing of debts as net transfers (disbursements less debt servicing liability) had become negative. Therefore, the government embarked upon debt relief/rescheduling efforts on its external bilateral debt.

The first rescheduling agreement was reached in January,1999 for 2.4 billion and second in January,2001 for $1.7 billion. Both these agreements provided for rescheduling of debt service maturities due in specified periods of about one year each.

In other words, only that portion of debts service was deferred which was due in the specified periods. The third agreement was negotiated and finalised in December, 2001. The agreement provides for rescheduling of bilateral debt of about $12.5 billion.

The official development portion of the total debt aggregating $8.5 billion will now be payable over a period of 38 years including 15 years of grace period while non-ODA rescheduled debt aggregating $4 billion is to be repaid over a period of 23 years including 5 years grace period.

The mark-up on both portions of the debt carries favourable rates. In a nutshell, this meant "deferment of debt servicing liabilities". Our current account deficits in balance of payments turned into sizeable surpluses during last few years mainly on account of ever-rising workers remittances from abroad and purchase of dollars from the Kerb market by the State Bank of Pakistan.

The other contributing factors were a sharp fall in interest payments, cash grant from USA and the Saudi oil facility. Accordingly, there was surplus of $1,338 million in 2001-02 and $3,028 million in 2002-03 and is likely to cross the mark of $4,000 million by the close of the current financial year.

With capital account also being positive, this helped us build foreign exchange reserves of $10.7 billion as at end June, 2003 which were now around $12.5 billion. Thus, the balance of payments position had become robust and Pakistan no longer required additional foreign borrowings either to meet its foreign debt servicing liability or to defray cost of imports for development.

As such, we should not switch expensive debt with soft loans of international financial institutions that we are trying to do at present but reduce the level of foreign debt stocks.

A comfortable position in our balance of payments has arisen from a number of factors including rescheduling of debt. The rescheduling of debt has directly provided a fiscal space to our budget to the extent of reduced interest and payment of instalments on principal amount.

The total servicing liability of foreign debt which was Rs143,678 million in 1999-2000, came down to Rs113,434 million in 2002-03. Thus, assuming existing debt stock remaining at current level, fiscal space of about Rs30.2 billion per annum will be available at least in the grace period, allowed by members of the Paris Club.

A decline in rate of returns/profit rates on domestic debt has also reduced debt servicing burden on the budget from Rs210,156 million in 99-2000 to Rs160,500 million in 2002-03.

Thus, a fiscal space of about Rs49,656 million became available. In aggregate, a reduction in debt servicing liability on foreign and domestic debt provided fiscal space of about Rs79.9 billion.

It is surprising that instead of catering for payment of foreign debt liabilities in future, following rescheduling of foreign debt, the entire fiscal space of about Rs79.9 billion has been utilized in meeting budgetary expenditures as are proceeds from privatization.

Should not we tighten our belts and create a sinking fund (special account) out of this fiscal space for retirement of debts in future? Our policy makers and parliamentarians must ponder this question and save themselves from being reproached by posterity.