Pakistan has amassed a massive $8 billion in foreign exchange reserves, within the last three years. For the first time in the history of Pakistan, the reserves have reached such an incredible level. A few years ago, we could not even think of it.

Has the country been able to avert the default situation by bolstering its foreign exchange reserves to the aforesaid level? No doubt, we do not face the default threat now in the short run. But in the long run and even in the medium term of two to three years, the default situation may return to haunt the economy.

We should not forget that only a few years ago, we had a foreign currency account of approximately $11 billion in this country. The entire amount was squandered within five 5 to six years in servicing foreign debt and meeting the country’s current account deficits. This clearly shows that we need not only a strong reserves position but, also, a strong economy, to avert the default situation.

A few months ago, when the State Bank’s share in the country’s reserves had reached $3 billion, the World Bank had expressed the view that, although Pakistan did not face the threat of default in the short run, the threat still existed for the long and even medium term of two to three years. The bank had stated that Pakistan’s reserves were still at a lower level, as compared to other developing countries and that the country was still very much vulnerable to a financial shock such as sharp increase in international oil prices or any other similar unfavourable situation.

No doubt, the first step needed to be taken by any heavily indebted country to get out of its debt trap is to stop increasing its debt burden further. The present government must be commended for initiating efforts to reduce both the country’s external and internal debt burden. If it is true, as claimed by the government, that the country’s external debt has been reduced from $38 billion to $36 billion and the internal debt has, also, been reduced by 2 to 3 per cent, then certainly it is no mean achievement. However, the external debt burden is definitely not going to remain unchanged at this level, in view of liberal assistance presently being offered by the World Bank, the Asian Development Bank and some donor countries for our poverty alleviation and other social uplift and economic development programmes. In all probability, our external debt burden is likely to increase tremendously in the coming years, as a result of the aforesaid assistance, unless our GDP and exports start growing and it is ensured that our repayment ability increases simultaneously.

To make any debt reduction strategy successful, it is necessary to bring about marked improvement in the country’s balance of payment (BOP) position. Fortunately, the present government was able to bring down the country’s current account deficit during the last three years to a lower level and the outgoing fiscal year had, in fact, witnessed a sizable current account surplus. In addition to the part played by the assistance that Pakistan had received for being a coalition partner in the war against terrorism, recent improvement in the BOP position was attributable mainly to the purchases of dollars by the State Bank from the open market and a surge in the home remittances from overseas Pakistanis. Neither of these sources was, however, completely dependable or of a permanent nature. The IMF had already asked the Pakistan government to refrain from buying dollars from the open market, in future, and so far as the home remittances were concerned the same had recently increased due to certain international developments. These circumstances could change with the passage of time and receipt from the home remittances could once again drop to the previous level. For the aforesaid reasons, it was imperative for Pakistan to accelerate its GDP growth rate and boost its exports in the shortest possible time. Rapid and sustained economic growth with simultaneous increase in the country’s export earnings was the only way to bring about lasting improvements in the BOP position and help the country get out of its debt trap.

Since our internal debt is nearly as formidable as the external debt and is no less menacing in size and repayment liability,it is also necessary to take care of it and keep it at a sustainable level. This can be done by increasing our tax revenue from its present level of 13 per cent of the GDP to at least 18 per cent. To achieve this objective, it may be necessary to do away with all tax exemptions and the government may seriously consider taxing agricultural income. Besides, the objective may be achieved by improving the tax collecting machinery, ending the evasions and plugging the leakages. Side by side with increasing the government revenues, an effort may also be made to curtail unproductive expenditure. The government should follow the policy of cutting its coat according to its cloth. Over and above all that, revival of the economy and rapid and sustained economic growth would be the best guarantee to ensure simultaneous increase in the government revenues, making it unnecessary for the government to borrow internally.

Once the economy starts growing and the tax revenues and exports start moving up, it would not be difficult for the government to improve the BOP further and keep the internal and external debt at a sustainable level.

However, the best way for a country to avoid the debt trap or avert a default situation is to have as little debt as possible. A massive external debt burden can become a curse even for an economic super power like the United States. The US trade deficit being of a chronic nature, its external debt has ballooned to trillions of dollars. At time, when the foreign creditors are tired of investing in the US securities, the US has an inexhaustible stock of agricultural land, plots and office buildings etc., to offer to the creditors in return of their money.

The creditors have, also, taken delight in availing the offer because of the liberal US immigration policy and excellent living conditions in that country. However, a number of economic writers and analysts in the US have severely criticized transfer of the US assets in favour of foreign creditors and likened it to the mortgaging of the US economic sovereignty. On the other hand, there is China, whose external debt constitutes a nominal percentage of its GDP. As a result, China is not bothered by the problem of external debt - a problem which today haunts many economies of the world.