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Pakistan: impact of foreign debts

January 10, 2013

IT is not denying the fact that a developing country has to rely on borrowings in order to achieve its overarching goals of economic stability and national development.

Proper debt management is the prerequisite for the sustainable economic growth of a country. There must be equilibrium in exports and imports so as to minimise the need for borrowing and overcoming fiscal deficit.

Unfortunately, the ever increasing foreign debt is one of the major problems besetting Pakistan’s lingering economy.

Pakistan is the third largest debt-recipient country in the region. Its external debts have been reported to reach 33 per cent of the GDP as compared to India’s 15 per cent and China’s seven per cent.

There are several factors, including domestic problems and international economic recession, behind this debt dynamics.

The increasing debt-to-GDP ratio is mainly due to declining-tax-to-GDP ratio as out of 190 million only 1.8 million people pay tax. Rampant corruption is the key factor in this regard.

According to the Transparency International annual report, Pakistan is at 34th position among the most corrupt countries of the world.

Apart from this energy crisis, including the erratic power supply, crippling inflation, growing security spending and low productive capacity have led to fiscal deficit which, in turn, increases foreign debt.

Pakistan is not in a position to formulate an independent fiscal policy due to these external debts and its struggling economy is at the mercy of leading lenders like the IMF and World Bank.

In a nutshell, Pakistan’s economy is at a critical juncture and there is a dire need for taking a pragmatic approach regarding fiscal management and independent decision-making as it is the only sine qua non for economic development.

SAJAWAL M. GHUMMAN Lahore