The week in focus

Pakistan is trapped in a vicious cycle of debt and options to come out of it are few.


Ghazanfar Ali August 09, 2010

Pakistan is trapped in a vicious cycle of debt and options to come out of it are few. These remarks were made by experts while commenting on reports that the country’s foreign debt had shot up by $3.295 billion to $55.628 billion in the year ended June 30, 2010.

The debt level has been increasing with loans and assistance coming in to overcome the financial constraints caused mainly by abysmally low tax revenues, insignificant foreign direct investment and high security expenditures.

The experts say there seems to be no end in sight to the burden in the short term which along with defence expenditures eats up more than half of the annual budget. Even fears are there that it will further pile up in coming years, compounding the woes of the ruling elite.

According to the United Nations, recent torrential rains and flash floods in Punjab and Khyber-Pakhtunkhwa have displaced 4.5 million people. Crops of vegetables and fruits have been destroyed along with important infrastructure by the unstoppable floods. This may cause food shortage and lead to heavy import of commodities, putting more strain on the country’s finances.

Taxes low

“Pakistan will need to take more loans to repay existing debt. It is stuck in a vicious debt cycle,” said Akbar Zaidi, an economist. According to him, corruption and non-development expenditures, particularly expensive foreign visits by political leaders, are straining the country’s meagre finances.

Besides, taxes are low with a wide revenue gap. However, he immediately cautioned that this does not mean that poor and ordinary people should be taxed more. “The exempted rich should be taxed in a proper way.”

About the floods, Zaidi said they have caused widespread destruction and for rebuilding damaged infrastructure, the government will have to seek more international assistance.

No short-term solution

“In the short-run, the country’s woes will deepen as it has to conduct flood relief operations and cope with security problems,” Kaiser Bengali, adviser to Sindh chief minister on planning and development, commented.

“Some 60 bridges have been washed away in the floods and crops have also been damaged, which will slash gross domestic product (GDP) growth this year.” The government has set a GDP growth target of 4.5 per cent for the current fiscal ending June 30, 2011.

Bengali said the country’s macroeconomic framework has been working against the industry for 20 years and suggested basic changes in policies. First, exports should be increased for improving foreign exchange reserves, but exports cannot be boosted without investment in the industry.

“Money went to speculative activities like real estate, stock market and foreign currency and there is a need to divert it to the industry,” he said.

Second, oil imports, which account for a bulk of total imports of the country, should be reduced. According to figures, imports of crude and oil products swallow around $12 billion a year. Bengali particularly called for reducing imports of diesel which has a 55 per cent share in oil imports.

Muzammil Aslam, an economist at JS Research, said “the government should attract foreign direct investment by improving law and order.” Besides, he said the privatisation programme has been stagnant for years, which needs a jump-start.

Aslam said exporters should go for value addition and think beyond cotton, adding this will lead to an increase in exports in the long run.

Anjum Nisar, former president of the Karachi Chamber of Commerce and Industry, called on the government to make a five-year plan for increasing exports. The plan should suggest which new markets to capture and what products to export.

the writer is incharge Business desk for the Express tribune

Published in The Express Tribune, August 9th, 2010.

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