Piling up Foreign debt burden mounting at rapid pace

Country needs to boost savings and exports, woo investors.

ISLAMABAD: American politician Alexander Hamilton says: “National debt, if not excessive, will be a national blessing.”

External debt refers to the money borrowed by a country and institution from other nations, foreign institutions and individuals. In the early phase of economic development, the developing countries acquired piles of foreign debt because of high deficits, shortfall in savings and capital stock.

External debt is utilised as a tool to reduce the gap in domestic savings, investments, exports and imports. It allows economic policymakers to spend and invest more by providing surplus resources for the economy.



If such financial resources are put to use in a productive way, they make a positive contribution to the economy and bring down the level of poverty in countries where economic growth rates stand low.

On the other hand, if debt is distributed uneconomically, the cost of borrowing goes higher and macro-economic management problems emerge. In general, the applied standard for external public debt is that its net present value should be less than 150% of the country’s exports or 250% of revenues.

In developing countries, an increase in external debt is regarded as a common phenomenon. A country with low savings needs to borrow more to propel its economic growth as domestic resources are not enough that could substantially support the economy. Pakistan is among these developing nations and faces serious debt woes.

At the time of independence in 1947, domestic savings stood quite low and the country faced a dearth of productive investment. This prompted Pakistan’s government to search for external borrowing avenues in an effort to boost economic growth with expectations that economic expansion in the future will help increase savings, create a commodity surplus for exports and ease the debt burden.

Until 1960, this strategy proved successful as it helped achieve a high level of economic growth. Later, the country started encountering serious debt problems because of a host of factors.

First, oil prices shot up in 1973-74, undermining the oil-importing developing countries’ ability to repay foreign debt and forcing many of them, including Pakistan, to heavily borrow more. These global events put a severe strain on Pakistan’s balance of payments and debt liabilities.

Second, internal factors like inappropriate implementation of macro-economic policies, political instability, corruption and poor law and order led to a rapid growth in the country’s external debt.

In 1970, the external debt was calculated at $3.4 billion, which went up to $9.93 billion in 1980 and later doubled to $20.66 billion. After the start of the current century, the debt level rose at an extraordinary pace and reached $54.60 billion in 2010. According to the World Bank Report for 2014, Pakistan’s external debt had surged to $65.5 billion.

To tackle the crippling debt, the country needs to focus on higher domestic savings and export earnings, which will boost economic growth and lessen the reliance on external debt. It is quite important that a favourable environment is created for investment and policies are primarily focused on the inflow of foreign direct investment.

With all this, strict monitoring and consistent debt management strategies should be followed in order to prevent wrongful use of external debt.

Policymakers and experts should come up with appropriate marketing strategies in a bid to push up overseas sales. A key factor that must be kept in mind is that if inflation is higher than price levels in trading partners, it will leave Pakistan’s goods uncompetitive in these markets.

Exporters must also strive for greater access to foreign markets, particularly those of the European Union and US for textile shipments.

Apart from these, the country, in a policy shift, should switch from the import of consumer products to capital goods as the latter enhances productivity and generates high returns on investment.

To woo foreign investors, the government must make a marked improvement in law and order conditions and paint an encouraging business environment. Also, external trade strategies should get support from the policies aimed at mobilising domestic savings and foreign investment.

 

The writer is a researcher at the Sustainable Development Policy Institute.

Published in The Express Tribune, October 6^th, 2014.

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