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PAKISTAN'S PUBLIC DEBT (PARTICULARLY EXTERNAL DEBT MANAGEMENT) Summary of the National Management Paper by the Participants in the

73rd National Management Course at Pakistan Administrative Staff College, Lahore Conceptual Framework A poor nation, in order to meet the economic needs of its growing population and also to improve their standard of living, must grow economically. Economic growth requires investment which has to be financed from savings. If a nation cannot finance its total investment needs from its own (i.e. national) savings, it has to borrow from abroad. To the extent National Savings fall short of National Investment they are being supplemented by Foreign Savings i.e.XM. In other words, the Current Account Deficit in the Balance of Payments is the mirror - image of the Savings - Investment Gap. Government can borrow both at home as well as from abroad. If it borrows from abroad, accumulated borrowings constitute External Debt. If it borrows at home, it raises what is called Domestic Debt. Domestic Debt can take various forms, e.g. i) Permanent Debt - consisting generally of long-term, relatively less costly debt investments like market loans etc. ii) Floating Debt - consisting of short-term, relatively more costly debt instruments like treasury bills. iii) Unfunded Debt - consisting of uncapped National Savings Schemes which, till recently, had been too costly. Borrowing is not bad per se, provided the borrowed funds are used so prudently and so productively as to generate enough surplus to take care of the requirements of the repayment of the Principal as also of the payment of Interest as and when these fall due. Debt Servicing implies: i) Interest Payments in relation to Domestic Debt. ii) Interest Payments in relation to External Debt. iii) Repayment of Principal in relation to External Debt. Debt Servicing, in a manner of speech, is the first charge on the Government's total revenues. The other dimension of the External Debt is that it has to be repaid and serviced in foreign exchange. For example, in the case of Pakistan, it is not enough for the Government to have the rupee-equivalent of its External Debt Servicing needs. It must have the needed internationally convertible currency (mostly US $) as well. Thus, in sum, problems relative to public debt flow from: i) Savings-Investment gap. ii) Government Revenues- Expenditures gap. iii) Balance of payments gap. Debt Indicators To make an assessment of the debt stock and the ability of the government of a country to

repay, certain ratios are used to correlate the debt stock and the debt servicing liability with GDP, Government revenues, exchange earnings, and exchange reserves serving as indicators of capacity to pay back and service the public debt. Nexus between the Internal Debt and the External Debt Domestic debt normally poses difficulty for the budget while external debt creates difficulty for the balance of payments. However, they are closely related because there are linkages between the two debts depending upon how the fiscal deficit is financed. Financing fiscal deficit can influence current deficit and foreign borrowings. The focus must be on both the aspects of the debt so as to assess a country's ability to service it. The growth of revenues and export earnings is critical to keep the debt burden manageable. Historical Background Part 1 - 1947-72 The position of savings/investment gaps and its implications for the period 1947-72 are as follows: i) The level of investment in the initial years after independence was very low e.g. 4.10% of GDP in 1949-50. In 10 years time, in 1959-60, it tripled to 12.5% of GDP but was still quite low. During the next five years, it was up by 75% to 21.1% of GDP, which could be regarded as satisfactory. But during the next 5 years, it went down to 17.83% in 1969-70. During the next 2 years it slid still further to 17.51% of GDP in 1970-71 and to 15.87% of GDP in 1971-72. These, undoubtedly, were low levels of investment . ii) The level of domestic savings too, during the initial years after independence, was very low: only 2.1% of GDP in 1949-50. However, it tripled to 6.5% in 10 years (1959-60); still it was low. During the next 5 years, it went up by about 60% to 10.6% of GDP in 1964-65, but it was still low. During the next seven years (1965-72), it remained about the same level, marginally going down to 10.11% in 1969-70, 9.55% in 1970-71, and to 10.55% in 1971-72. iii) In the initial years after independence, the level of foreign resource inflow too was very low: 2% of GDP in 1949-50. During the next 10 years, it tripled to 6% of GDP. During the next 5 years, it went up by 75% to 10.5% of GDP in 1964-65. These were the years when the seeds of foreign aid addiction were sown. During the next 5 years, this element went down to 7.72% in 1969-70 and further down to 5.3% in 1971-72. But the reasons for that were largely political, exogenous and lender-related. On a consolidated basis (i.e. the Federal Government and the Provincial Governments taken together), there were budgetary deficits on revenue account for 8 years as follows: Consolidated Revenue Deficit Reasons 1947-48 Both the Federal Government and Government of West Pakistan had revenue deficits. 1949-50 The Government of East Pakistan and the Government of West Pakistan had revenue deficits. 1952-53 -do1952-54 -do1954-55 The Government of East Pakistan had a revenue deficit. 1965-66 Federal Government had a revenue deficit. 1970-71 Both the Government of East Pakistan and the Government of West Pakistan had revenue deficits. 1971-72 Both the Federal Government and Government of West Pakistan had revenue deficits.

It would also be noticed that the Federal Government had an overall Budgetary Deficit for all the years except one, namely 1950-51. The implications are that the borrowings financed the entire development expenditure all through the years. Pakistan's Trade Balance was in surplus during the six years out of the first eight years after independence: the surplus years being 1947-48, 1948-49, 1950-51, 1952-53, 1953-54 and 1954-55. It would be observed that these surplus years were the Korean War Boom years. It would also be observed that the current account balance was also surplus in five years out of the initial thirteen years, the surplus years being: 1950-51, 1954-55, 1955-56, 1958-59 and 195960. It would also be observed that in 1970-71, Trade Deficit equal to Rs.1816 million was much less than the corresponding current account deficit equal to Rs.2838 million. Obviously, the implication is that this deficit was met partly by drawing down the reserves and largely by external resource inflow - grants and loans. It is clear that during the first 25 years of Pakistan's existence, Government of Pakistan had to borrow money domestically to meet its fiscal deficits. Accumulated domestic borrowings constituted domestic debt of 3 types: i) Permanent debt - generally market loans of long duration and low cost. ii) Floating debt - e.g. Treasury Bills of short duration and low interest rates.. iii) Unfounded debt - e.g. National Savings Schemes. Similarly in relation to its external account the Government had to borrow externally for the sake of its balance of payment needs. The position for the years 1947-48 to 1954-55 could not be ascertained. Probably the External Debt and External Debt Servicing Liability during these early years were either nil or negligible. However, it would be observed: i) that the external debt never exceeded $1 billion till 1964-65. ii) that from 1964-65 to 1967-68, in 3 years it doubled to about $2 billion. iii) - that during the next 5 years i.e. by mid 1972, it was $3.766 billion. It would also be noted that the debt servicing liability too was negligible. The main reasons for the low debt servicing liability during these years were: i) The foreign resource inflow had very large grant element. ii) The entire debt consisted of official loans; there were no commercial loans. iii) Rates of interest were very low, ranging from 0.75% per annum to 8.5% per annum with amortization period ranging from 3 years to 50 years. In a nut-shell, the position of Pakistan's total public debt stock (internal and external) as of 31st March, 1972 was as follows: Internal Debt: Rs.7.62 billion External Debt: Rs.39.85 billion Total: Rs.47.47 billion Pakistan's Foreign Debt: The External Environment Introduction External resources are an important supplement to domestic resources in the process of

development. In Pakistan, however, the relatively easy availability of external resources has often led to substitution of foreign savings for domestic effort. Since large current account balance of payments deficits could often be financed without too much difficulty, exports and domestic savings did not receive the urgent attention from the government they deserved. Signing of a Mutual Defense Agreement with USA in 1954 opened the way for large-scale external military and economic inflows. During 1955-58 economic inflows were easily forthcoming and, therefore, at the end of 1950s, foreign official inflows totaled US $ 500 million, or 2.8 per cent of GDP, for the whole of Pakistan. The strong political alignment with USA through Pakistan's membership in Central Treaty Organization (CENTO) and South East Asia Treaty Organization (SEATO) and signing of Indus Basin Treaty in 1960 with India under World Bank auspices on sharing of water from common rivers further spurred foreign inflows. By 1964-65, the balance of payments deficit for Pakistan as a whole, financed almost entirely from foreign inflows, had risen to 6.8 per cent of GDP. The Second Plan (1960-65) was quickly revised upwards and public sector development spending expanded more than 40 per cent over the original levels. After the 1965 war with India, both military and economic inflows declined. However, economic assistance again increased during the 1972-77 period as grants and loans from oil exporting countries in the Middle East came through to finance the much larger oil import bill. External resource inflow has many faces, the ugliest of those being disguised or undisguised dependency inducers. It has been observed that countries heavily dependent on resource inflow can be destabilized economically if they refuse to tow the lenders' line. Resource inflow dependency as such is not a healthy prospect, much less for a country like Pakistan, which would like to follow an independent foreign policy. Admittedly, foreign resource inflow did provide, to some extent, a desirable base of infrastructure for accelerating the agricultural and industrial growth, but it played quite an ambiguous role in Pakistan's overall development. It gave a green signal to both constructive and destructive policy actions. Lenders' support for policies like import substitution, industrialization and doctrine of functional inequality paved the way for permanent decay of Pakistan's industrial base increasing it's inability to capitalize on the comparative advantage in agriculture and close or reduce the gap in income distribution. Pakistan is under obligation to pay back to a wide variety of banks and other agencies. According to Economic Survey of Pakistan 1999-2000, the share of financial institutions (IDA, IBRD, ADB, IFAD, etc.) in total external debt of Pakistan as of 30th June 2000 was 51.9 per cent, while the share of consortium countries (Japan, USA, Germany, France, Canada, Italy, UK, Sweden etc.) was 40.3 per cent. The share of non?consortium countries (Korea, China, Russia, Australia, etc.) was 5.5 per cent, while the share of Islamic countries (Kuwait, Saudi Arabia, Islamic Bank, Turkey, etc.) was 2.2 per cent. The share of long-term debt in total debt decreased from 89.5 per cent at end of June 1991 to 79.6 per cent at end of June 1999. The share of bilateral, multilateral, non?consortium and Islamic countries in total loans and credit contracted and changed from 31.2, 62.6, 3.4 and 2.8 per cent in 1990?91 to 39.7, 49.5, 6.9 and 3.9 per cent in 1998?99. Terms and Conditions of Foreign Debt The terms and conditions of foreign debt have become more stringent over the years. It has

been reported in the World Bank publication "Global Development Finance 2000"*, that the maturity period of external debt decreased from 31.6 years in 1970 to 19.7 years in 1998, while the grace period declined from 11.9 years to 5.6 years. The interest rate increased from 2.8 per cent to 6.0 per cent, while the extent of grant element decreased from 59.2 per cent to 29.7 per cent during the same period. Incidentally, the share of grant and grant like commitments was 80 per cent during the First Five Year Plan period (1965-70). Historically speaking, the rapid increase in debt and in debt service obligations has principally resulted from the following factors: i) Increase in the amount of external loans obtained by Pakistan. ii) A sharp and continuing shift in the composition of inflows from grants and grant-type assistance (loans not involving obligations in foreign exchange) to loans requiring service in foreign exchange. iii) A decline in the share of loans carrying confessional terms in total borrowing. iv) iv. Domestic factors and international events of exceptional nature. Along with other events, depreciation in the value of Pakistani rupee over the years has meant higher amount of debt repayment in terms of rupee. The global debt problem stems from forces dating to the mid-1970s, and to the first oil price shock (1973-74) in particular. The intensification of the problem in 1982 derived primarily from the effects of global recession from 1980 to 1982, combined with the adverse psychological shocks to credit markets caused by events in some countries. In a broad sense, the problem is a consequence of the transition from inflation to disinflation in the world economy. Funds that were borrowed when inflation was high and real interest rates were low or negative are no longer cheap in an environment of lower inflation and high real interest rates. Devaluation of the Rupee Debt servicing increased sharply in the eighties as the stock of external debt exceeded US$ 10 billion in 1981. Thus, during 1982-86, the amortization payments were on average 2.4 times those in 1978-81, and the interest payment was twice as much. During 1987-90, the amortization payments again doubled, and the total debt servicing averaged US $ 1.8 billion. There emerged a rapid increase even in short-term loans as a proportion of borrowing because of the deteriorated exchange reserves. Despite a rapid rise in short-term debt in the total debt portfolio of the country, 'official' confessional and non-confessional finance still remained the principal external capital inflow. The higher amortization and interest payments The World Bank (2000), Global Development Finance, Country Tables (2000), Washington, D.C. meant that 85 per cent of the new debt acquired in 1990 was devoted to debt servicing, which implied a large and rising debt burden. Policies For Structural Adjustment Loan The policy regime during this period was dictated by the conditionalities attached to the structural adjustment loan, though not all the policy suggestions were followed fully. At the core of this policy regime were: privatization policies including (i) liberalization of the trade regime, (ii) greater incentives to promote private investment, and (iii) disinvestment of public sector

enterprises. Over the years privatization process has not been able to achieve the desired objectives like reducing budgetary deficit or relieving debt burden. Impact And Consequences Of Public Debt Particularly External Debt Rising debt and debt servicing burden on the economy has generated primary as well as secondary impacts and consequences for Pakistan. Composition of the rising debt stock has changed from long-term, low cost to short-term/ high cost. The debt is driven largely by interest rate cost reflecting the combined effect of rising nominal interest rates, slow down of both domestic and international inflation, and real depreciation of the exchange rate which increases the cost of servicing of external debt. The rising debt servicing has squeezed out development expenditure drastically in the face of stagnant revenue. This has resulted in higher budget deficits, which came via larger current account deficits and had the effect of crowding out the private sector. In Pakistan's setting there is a nexus between domestic and external debt. Since fiscal deficits are financed via current account they influence the levels of current account and foreign borrowings. As external official lending became scarcer and external commercial lending high cost and short-term coupled with harsher economic and non-economic external conditionalities, Pakistan was caught in the debt trap and became more vulnerable. Debt burden indicators suggest unsustainable levels of debt's growth, cost and debt servicing capacity adding to vulnerability. External lenders' conditionalties contributed to cost push inflation which in turn induced still further devaluation raising the rupee value of debt and rupee cost of debt servicing manifold. Constant devaluation and consequential inflation coupled with drastic squeezing of development expenditure and decreasing maintenance of infra-structure in the face of stagnant revenues led to economic slow down, rising poverty, rising income inequalities, rising unemployment, rising crime and rising social unrest. The effectiveness of external loans on economic growth during the last fifty years has been questioned seriously on the premise that foreign capital inflows were used to finance consumption and that increases in foreign capital resulted in lowering the savings rate by the same magnitude. Macroeconomic Framework Projections For Debt Management (2000-05) Assumptions The following are assumed in accordance with the three year macro-economic framework adopted by the Government of Pakistan: i) GDP growth will gradually increase to 7% per annum by the year 2005. ii) Inflation, on average, will be contained within a band of 5-6%. iii) Investment to GDP ratio will increase to 18%. iv) Money expansion will be in line with the inflation and the GDP growth targets. v) ICOR is assumed to fall from 3.5 to 3 with a strong likelihood of further decrease with labour intensive investments in agriculture and Small and Medium Enterprises alongwith small size capital investments in Information Technology. vi) Overall, fiscal deficits will decline to 3.5% of the GDP from 6.7% in 1999-2000. Primary balance would remain positive throughout the forecast period. vii) Value added exports particularly in textile and IT sectors will lead the export sector. viii) Current account deficit will be brought down to about 0.5% of GDP. ix) Reserves will be built up gradually equal to 8 weeks of imports. x) To have a positive overall balance in the external sector by the year 2005, innovative policies

and positive incentives will be introduced to augment remittances and direct foreign investment. xi) Private sector confidence will be fully restored and large scale manufacturing activity will pick up during the program period. Substantial progress in broadening the tax base and expanding the GST net, turnover and income tax would be achieved. Improvement in investment climate will take place. xii) Support of IMF and IFIs will remain in place. Low Growth Scenario on Business as Usual Basis In order to demonstrate why a high growth aggressive plan, as given in the preceding paras must be followed, another scenario based on the low growth trend of last five years has been developed. In this scenario the following are assumed : i) Real GDP growth will take place during the next five years i.e. up to 2005 at an average growth rate of 4.1% which is the average growth of the years 1995-00. ii) Inflation (CPI), which has an average of 7.9% during the last five years, is assumed at 5.7% keeping in view the recent trends. However, GDP deflator is assumed to keep the average of 8%, given higher cost of construction, communication and other sector related to public works. iii) Savings have been assumed to increase from the trend average of 11.3% to an average of 12% keeping in view the expanding tax base. iv) Given low growth trends and stagnation in the economy investment is assumed to grow at 15.3%. ICOR is assumed to decrease from the trend average of 4.8 to 3.8, as per recent trends. v) Total Revenue is assumed to grow at 16.7% during the forecast period as compared to trend average of 16.4%. vi) Total expenditure is assumed to grow at an average of 20.6% as compared to trend average 23.1%. vii) Exports are assumed to grow at 15.8% according to trend average of 1995-2000. However imports will grow at 19.1% as against trend average of 20.8%. viii) Services net is assumed to maintain an average of $ -3.1 billion as per trend average. Similarly private transfers are assumed to maintain an average of $ 3 billion as per trend average. ix) Long Term Capital net is assumed to keep an average of $ 1.5 billion according to the trend average. . Options And Strategies For Debt Management (2000-05) Need for a Co-ordinated Public Debt Management Policy In a macroeconomic context, public debt is one of the many economic variables, which require policy management. Until recently, the economic managers of most developing economies primarily relied upon fiscal, monetary and trade policies, exchange rate adjustments and other traditional instruments of public policy to redress their domestic and international economic woes. Effective management of public debt was largely overlooked. In the late 1990s, debt management has emerged as, perhaps, the most critical aspect of public policy for the overwhelming majority of the poor countries of the world including Pakistan. The reasons for this sea change are not far to seek. In the postcolonial period, foreign debt was indiscriminately contracted by the developing economies to plug the gap between their low domestic rate of savings and the high rate of investment required to graduate from impoverished postcolonial societies into modern affluent nations of the world.

Pakistan is not merely facing a debt crisis, it is in fact in the throes of a 'debt trap' where more money is being borrowed, mostly, to repay the accruing liabilities. It is therefore, imperative to devise and implement a debt management strategy with a view to minimising social, economic and political costs of the debt burden, both for the state and the society. Broadly, this strategy should provide for both macroeconomic as well as microeconomic thrusts. Whereas the macroeconomic strategy should delineate the overall framework comprising policy guidelines for contracting, utilization and retirement of debt, organizational structure for its management and rules and regulations governing all kinds of transactions/decisions regarding public debt, the focus of microeconomic debt management strategy should be on the day to day, financial handling of various instruments of public debt in the context of fluctuating currency and interest rates, and vacillating capital market conditions in an increasingly interconnected global economy. In view of the enormity and seriousness of the problem the first and foremost element of any strategy for debt management has to be a standard methodology for accurate and authentic estimation of the stock of total outstanding debt at any given point in time. It is not possible to manage/retire debt without knowing exactly the precise figures of the public debt itself. In Pakistan there are at least two different approaches being followed independently: one by the Finance Division (FD) as reflected in the Annual Economic Survey (ES) and the other by the State Bank of Pakistan (SBP) as reflected in its Annual Reports, to calculate the outstanding stock of external debt. The approach of the World Bank, which reflects the lender methodology, represents yet another variation. No strategy for debt management can be evolved without knowing the precise size of the national debt, its maturity structure and the financial character of its various components. Whereas the methodology for estimation of domestic debt needs both fine tuning and uniformity, it would be appropriate to discard the ES approach and use the SBP methodology for calculating external debt for the simple reason of growing importance of the burden of short term borrowings. It is also vital not to ignore the World Bank methodology, which was adopted in 1992-93 so as, to remain in touch with the lender way of appraising our external debt liability. However, the development of an indigenous methodology for a holistic overview of the National debt scenario is imperative because isolated evaluation of external and domestic debt situation overlooks their multiple interlinkages, which have played a critical role in exacerbating Pakistan's debt problem. External Debt Management Although the burden of both domestic external debt is debilitating for the national economy, the effective management of external debt is important and pressing. The external debt has exceeded domestic debt since 1995-96 and is growing rapidly. Debt Rescheduling Debt rescheduling postpones payments of present liabilities to a future date and provides only transitory relief. On the other hand, it significantly enhances the debt burden as the total quantum of external debt actually rises. The burden is passed on to the future generations who are neither responsible for the stockpiling of debt, nor are likely to enjoy much benefit from the

debt squandered on un-productive and wasteful expenses by their ancestors. Most importantly, debt rescheduling leads to subjection of the economy to deflationary policies of the lenders which have aggravated the poverty and unemployment situation of the economy in the 1990s as never before. Debt rescheduling, therefore, may be useful as an adhoc measure when other options are foreclosed; it is not a permanent remedy. Privatization/Debt Equity Swap Use of sale proceeds from privatization i.e. selling of publically owned assets, for retirement of the external debt is being portrayed as a most promising strategy for getting rid of the external debt. This again is myopic. Firstly, the privatization effort for selling National assets has been in place for more than a decade with almost no significant results. The sale of the 'family silver' has generated around Rs. 11 billion in local currency and around US $1 billion in foreign currency. Negligible amount from this cash flow has been spent on retiring debt, internal or external, as was planned. On the other hand, the costs of privatization to the National economy have included not just the disposal of the best of the 'family silver' but also rise in unemployment and in prices of commodities such as cement. Secondly, the privatization proceeds which have already accrued are minuscule relative to the enormous size of the public debt. Lastly, the pace of privatization has been extremely slow during the past years and is unlikely to pick up significantly in the near future. Debt/Education/Health/Environment/Poverty Swap A new line of thinking which is gaining wide support in the developing countries tries to link the issues of poverty, environment, health and other basic needs to the question of repayment of foreign debt. A great deal of social and economic problems being faced by the poor countries can be attributed to the deflationary impact of demand management policies of the lenders and outflow of national wealth to repay sovereign debt. This has severely curtailed the poor states' capacity to meet their external liabilities, while jeopardizing the future of their people. The argument for debt/education/health/ environment swap thus, advocates investment of accruing debt installments into the social sectors of the debtor economy. It is argued that such a strategy would build up the physical and human capital stock of the poor countries and thereby, facilitate repayment of their future liabilities. It will also ensure that no wasteful expenses are incurred by the ruling elites of the poor countries as the utilization of such funds would be restricted to the social and economic uplift of the target groups. This option indeed is greatly beneficial for the poor countries including Pakistan but it is still in the formative phase. It however, lacks the potential of emerging as 'the solution' of the debt problem. It should therefore, be regarded as one of the many ways to reduce some of the burden of our foreign debt. Domestic Debt Management The 1980s and 1990s witnessed exceedingly high levels of deficit financing, leading to exponential growth in domestic borrowings to finance the budgetary disequilibrium. Low tax revenues could not keep pace with sharply escalating expenditures occasioned mainly by everincreasing size of the debt servicing. In terms of its implications for state sovereignty and repayment urgency, the issue of management of the domestic debt may not look as pressing as that of the external debt, domestic debt is denominated in rupees and not in foreign exchange; it is owed to the local lenders and not to the foreign states, international organizations or

commercial banks. Theoretically, the repayment of domestic debt can be done by the State Bank of Pakistan by merely printing rupee currency notes, if the option of raising funds from other domestic sources is not available. Printing money, however, has a number of adverse macroeconomic implications. Repayment of domestic loans flows back into the domestic economy and generates internal economic activity rather than the transfer of wealth abroad caused by retirement of the external debt. On the other hand, repayment of domestic debt brings about a transfer of resources from the lender to the borrower i.e. from the private sector to the state as the real value of debt after adjusting for inflation decreases over the years. Unlike the external debt, whose real value may or may not decline, the decline in the real value of the domestic debt benefits the state. Public Debt Management Through Macroeconomic. Change and Structural Reforms The permanent solution for the debt problem lies, however, in an overall restructuring of the economy, in a medium to long term macroeconomic framework, with the main objective of reducing the debt burden to manageable levels. To achieve this goal, the first step should be the identification and neutralization of the fundamental causes of the growing debt burden of the country. The Three Imbalances The basic reason for accumulation of debt is rooted in the sustained existence of the three imbalances described below : a) Savings-Investment gap - over the last many years, savings rate in Pakistan has remained stuck at abysmally low levels of 13% of GDP and investment at less than 20%. In comparison, in China, Korea and other East Asian economies, savings ratio has at least been about 30% of GDP and at best 40-45%. Historically, the savings-investment gap has meant overdependence of LDCs, like Pakistan, on foreign loans to finance growth of the economy. Currently, the paucity of external as well as domestic resources to fill this gap is taking its toll on the growth momentum of the economy and is adding to the budgetary deficits. b) The overall Budgetary Deficit i.e. imbalance between public expenditures and revenues, (which subsumes the deficit in current budget and the primary deficit) for the past many years has led to deficit financing at around 7% of the GDP every year. The gap between the Government revenues and Government expenditures has been plugged by borrowing from the external and internal sources. c) The Balance of Payments (BOP) imbalance which subsumes the trade imbalance principally due to high level of imports and inadequate level of exports has also necessitated external borrowings to raise foreign exchange required to pay the import bill not met from our own exchange earnings. Part of the reason for the BOP imbalance also lies in the fiscal deficit. The nation is poised at crossroads. Hard choices and decisions have to be taken and cannot be postponed any longer. For example, the untaxed portions of the economy must be brought into the tax net, all leakages plugged, tax administration toned up, unnecessary government expenditure curtailed, the size of government reduced and a robust export led strategy pursued to narrow and eliminate the current account deficit. We must introduce debt targeting in the budget and at no cost must any revision or change be allowed to be made in it during the course of the year. If there is any change necessitated due to change in revenue or expenditure

parameters, it is the later that must be revised through reverse working and the debt retirement target held sacrosanct.