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FOREIGN DEBT OF PAKISTAN

RESEARCH PAPER

MUHAMMAD HASAN KARIM


BPA 2K14
Preface
The basis for this research originated from my desire for studying the foreign debt
and how governments deal with it. Nearly all countries of the world have relied upon
foreign loans at some point in their history. However, it is pretty alarming what
adverse effects it has on the economy and how it adds to inflation and
unemployment. It is a cycle of events and a loop that keeps growing. It is my passion
to not only study how the governments control foreign debt, but to also find out how
increase fluidity in managing money and repaying the loans.
In truth, I could not have achieved my current level of success without such strong
support from my instructor and peers. Thank you all for your firm support.
Dedication
I take pride and honor in dedicating my research paper to my instructor, Mr. Ejaz
Bajwa, who has provided me with assistance throughout the course and has been of
massive help at every step of writing this paper. I thank you for your patient advice at
all levels.
Executive Summary
Research on this topic was done to find out how governments cater foreign debt in the
economies around the globe. Method of investigation used was the analysis of secondary
data, obtained from various websites. Findings tell us that repayable loans will continue to
increase due to various factors, including loopholes in the system overall. In conclusion, we
have found that increasing foreign debt will give rise to numerous adverse effects on the
system. A chain of events, such as rise in inflation, unemployment, other issues, both on
national and international levels, occur. These tend to go on in a loop and keep giving rise to
one another.
Table of Contents
Introduction ..................................................................................................................... 6
History ............................................................................................................................. 6
Repayment ....................................................................................................................... 6
Overtime increase in debt ................................................................................................ 7
Conclusion........................................................................................................................ 7
Recommendations ........................................................................................................... 7
Bibliography ..................................................................................................................... 8
Introduction
Foreign debt is defined as the outstanding monetary amount one country owes to another or
institutions of other countries or its own. Payments to international organizations such as the
International Monetary Fund (IMF) are also included in the foreign debt of a country.
(Investopedia, n.d.) The debt may be comprised of fees for goods and services or outstanding
credit due to a negative balance of trade. Total foreign debt can be a combination of short-
term and long-term liabilities.

Rescheduling of obligations or simply paying off debts can help governments lower their
foreign debts. (Investopedia, n.d.)Foreign countries typically hold U.S. debt in the form of
short- and long-term government-issued bonds.

Grants differ from debts. Grants are financial assistances which are non-repayable in nature.
To fulfill a particular purpose, usually related to the welfare of general public, grants are
provided by governments to other governments, individuals or entities. Loans, on the other
hand, require repayments, usually along with a specific amount of interest levied after the
term expires for which it is repaid.

History
Pakistan’s total external debt and foreign exchange liabilities grew at an average rate of 7.4
percent per annum during 1990-99- which rose from $20.5billion in 1990 to $38.9 billion by
mid 1999. On other other hand, the foreign exchange earnings remained unchanged or
increased at a very slow pace in that period. (Economic Survey ) Despite the accumulation of
almost $ 18.4 billion debts in the 1990s, foreign exchange earnings rose by only $ 4.0 billion.
Consequently, the debt burden rose from 256.6% in 1989-90 to 335.4% in 1998-99. Following
a credible strategy of debt reduction over the last several years, Pakistan has succeeded in
reducing the country’s debt burden by ensuring that the growth in EDL is less than the GDP
growth. Consequently, the burden of the debt has declined substantially during the same
period. However, over the recent years, the debt growing at an exponential rate and the
increasing inability of the country to pay back the money, Pakistan has pushed its capacity
and is now largely indebted to various countries and international organizations.

Pakistan signed for its first ever loan of 27.2 million USD, on 27th of March, 1952. It was signed
between the country and International Bank for Reconstruction and Development (IBRD),
since the loan was taken for rehabilitation purposes and also the development of Pakistan
Railway. (Choudhry)

Repayment
Till date, Pakistan has a poor repayment history. The accumulation of a stock of such a large
debt has threatened the country’s ability to pay back the loans. Pakistan’s governments
frequent borrowing and inability to return has had the debt grow to an amount beyond
Pakistan’s capacity to be a debt-free country in the near future without extensive planning to
function efficiently with competent government personnel.
Overtime increase in debt
The overall deficit (total revenue minus total expenditures) amounted to Rs. 89.2 billion in
1990-91, which swelled by 66 percent to Rs. 148 billion in 1997-98. While the domestic
component of national debt increased from Rs. 448 billion to Rs. 1280 billion (185 percent)
foreign debt, increased from Rs. 272 billion to Rs. 697 billion (156 percent) over the same
period of time. As a consequence, debt-servicing has increased rapidly from Rs. 23 billion to
Rs. 73 billion (217 percent), during the period between 1990-91 to 1997-98 [Pakistan (1997-
98)]. (ISHFAQ)

The rescheduling of the debt repayment has proved to be a major fiscal constraint in the early
1900s. Over the years, the payment of debt-servicing has become increasingly difficult not
only because its amount has been increasing continuously but also because it has been
accompanied by a reduction in the availability of low interest bearing external financial
assistance and the rising cost of the internal borrowing.

External Debt in Pakistan increased to 85052 USD Million in the third quarter of 2017 from
82981 USD Million in the second quarter of 2017. External Debt in Pakistan averaged
52551.19 USD Million from 2002 until 2017, reaching an all-time high of 85052 USD Million
in the third quarter of 2017 and a record low of 33172 USD Million in the third quarter of
2004. (Trading Economics)

Conclusion
Foreign debt gives rise to various factors that adversely affect the country’s system, and in
the end, the general public has to suffer. Out of the numerous factors, inflation is one of the
most important ones. International borrowing gives rise to inflation in a country, which in
return aids in the growth of poverty, unemployment and decreasing purchasing power. Due
to the governments inefficiency and incompetence in handling internal and external affairs,
ad managing budgets, the general public suffers.

Recommendations
In order to make the aid productive for development and growth the government should
focus on transparency and accountability.
Insure proper utilization of foreign resources.
The government should introduce policies to restrict the imports of country, reducing the
national debt. Import of specialized items should be minimized. The national industries
should be encouraged and to make the country self-sufficient.
Secondly, the foreign aid programs should be distinctly understood as short-term and
temporary solutions to development strategy. They have an in-built exit strategy. For
instance, the successful Marshal Plan by US was developed with a planned exit strategy, and
with aim to motivate for self-help.
Furthermore, the donors should be encouraged not to provide aid with stringent rules,
directions and instructions, and allow space for the governments to formulate their own
projects and policies, for best use of aid money.
Bibliography
Choudhry, J. (n.d.). Pakistan’s first loan & first grant. Retrieved from
https://weeklycorporateambassador.wordpress.com/2014/10/22/pakistans-first-
loan-first-grant/
Economic Survey . (n.d.). Retrieved from http://www.finance.gov.pk/survey/chapters/10-
exter_d.PDF
Investopedia. (n.d.). Retrieved from https://www.investopedia.com/terms/f/foreign-
debt.asp
ISHFAQ, M. (n.d.). Retrieved from http://www.pide.org.pk/pdf/PDR/1999/Volume4/1067-
1080.pdf
Trading Economics. (n.d.). Retrieved from https://tradingeconomics.com/pakistan/external-
debt