PAKISTAN AND THE IMF

WHERE DOES THE PROBLEM LIE?

After the PPP-led government announced its fifth and what was being bragged as “a historic budget’
(for reasons having less to do with economics), the finance minister was quick to retort that with a soaring
current account and budget deficit, Pakistan, for resolving its financial crisis, may take the begging bowl
to the IMF. In the post-budget briefing, the minister said that ‘containing current account and budget
deficits’ was the topmost challenge which the country faced. The statement put the current account deficit
for the outgoing fiscal year at $4 billion or 1.7 per cent of GDP and overall fiscal deficit for the current
year at about Rs. 1.5 trillion or 7.4 per cent of GDP while the current account deficit for the next year has
been projected at $4.8 billion or 1.9 per cent of GDP and budget deficit at Rs. 1.105 trillion or 4.8 per
cent of GDP.
Pakistan’s association with the IMF dates back to 1980s when the agency started to play an increasingly
important and assertive role in our economic policies. The IMF was created with the purpose to preserve
the post-Second World War international economic order and in the process, oversee that industrialised
states do not engage in competitive devaluation which caused much of the economic crisis of the 1930s.
Though the IMF evolved to regulate the (im)balance of payments problems that states face yet, over the
years, it has acquired a more assertive and aggressive tone particularly in the area of determining
economic policy choices. Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral
discussions with member countries usually every year. A staff team visits the country, collects economic
and financial information and discusses with officials the country’s economic development and policies.

The IMF doles out what is regarded as a ‘stabilisation’ programme for countries which face
macroeconomic instability, that is, high inflation and severe budget and foreign payments deficits. A
state’s negotiation with the IMF revolves around executing policies which are labelled as
‘conditionalities’. These conditionalities are imposed on the state receiving IMF loans and, in particular,
comprise the implementation of these policies:

a) abolition or liberalisation of foreign exchange and import controls;

b) devaluation of the official exchange rate;
c) control of the government deficit through limits on spending, especially in the area of social services
for the poor and staple food subsidies; and
d) greater hospitality to the foreign investment and a general opening up of the economy to international
commerce.

Most of these policies proved quite unpopular in most countries where these had been tested. This is so
because the primary thrust of IMF’s policies is not geared toward ensuring development of the aid-
receiving state rather it is to oversee that such state continues to pay back the international loans accruing
to it. During the 1980s, the IMF strategy was tested in 28 of the 32 nations of Latin America and the
Caribbean. The results revealed that though Latin America had performed more than reasonably well in
paying back its debts (around $145 billion) yet the economic costs were tantalising including economic
stagnation, rising unemployment and a decline in per capita income of 7%.
Pakistan first went to the IMF in 1980 when an ‘Extended Fund Facility’ was made available. Many
leading and well-reputed economists still believe that when the IMF facility was provided for Pakistan, it
was not really needed. Akbar Zaidi has argued that Pakistan’s economy was in a far better shape than any
other developing country and was not on the brink of an economic crisis or collapse during the 1980s.
Comparing Pakistan with Bolivia, which accepted the IMF stabilisation programme, Zaidi notes that the
latter had an inflation rate of 11 per cent and a fiscal deficit in excess of 30 per cent of GDP. Pakistan’s
economy, on the other hand, was (and one may add, still is) in fairly good shape provided that important
steps are taken in order to boost revenues. At present, Pakistan owes the IMF about $8 billion: $1.8
billion is due to be paid in 2012, $3.9 billion in 2013 and $2.1 billion in 2014. It is quite evident that
Pakistan has to repay around $8 billion in almost two and a half years which makes it imperative that a
new deal with the IMF is signed in order to buy more time. But this generates a paradox: you borrow in
order to retire the loan, which means that you are being burdened by debt after debt after debt. This
approximates the example of an individual who seeks loan from one bank in order to pay another.
Considering that no drastic increases are accruing in the said individual’s income, he/she is forced to live
in a burden of lifetime debt. Where is the sense in all of this?

Coming to the policy prescriptions, Pakistan was advised by the IMF in 1980 to devalue the rupee against
the dollar, reduce government expenditures, establish tax reforms to increase domestic resource
mobilisation, encourage savings, institute price reforms and push for export-led growth and privatisation.
Most of such measures are policies with which most political economists, simply, don’t disagree. Yes,
they would criticise reduction of government expenditures as leading directly to curtailment of social
welfare programmes (such as investments in health and education) and privatisation which leaves the
middle-class employed on the whims of the market and its functioning with no social security net once
they are rendered unemployed. But who would disagree with IMF’s policy prescription to increase the tax
base or encourage savings or even competitive devaluation?

The primary thrust of IMF’s policies is not geared toward ensuring development of the aid-receiving state
rather it is to oversee that such state continues to pay back the international loans accruing to it.
The sense, from an economic perspective, requires that the government should institute policies to
increase its revenues so that proportionality is maintained between earnings and expenditures. One of the
basic mechanisms, over which successive governments have failed miserably, is efficient tax collection.
At present, Pakistan’s tax-to-GDP ratio stands at a little less than 9 per cent which is one of the lowest in
the world. The PPP’s ‘historic’ budget flirted slightly with the tax system but did not make any significant
structural change. The finance minister reiterated that his government’s proposals would increase the tax-
to-GDP ratio to a slightly better 10.1 per cent.
The government’s inefficiency in raising revenues and curtailing wasteful expenditure is the root cause of
all the fiscal ills and woes which plague the country. By wasteful expenditure is meant money that goes
under the head of corruption. This wasteful expenditure sits side by side with debt servicing which has
eaten up one-third of the budget. The present budget outlines that the government will spend Rs. 1.1
trillion–or more than one-third of its outlay–on servicing both domestic and foreign debts. Debt servicing
and defence expenditure (which the finance minister put at 18.4 per cent), jointly take away major chunk
of the budget and almost 48 per cent only is left for running the country. This is still quite a handsome
figure, however, figures hardly are the right source to celebrate or denigrate a country’s economic
performance. It is the ‘performance’ itself which counts and the fundamental requirement for effective
‘performance’ is essential economic reforms, including the implementation of agri tax. It is the
government of Pakistan, not the IMF, which is responsible for the poor state of our economy. Before
going to the IMF, we need to put our own house in order first. If we don’t, we will continue to flounder in
a sea of economic woes!

USAID!
Over the past 51 years, the United States Agency
for International Development (USAID) has grown
into a powerful multi-billion dollar political-cum-
military weapon in the hands of the American
establishment.
Over the past 51 years, the United States Agency for International Development (USAID) has
grown into a powerful multi-billion dollar political-cum-military weapon in the hands of the
American establishment. USAID’s charter is explicit: To serve the foreign policy interests of the
United States. USAID is a big business in Pakistan. In fact, USAID is a billion dollar per year
wrangle ‘and that is more money than OGDC, MCB, Pakistan Petroleum, PTCL, PSO, Engro,
Fauji Fertilizers, SNGPL, Lucky Cement, Indus Motors and Pak Suzuki collectively make in one
year.
In 2009, USAID contracted out its five-year, $80 million jobs project. USAID contracted out a
$89-million four-year FIRMS project. USAID contracted out a $30-million five-year trade
project. Roger Bate, a former director at the London-based Institute of Economic Affairs, claims
that ‘data from USAID’s Buy American Report indicates that over the last decade between 70
and 80 per cent of funding appropriations were directed to US sources. Ruben Berros, the
author of ‘Contracting for Development’, claims that only a ‘few cents of every dollar of foreign
aid ends up in the Third World.’

On February 9, 2012, Rolf Rosenkranz of Devex, the organisation focused on reducing

inefficiencies in the field of international development, asked the all-important question: ‘Can
USAID afford a 90 per cent failure rate?
President Kennedy’s stated objective behind the creation of the USAID was to separate military aid from
development aid. According to Eva Golinger, the author of ‘The Chavez Code’, over the years USAID
‘merely became an additional fund for the CIA to dip into for covert interventions.’  William Blum, a
former employee of the US Department of State, maintains that there exists ‘a close working relationship
with the CIA, and that Agency officers often operated abroad under USAID cover (Killing Hope: US
military and CIA Interventions Since WWII).’  More recently, a former editor of The Japan Times
asserted that the ‘CIA, through USAID, is running a disinformation campaign on Japan’s earthquake
crippled nuclear facilities.’ Corruption also runs rampant. This is what, USAID achieved under its $150
million Fata Livelihood Development Programme: USAID trained two-dozen truck drivers to read road
signs. USAID transported cattle from central Punjab to improve the breed in Fata. For $150 million
USAID distributed 278 Ravi Piaggio motorcycles, 10 tractors, 12 threshers, nine reapers, 10 trolleys, six
MB ploughs, six cultivators, 210 spray pumps and 20 auto sprayers. This is what USAID achieved under
its $3.3 million HIV/AIDS Prevention and Care Project: USAID ‘provided services to 78 HIV-positive
individuals and their 276 family members.’  Then there was the ‘Kabul bank fraud’ in which USAID lost
a wholesome $850 million. On May 11, 2011, US House Republicans told Dr Rajiv Shah, USAID’s
administrator, that USAID’s ‘efforts in Haiti have been a failure.’ According to David Reef of The New
Republic,’USAID has provided a total of $28 billion in economic and development assistance to Egypt’
but USAID’s undertakings in Egypt have been a total failure. On February 9, 2012, Rolf Rosenkranz of
Devex, the organisation focused on reducing inefficiencies in the field of international development,
asked the all-important question: ‘Can USAID afford a 90 per cent failure rate?’
The Impact of Foreign Aid on Pakistan in post-9/11 Scenario
During Musharraf’s tenure, the US provided over
$13 billion in military and economic aid, with military
assistance accounting for over two-thirds, mostly
through Coalition Support Funds (CSF). The
approach was described by well-informed analysts
as billions of dollars ‘provided without an overall
perspective or any real sense of objective aside from
support to Pakistan’s military.’ In return, Musharraf
agreed to cooperate in the US-led war on terror,
including informal agreements to provide the primary
route for supplies to Nato forces in Afghanistan.
Pakistan started receiving foreign aid when it sided with the West in the cold war era. In 1954, Pakistan
signed a Mutual Defence Assistance Agreement with the US. In the following year it signed the Baghdad
Pact. With these agreements, Pakistan received over $1 billion in US. military assistance in 1956, the
highest level of such assistance until 2002. The US aid continued after the first military coup in 1958. The
assistance from US was well over half of all the aid received by the country. The assistance was primarily
for civilian development and aimed at economic growth. Funds and technical expertise were provided to
modernise the agricultural and industrial sectors. During that time, the Tarbela and Mangla dams were
financed through the aid to meet energy and irrigation needs.

Pakistan fought two wars with India during 1965 and 1971. The conflict provided an excuse to the US to
stop economic assistance to Pakistan. The economic aid was reduced and most military assistance was
withdrawn. The situation further deteriorated following the launch of Pakistan’s nuclear programme in
1974. The economic and military aid continued to fall, and it remained at low levels throughout the first
democratic transition. The democratic government saw an abrupt end when Zulfikar Ali Bhutto was
ousted in a military coup in 1977 by Gen. Zia-ul-Haq. The aid to Pakistan was stopped. But a number of
developments were taking place at the time. In 1979, Bhutto was executed. The same year, the Shah of
Iran, a key western ally in the region, was ousted by anti-American regime. The Soviets intervened in
Afghanistan during the same time and this gave another opportunity to regain its geo-strategic
importance. Pakistan became the frontline state in the anti-Soviet jihad through the 1980s. In 1981, the
US agreed to provide $3.2 billion in economic and military aid over five years. While economic aid more
than doubled, from $164 million in 1981 to $400 million in 1982, military assistance increased most
dramatically: almost non-existent in the 1970s, it reached almost $500 million in 1983.

Some lobbies were not happy with such assistance to Pakistan and lobby against its interests. In 1985, an
amendment the ‘Pressler Amendment’ was introduced and passed by the Congress to condition aid on an
annual presidential certification that ‘Pakistan does not possess a nuclear explosive device and that the
proposed United States assistance programme will reduce significantly the risk that Pakistan will possess
a nuclear explosive device.’ Both President Reagan and Bush provided that certification throughout the
1980s and channelled $3 billion to the Afghan mujahideen through Pakistan. With Zia’s death in 1988,
the military era ended and power was handed over to civilians. The PPP of Benazir Bhutto won plurality
of seats in general elections and formed a coalition government at the centre. Incidentally, this second
democratic transition coincided with the Soviet withdrawal from Afghanistan. The cold war era ended
and the Soviet Union disintegrated. The changing situation made a drastic shift in Washington’s mood.
The US did no longer deem it essential to certify that Pakistan did not possess nuclear capability.
President Bush invoked the Pressler Amendment in 1990. Military aid was ceased, and economic
assistance drastically reduced, from $548 million in 1990 to $149 million in 1991 and $27 million in
1992.
  In 1985, an amendment the ‘Pressler Amendment’ was introduced and passed by the Congress to
condition aid on an annual presidential certification that ‘Pakistan does not possess a nuclear
explosive device and that the proposed United States assistance programme will reduce
significantly the risk that Pakistan will possess a nuclear explosive device.’
 
 The economic assistance from US remained at low levels during the 1990s. USAID closed its mission in
1994 and the little that flowed to the country, under a humanitarian assistance regulation, bypassed the
civilian government to go through NGOs. Following the withdrawal of western political and economic
support and facing a financial crunch, democratically-elected governments were forced to obtain high-
interest loans. Already in 1988, as western assistance began to shrink, Pakistan agreed to an International
Monetary Fund (IMF) structural adjustment package. Stringent conditions, including freezing public
sector wages and reducing subsidies, undermined successive civilian governments’ popularity and, some
analysts argue, contributed to increased poverty and inequality. Nuclear tests in May 1998, in response to
those of India the very month, and Pervez Musharraf’s coup in October 1999 further isolated Pakistan
globally. A political narrative of international betrayal, alliances of convenience and abuse of Pakistani
cooperation began to congeal.
POST-2001 Scenario
With the Musharraf regime pledging its cooperation in the Bush administration’s war on terror and the
US-led intervention to oust the Taliban in Afghanistan, sanctions were lifted and international aid
returned. Pakistan became the critical player in ‘Operation Enduring Freedom’ . In September 2001,
following the al-Qaeda attacks in the US, the Bush administration released US$600 million in emergency
cash to Pakistan. The EU, Canada, Japan and IFIs also extended grants and loans and agreed to
reschedule debt payments. Pakistan’s foreign exchange reserves, then around $700 million, were $7
billion by August 2002.
During Musharraf’s tenure, the US provided over $13 billion in military and economic aid, with military
assistance accounting for over two-thirds, mostly through Coalition Support Funds (CSF). The approach
was described by well-informed analysts as billions of dollars ‘provided without an overall perspective or
any real sense of objective aside from support to Pakistan’s military.’  In return, Musharraf agreed to
cooperate in the US-led war on terror, including informal agreements to provide the primary route for
supplies to Nato forces in Afghanistan.

Bilateral economic aid, primarily distributed through USAID, lacked transparency and was seldom
conditioned on meet ing clear, mutually agreed benchmarks. According to a former US National Security
Council official, ‘the main idea was to give Pakistan something so that they would allow for all the
strategic cloak-and-dagger stuff.’ A former administration official described direct budget support to
individual Pakistani ministries during this period as ‘even more opaque than CSF [Coalition Support
Funds].’ Budget support, for instance, was officially intended to relieve part of Pakistan’s debt repayment
so that it could dedicate more resources to the social sector. Yet, public spending on education declined
from 2.6 per cent of GDP in 1990 to 1.8 per cent in 2002-2003, while the regime increased military
spending, diverting billions – by Musharraf’s admission to buy arms to counter a perceived Indian threat.
  President Bush invoked the Pressler Amendment in 1990. Military aid was ceased, and economic
assistance drastically reduced, from $548 million in 1990 to $149 million in 1991 and $27 million in
1992.
 The US and other donors largely allowed Musharraf to determine aid priorities and, by doing so, helped
the military to consolidate its hold over state institutions. Donor support for his Devolution of Power plan,
for example, was drafted with technical help from and its implementation supported by the UN
Development Program (UNDP). Announced in August 2000, the plan pledged to build genuine
democratic institutions and empower people at the grassroots by placing local political and administrative
powers under elected representatives, reversing a system that subordinated elected politicians to
bureaucrats. But with elections held on a non-party basis and amid allegations of mass rigging and other
critical flaws, the scheme allowed the military regime to create pliant political elite at the local
level.Donors, however, continued to channel their funds to the military’s devolution plan, justifying it as
support for democratic governance. Similarly, the US, UN, EU and UK channelled significant funds to
the Election Commission of Pakistan (ECP) for the 2002 national elections. By failing to condemn
electoral abuses and continuing to support deeply flawed electoral institutions, they helped the military
regime gain international legitimacy and consolidate its hold at home.
In 2007, a movement for the restoration of democracy, comprising the legal community, political parties
and civil society activists, brought about the downfall of Musharraf’s military regime. After elections in
February 2008, a PPP-led coalition government was formed. The fledgling democratic coalition faced a
deteriorating economy and major security threats. Given the importance of Pakistan’s stability for broader
strategic objectives, influential international actors, including the US, appeared willing to support the new
government as it addressed these challenges.

On September 26, 2008, Presidents Asif Ali Zardari and Barack Obama co-chaired the launch of the
Friends of Democratic Pakistan (FoDP) in New York, a forum through which donors could support the
government’s efforts to consolidate democratic institutions and confront the myriad social, economic and
security challenges. The then UK foreign secretary, David Miliband, described the meeting as sending ‘a
very strong signal of political support and also of practical support to the democratically-elected
government of Pakistan.’ Yet, FoDP’s ability to facilitate dialogue between the international community
and Islamabad had major limitations.

Analysts and donor representatives argued the group was too large and diverse to use its influence to
press for policy reforms in Islamabad. Moreover, the FoDP countries did not support the financial bailout
Islamabad sought. With no other choice to avoid defaulting on its foreign debt, and also in order to pursue
macro-economic stability, the government entered into a Stand-by Arrangement with the IMF for a $7.6
billion loan (later raised to $11.3 billion) in November 2008.The IMF imposed politically difficult
conditions, such as ending power sector subsidies, imposing a general sales tax on goods and services and
taxing agricultural benefits.  At the April 2009 FoDP meeting, donor countries and IFIs pledged over $5
billion in aid, with host Japan promising $1 billion, but ‘premised on the continued steady implementation
of the IMF program underway since November 2008’ . Implementing an austerity program, no matter
how desirable, requires political will but also stability; this has eluded the government. By linking aid to
IMF conditionalities, with little flexibility, donors have failed to recognize the stresses of a young
democratic order.
LEARNING TO LIVE WITH DEBT

Pakistan’s public debt accumulated to reach 63 per

cent of GDP by 2011-12. As a result, the total fiscal
requirements to finance budget deficit and to roll
over mature debt for 2012-13 reached over 35 per
cent of GDP, the highest among the emerging
market economies after Egypt (40 per cent) as well
as among the advanced economies after Japan (54
per cent).
What causes the public debt?

The sustained and increasing national budget deficits are the primary reason for accumulated public
debt. The size of budget deficits has increased from Rs. 89.97 billion in 1991-92 to Rs. 1369.71 billion in
2011-12, an average increase of Rs 373.01 billion during the said period. On an average, the budget
deficits grew about 17 per cent during this period with a peak figure of 106 per cent in 2007-08 and a
lowest figure of 1 per cent in 1991-92. As a percentage of GDP, on an average the budget deficits
increased by 5.6 per cent during the period, with the peak figure of 8 per cent in 1992-93 and a lowest
figure of 2.3 per cent in 2003-04.

The budget deficits are mainly because of extremely low level of revenues in the country. On an average,
the national revenues were about 14 per cent of GDP during period from 1991-92 to 2011-12, which are
lower than  many developing countries such as Egypt (22 per cent), Kenya (20 per cent), Thailand (21
per cent), Malaysia (21 per cent) and Nepal (15 per cent) not to mention advanced nations like Germany
(29 per cent), France (43 per cent) and Italy (38 per cent), etc. in 2011.

Like many countries of the world, taxes constitute major segment of Pakistan’s national revenues. But, in
contrast to many similar economies, the tax-to-GDP ratio in the country remained low and stagnant at
around 10 per cent to 12 per cent during the period 1991-92 to 2011-12 despite significant increase in
GST revenue and income tax revenue due to tax policy changes. In 2011, the tax-to-GDP ratios of Egypt
(14 per cent), Kenya (19 per cent), Philippines (12 per cent), Indonesia (12 per cent), Malaysia (15 per
cent), Sri Lanka (12 per cent) and Nepal (13 per cent) were higher than 9 per cent of Pakistan.
The reasons for low tax revenue mobilization are well-cited and documented in the literature. Specific to
Pakistan, the most common ones are considerable tax evasion, reasonably large size of informal economy
and too many exemptions. For instance, the GST gap, which is the difference between GST actually
collected and that which is potentially collectable, was computed to 63 per cent in 2002-03 and has
increased to 75 per cent in 2010-11, largely attributable to the increased level of non-compliance,
exemptions and excessive input tax adjustments.

The excessive and increasing public expenditure is another reason for widening budget deficits ergo debt
accumulation. On an average, the public expenditures were about 20 per cent of GDP during the period
1991-92 to 2011-12, with the highest figure of 22 per cent in 1991-92 and 2007-08 and the lowest figure
of 17 per cent in 2000-01 and 2003-04. However, the current expenditures were much more than the
development expenditures. The current expenditures remained within a band of 14 per cent to 18 per cent
of GDP, with a highest figure of 18 per cent in 2007-08 and a lowest figure of 14 per cent in 2003-04. In
contrast, the development expenditures were significantly lower with highest figure of about 6 per cent of
GDP in 1991-92 and lowest figure of about 2 per cent of GDP in 2000-01; needless to mention that the
development expenditures promote economic growth, which, in turn, raises more tax revenues essential
to balance the budgets.

Since the country does not have sufficient natural resources to provide for non-tax revenues, the taxes
would continue to be the major instruments for raising revenues and balancing the budgets in the future.
But, poor tax culture has been posing serious threats to implementing adequate and economically vibrant
fiscal policy. Less than 30 per cent share of voluntary payments in gross income tax collection in 2011-12
provides better illustration of poor tax culture, despite the fact that the self-assessment scheme was
introduced in the interest of the taxpayers.

The above discussion suggests that until and unless the government reexamines its fiscal policy, the
people realize their national obligation of paying due taxes, the tax authorities enforce tax laws in
transparent and indiscriminate manner, we would probably learn to live with higher level of debts in the
future.

DOES FOREIGN AID HELP TO ACHIEVE ECONOMIC STABILITY

Every nation on this planet covets progress and development in every field of life. But, it is
also a reality that while some countries are making huge headways in the realm of progress
and development, others are still grappling with extreme poverty. Latest data suggest that
nearly 1.3 billion people live in extreme poverty — less than $1.25 a day. There are many
countries in the world that do not possess ample resources to feed their populations. So,
they have to depend on aids and grants from developed countries or international financial
institutions.
In today’s globalized world, every nation-state needs to maintain trade relations with other
nation-states in order to run the country’s affairs. For this, they need also to depend on
development banks, international donor agencies and other financial institutions so that inter-
state trade and relations fare as per the norms of international law and a fairness in the deals is
maintained.

Developing countries like Pakistan in their struggle for self-reliance need international assistance
and foreign investment so as to fund the development projects in the country. Historically, the
countries which got freedom from the colonial powers remained dependent on the developed
countries except those which realized the need of making developments by relying on
themselves rather than on foreign aid and loans. Unfortunately, successive governments in
Pakistan resorted to running the country on foreign loans and aid. Consequently, the country is
tangled in an intricate web of debt burden and deficit financing.
At present, Pakistan is the third largest debt-recipient country in the region. Its external debts
have reached 33 percent of the GDP as compared to India’s 15 percent and China’s 7 percent.

When Pakistan became independent in 1947, it had meager resources and establishment of basic
infrastructure was the biggest challenge for the nascent state. Moreover, the looming threat of
Indian hegemony was also aggravating the situation. So, Pakistan reached USA for military and
economic assistance and because of these factors, the country joined the capitalist bloc in Cold
War era. From the very beginning, Pakistan’s growth model had been based on foreign
dependence rather than capital accumulation from within the country. This policy led to increase
in debt and a greater import-export imbalance. Economic policies adopted by successive
governments were pro-rich; for example, Ayub Khan opted for trickle-down policies that only
increased the gap between the haves and have-nots. This policy impeded country’s process of
raising its own capital and reforming the tax regime. Although a lot of foreign capital was
available, the rich as well as those in power did not bother taxing themselves. So, the
governments had to rely heavily on indirect taxation which caused more poverty and further
burdened the poor.

Foreign loans and grants always come with certain conditions that, in effect, means the country
at the receiving end must not only bear an increased debt burden but also has to follow some
conditions. Hence, such a loan is like a double-edged sword as it, on the one hand, fails in
sufficiently fulfilling the needs of the recipient country while further piles up the debt, on the
other. The incumbent PML-N government is also treading the same beaten track and is relying
heavily on foreign lending which would causes more problems. The government needs to
increase tax base by improving taxation system and imposing direct taxes to the rich landlords
and big businessmen. Like its predecessors, the present government is trying to increase its
revenue through indirect taxes. Nothing solid has been done in order to strengthen Federal Board
of Revenue (FBR) where corruption prevails and an utter disregard to merit and consistency in
policies is taking a heavy toll on country’s economy.
The government needs to introduce radical reforms and carve out prudent, pragmatic policies.
Following suggestions may be instructive in this regard:

1. Country’s defence expenditure should be reduced as in this modern world of nuclear warfare
having large arsenal of conventional weapons is not a wise option.
2. Pakistan’s economy is reeling under the claws of the elite of the country and this class is also
at the helm of country’s affairs. Whenever an attempt is made to broaden the tax net, only a few
privileged individuals become hurdle and thwart the emergence of progressive taxation. Unless
these handful of people are meritedly taxed, the economy cannot improve.

3. Big landlords do not pay taxes on their incomes. Although, laws on agriculture tax have been
imposed by the provincial governments yet it those are too weak and are like a nose of wax.
Moreover, some landlords are out of tax net and exploiting their clout at the local level, they do
not pay Abiana/ Water rate or other government dues. Hence, a stricter implementation of law is
the most pressing need of the hour.

4. Pakistan’s tax machinery is weak and collects only a paltry amount in direct taxes whereas
corruption is also rampant in it. The Tax Amnesty Schemes launched by different governments
have failed to get the desire results. Radical reforms in this realm are direly needed.

Pakistan’s aid dependence is rooted in the very structure of the economy. It has been shaped by
an institutional framework that restricts the process of savings and investments to the elite.
Therefore, aid dependence can be overcome only by restructuring the economy through an
institutional change that enables the middle class and the poor to participate in the process of
savings, investment and innovation.

UNSUSTAINABLE EXTERNAL DEBT:

WHAT NEEDS TO BE DONE?
Pakistan has reached this point of carrying
unsustainable and unmanageable external debt due
to massive corruption levels, inefficient allocation of
debt money, poor implementation of foreign-aided
projects and financing of the current account.
Consequently, the economy as a whole has become
all the more dependent on large scale foreign long,
and short-term borrowings.
In 2010, Pakistan was declared the third largest external debt recipient country in the region, after Sri
Lanka and Nepal. Pakistan’s external debt stood at 33% of GDP as compared to India’s 15% and China’s
7%. The external debt and liabilities of Pakistan comprise of foreign exchange liabilities of the State Bank
and all foreign currency debt contracted by the public and private sector.  About 76% of the external debt
and liabilities is composed of public and publicaly guaranteed debt as Pakistan has been financing its
current account deficit through loans from multilateral and bilateral lenders. Debt liabilities of the private
sector are a minuscule 6% and borrowings from the International Monetary Fund intended to assist in
balance of payment are 13% of the entire external debt and liabilities stock.   On June 30, 2012, the total
external debt of Pakistan as shown by the State Bank was US $ 65.5 billion.
Domestic and external debts are treated separately. Domestic debt has to be considered as a charge on the
budget and has to be serviced through government revenues or additional debt. External debt, on the other
hand, in addition to revenues, is also a charge on the balance of payment and is serviced from foreign
exchange earnings, reserve drawdown and additional borrowings. Inadequate debt management and a
permanent growth of debt to GDP ratio may result in some negative consequences and changes in
macroeconomic indicators, like crowding out of investment, financial system instability, inflationary
pressures, exchange rate fluctuations, etc.

Debt servicing and external debt have been regarded as one of the major problems of Pakistan’s
struggling economy. Governments of developing countries like Pakistan need to borrow in order to
facilitate the development process and enhance their overall economic growth. The borrowed funds, if not
allocated properly, create a host of problems for an economy as in case of Pakistan. Proper debt
management has been regarded as useful for growth of a country however, dependence on debt has to be
monitored closely. Due diligence has to be exercised for devising a strategy for making the optimum use
of the debt money as well as enhancing the repayment capability of the country. Unsustainable levels of
debt, over the years, have created serious problems for Pakistan as the country has to service this huge
debt which consequently has shrunk the developmental expenditures. Pakistan has been trapped into a
vicious circle where it has become impossible for her to service the foreign debt without taking additional
debt.
The external debt component of Pakistan has grown over the past few years largely due to increased
foreign public debt inflows on one hand and depreciation of US dollar against other major currencies on
the other. During 2010-11, total external debt servicing was US $ 4.799 billion. A payment of US $ 2.348
billion out of this total was paid on account of maturing external debt and liabilities stock while interest
payments were US $ 963 million. An amount of US $ 1.488 billion was rolled over.

 Inadequate debt management and a permanent growth of debt to GDP ratio may result in some negative
consequences and changes in macroeconomic indicators, like crowding out of investment, financial
system instability, inflationary pressures, exchange rate fluctuations, etc.
 Since 2007, domestic problems as well as international recession and credit crises have impacted
Pakistan’s debt dynamics in an unprecedented way. Higher interest payments, large subsidies, especially
food and energy, growing security spending needs, extremely low tax to GDP ratio and rising
international commodity prices have resulted in large twin account (fiscal and current account) deficits.
Lower FDI and other non-debt creating flows due to energy shortages and security concerns have
contributed towards negative balance of payment and depletion of foreign exchange
reserves.Policymakers in Pakistan have to seriously consider reforms to strengthen the quality of public
debt management and reduce Pakistan’s vulnerability to international financial shocks. Vulnerability is
often greater for countries like Pakistan because their economies are usually less diversified, have a
smaller base of domestic financial savings and less developed financial systems. Each country’s capacity
building needs in sovereign debt management are different. The needs are shaped by the capital market
constraints being faced by the country, the exchange rate regime being followed, the quality of
macroeconomic and regulatory policies, the institutional capacity to design and implement reforms, the
country’s credit standing and its objectives for public debt management.
Debt managers, fiscal policy advisors and central bankers should share an understanding of the objectives
of debt management, fiscal and monetary policies given the interdependencies between their policy
instruments. Debt managers have to convey to fiscal authorities their views on the costs and risks
associated with government financing levels and debt requirements. Debt management, fiscal and
monetary authorities should share information on the government’s current and future liquidity
needs.Pakistan has reached this point of carrying unsustainable and unmanageable external debt due to
massive corruption levels, inefficient allocation of debt money, poor implementation of foreign-aided
projects and financing of the current account. The country’s sovereignty and independent decision
making have also been adversely affected due to influence of the lending countries and the multi-lateral
lending institutions. Continued fiscal deficits have negatively affected various sectors of Pakistan’s
economy. Inflationary pressures over the years have mounted and crossed tolerable limits creating huge
problems for the common man.
Consequently, the economy as a whole has become all the more dependent on large scale foreign long-
and short- term borrowings. Prudent fiscal management and reducing corruption have to be set as the top
policy priorities within the policy agenda. For quite some time we have been hearing about the population
dividend in Pakistan. Benefits from this huge population can only accrue if the government is sincere in
properly investing into developing human capital by proper and efficient investments into the
developmental projects. The question, however, remains who will do this when those at the helm of
affairs are considered to be more motivated towards their self interest rather than national interest.