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The Journal June 2002

Barkat Ali Bukhari *
1. Introduction There is something really vicious about the debt trap entangling Pakistan. On the one hand, every thinking Pakistani is mindful of the sinister jaws of the debt monster and all around, there is emphasis on self-reliance, and on the other, the government of Pakistan expresses jubilation on the issuance of certificate of good housekeeping by IMF because that clears the hurdles coming in the way of issuance of next tranche by the International Financial Establishment.(1) That speaks volumes about the contradictory perceptions of the ruling elite and the independent thinkers which are always in minority. In this background, the case study of the aid flows in the last 10 years (1989 to 1999) becomes very crucial. As every new tranche released by the World Bank/IMF adds to the debt burden as well as the miseries of the commen man by way of harsh conditionalities imposed in return, one wonders as to whether a study of the past behavior of power-haves of our country can throw some light on the ills of the system; and whether there is any ray of hope at the end of the tunnel, or not? The precise questions which come to mind are. a) Did all those who held office in Pakistan raise its external debt to unmanageable heights forcing it into a debt trap and making it essential to call for rescheduling of repayments from time to time? Or b) Did the international aid agencies bring us to this pass? Or c) Was it the excessive borrowing and reckless spending by those in office in the 1990s reponsible for this sorry plight, as the resident Director of the Asian Development Bank in Pakistan asserts? (2)

The writer is a Civil Servant (Customs Group) and holds the degrees of Masters in English and Bachlors in Law. The article was presented as Term Research Paper during his participation rd Advanced Course held here in 2002. in the 73rd


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2. Understanding the Topic: 2.1. The statement Aid flow in the last 10 years has been wasted? ends with a question mark. Thus, it is not a hypothesis. Rather it is a question put to the thinking minds. 2.2. What constitutes foreign aid has remained controversial. Two different views are prevalent nowadays about this. The first view considers all foreign resources such as loans, credit, grants, direct private investment, technical expertise etc that facilitates and consolidates the process of growth, as constituting foreign aid. The second view is somewhat restrictive as it regards only those foreign resource transfers as foreign aid, which carry an element of concession. The concession may take the shape of lower rates of interest or longer period of repayment or a grace period or an outright grant. (3) For the present article, the restrictive meaning of the term is assumed. The difference between a loan and a grant is also to be understood. Whereas loans incur a liability on recipient to pay back, at future date with or without interest, the loans thus taken, grants have no repayment liability. They just create a moral obligation on the recipient. At times, loans are on market rate, and sometimes these have very soft conditions of repayment. (4) 2.3. The period last 10 years in the topic means FY 98 to FY99, which is very significant in the sense that it covers eight civilian governments between two military-controlled regimes. Out of these eight two stints, each go the Pakistan Peoples Party under Ms Benazir Bhutto and Pakistan Muslim League under Mian Nawaz Sharif and four care-taker regimes of Mustafa Jatoi, Moeen Qureshi, Balakh Sher Mazari and Malik Meraj Khalid. The period under study is characterized by high political instability, frequent policy shifts, intermittent bouts between opposite political parties involving horse-trading as well as political victimization. Continuous struggle for dominance between various organs of state e.g. President, Parliament, Judiciary and Executive was another striking feature of the period. The two extreme points being military led regimes, that threat of martial law always loomed large on the heads of so-called democratic regimes in between; the military, almost always, playing the role of a power broker. 2.4. The word waste does not mean wasted in spendthrift way only. It basically signifies that the aid received during this period could not be put to its proper use. Now, what is a proper use for aid received is another million-dollar question? While repaying the previous debt is always considered a proper use, it remains important to know as to what use the original aid

The Journal June 2002

was put to. Our study, therefore, will not necessarily be limited to the confines of 10 years referred to in Para 2.2. It will cut across different regimes of economic history of Pakistan. 3. Genesis of Aid: 3.1. The genesis of aid goes back to the independence of the Asian and African countries from the colonial masters. While launching struggle for independence, the movement leaders promised positive change after independence (one is reminded of the famous Lahore Resolution of 1940 which promised a homeland, for Muslim majority areas of the erstwhile sub-continent, wherein the Muslims could lead their lives in accordance with the religio-socio-economic principles of Islam), without realizing postindependence problems of the infant state. As they achieved their cherished goal of independence, the masses started asking for the promised privileges, which were not forthcoming. To overcome this unforeseen situation, the leaders started looking around for help. Finding it as a golden opportunity, the ex-colonial masters jumped in to further their markets, which they had lost as a result of independence of these colonies. Showing concerns for those countries, the donors started with big chunks of grants. But purposely they kept these grants confined to food and other consumer goods. At times, some cash was also doled out, but it was always kept so little that no capital formation could take place. It was in fact the beginning of Pauperization process. In early thirties to late fifties, the ratio of grants to loans was 80:20, but in late eighties the ratio changed to 20:80. 3.2. Foreign economic assistance to Pakistan started in early 1950s. The (5) disbursed and outstanding external dept at the end of June 2000 was estimated at $25.5 billion that was 39.4 percent of GDP and about 306 percent of export earnings. 4. Composition of Aid/Terms of Loans: 4.1. The composition of aid over the years has considerably changed from grants and grant-like assistance to hard-term loans. The share of grant like foreign assistance in total commitments was 80 percent during the first fiveyear plan (1955-60) but dropped to 46 percent during the Second Plan (1960-65). It continued to decline thereafter, averaging 31 percent during the third plan (1965-70), and 10 percent during the fourth plan (1970-75), However, due to the relief for Afghan refugees, grants share increased to

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about 22 percent during the 5th plan (78-83) and 6th plan (1983-88). It remained at 16 percent during seventh plan (1988-93), and again went down (6) year 98-99. to 15 percent in the 4.2. The terms of loan and credits have significantly become harder over the years. The terms and conditions were soft during 1960s as compared to the same in the early years i.e. 1950s. During the 80s and the first 9 years of the 1990s, these terms heve become harder and harder. The rate of interest averaged at about 4.6 percent during the 1950s; it declined to 3.3 percent during the 1960s and the 1970s but increased to 4.8 percent and 4.4 percent during the 1980s and the first nine years of the 1990s respectively. The repayment period of the loans during the 1950s was 21 years with a grace period of 2 years, which improved to 30 years with a grace period of 7 years during the 1960s, but reduced to around 25 years with a grace period of 6 years during the 1970s. In 1980s the average repayment period remained at 28 years with a grace period of 7 years, which declined to 22 years including a(7) grace period of 6 years during the first 9 years of 1990s. Box.1:
Rate of Interest during various Periods

1950s: 1960s & 1970s: 1980s: 1990s:

4.6% 3.3% 4.4% 4.8%

5. Sources and Types of Aid: 5.1. The major sources of foreign aid to Pakistan have been the Consortium, Non-consortium and Islamic countries. Among these the Aid-to-Pakistan Consortium formulated in 1960 (now renamed as Pakistan Development Forum) remains the largest source of economic assistance to Pakistan by providing almost 84 percent of the total aid. Of this 46 percent was bilateral (Paris club and other than Paris club) and 38 percent on multilateral basis. The members of non-consortium provided 8 percent while Islamic countries provided 5 percent of the total foreign aid. Relief assistance to Afghan refugees was 3 percent. (8)


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5.2. From qualitative point of view foreign aid can be classified into two (9) types, namely, tied and non-tied aid. Tied aid is that which carries implicit or explicit conditions and strings. It may be tied to source or utilization or to both. This reduces the utility of the aid for the recipient country. Aid is tied to utilization when it can only be used for specific projects or products. More than 90 percent foreign aid received by Pakistan has remained tied. Un-tied aid, on the other hand, is aid, which is neither tied to source nor to utilization. The cash foreign exchange loans advanced by some Islamic countries of OPEC (notably Saudi Arabia and Iran) provide best examples of un-tied loans. In the 1970s the ratio of the un-tied aid was up to 40 percent of the total aid. 5.3. From the operational point of view, foreign aid received by Pakistan has been of four (9) types:a) b) Project assistance: which is confined to specific development projects mainly in public sector; Commodity assistance: which is in the form of specific commodities ranging from industrial spare parts to consumer goods. It may go to public as well as private sector; PL480 Commodity assistance: which was extended by USA during 1950s to provide surplus agricultural commodities to different countries. Payment for this could be made in local currency as well; and Technical assistance: which means transfer of technical know-how in the form of experts and trainers along with capital transfers from the rich countries.
Box.2: Sources of Aid:



Aid to Pakistan Consortium:

Bilateral: Multilateral: 46% 38%


Non-consortium: Islamic countries: Afghan assistance:

08% 05% 03% 83

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6. Philosophy of Aid: 6.1. It is important to be understood that loans whether hard or soft are to be repaid and should be addressed as such. Even out-right grants are to be viewed skeptically as these also ential a certain quid-pro-quo and are largely advanced by the donors to promote their foreign policy objectives. Any country which remains oblivious of the above implications of foreign aid, finds herself, sooner or later, completely submerged in high indebtedness endangering her political independence, and ushering in an era of economic colonialism. (10) 6.2 . In order to assess whether aid flow in the last 10 years was utilized properly or not, it would be appropriate to discuss the philosophy of aid keeping in mind the theoretical view-point, donors viewpoint as well as view-point of the Government of Pakistan. 6.3. At the theoretical level, the rationale of foreign aid is explained in terms of the dual gap analysis. Dual gap refers to the saving-investment gap and export-import gap. These two gaps are important constraints on economic growth in developing countries. The saving-investment gap equal to the difference between the savings required to achieve a target rate of growth (or S ) and the savings, which can be guaranteed domestically (S): Saving gap = S - S The export-import gap also known as the foreign exchange gap refers to the difference between the import ratio required (or M ) and the import ratio actually feasible (or M): Foreign exchange gap = M - M The process of growth will be exchange constrained if import-export gap exists, and is more formidable of the two. On the contrary the development process will be investment constrained if saving-investment gap is more challenging of the two. Foreign aid will primarily be needed to fill the bigger gap and its role in bridging or narrowing down the smaller gap will only be secondary and peripheral. (11) It may be concluded that the foreign aid is basically needed to supplement the domestic saving for enhancing the capacity to invest in developmentoriented activities. 6.4. Donors point of view cannot be more appropriately found than in the documents of the World Bank. The World Bank Report 2001 says that

The Journal June 2002

liberalization, stabilization, privatization and poverty relief are intrinsic to TRANISTION (from centrally planned to market economy), but they are not enough to create vibrant market economies. Building on the early gains of transition will require major consolidating reforms, to develop strong market-supporting institutions, a skilled and adaptable workforce, and full integration into the world economy. (12) Another important document in this respect is Human Development Report 1990. It gives insight into the World Banks concept of development at a point wherefrom our study starts. The Human development Report, 1990 defines Human Development as a process of enlarging peoples choices. The definition goes on to say that at all levels of development, the three essential ones (choices) are for people to lead a long and healthy life, to acquire knowledge and to have access to resources needed for a decent standard of living. (13) Yet another viewpoint is that of the former President of America, Bill Clinton:people of developing nations have their responsibilities as well to narrow the gap between rich and poor, by ensuring that government institutions are open and accountably, honest and effective, have widely shared growth, uproot corruption and solve social problems. There is limit to what wealthy nations can do for people, who will not take necessary steps to make their own societies work. (14) 6.5. And now the official view of the Government of Pakistan. Federal Bureau of Statistics, in 50 years of Pakistan Economy maintains, Developing countries being unable to generate sufficient domestic saving for economic growth have to seek finances from abroad to steer countrys economy towards self-sustained development in the long run. Pakistan has, thus also been relying on foreign economic assistance since its begining to augment its domestic resources, needed for development plans. (15) And the Economic Survey of Pakistan (1999-2000) says, the foreign economic assistance since early 1950s has largely supplemented the scarce domestic resources and made positive contribution towards sustaining higher economic growth and developing the countrys infrastructure base. 6.6. The key word used in official documents of Government of Pakistan is sustained development. The dictionary meanings of this word are to keep in existence over a long period. (16) When coupled with development it would means development that exists for a long time to come. But there

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is another aspect as well. Internationally sustainable development means development that meets the needs of the present without compromising the ability of future generations to meet their needs. (17) Therfore, when referring to sustained/sustainable development, we need to assess its worth keeping in view the fact whether burden has been transferred to future generations or not. 6.7. Up till now we have been discussing the theoretical aspect of the issue. Still we do not know as to what was the quantum of aid, which flowed into the economy of Pakistan during the period 1989-90 to 1998-1999. Lets attempt to guage the quantum. 7. Quantum of Aid: 7.1. According to Economic Survey of Pakistan, external debt at the end of June 89 was $14190 million, which grew to $22633 million at end June 1999. Thus an increased burden of $8443 million was transferred to the posterity. The gross disbursement during July 1989 to June 1999 was $24119 million.(18) Short term loans of $6572 million are in addition to this. (19) 8. Measuring changes in development: 8.1. Despite the inflow of such a huge amount of external assistance, the position on ground has not improved much. It has rather deteriorated. 8.2. The official viewpoint that foreign aid is obtained in order to boost investment is not corroborated by the situation on ground. According to Mr. Shahid Javed Burki. During the first 40 years of its independence, Pakistan was able to net-in about 8 percent of savings in the form of remittances and foreign aid. These domestic and foreign savings combined gave us an investment rate of about 20 percent a year. These savings were invested in the country efficiently. The incremental capital out-put ratio for the first 40 years is estimated at 3.3, meaning thereby that Pakistan had to invest 3.3 percent of its GDP in order to produce an increase of one percent in its GDP. This efficiency was because of: i) a very well developed physical infrastructure; and ii) efficient administrative and legal systems. These coupled with reasonably sound governance, Pakistan was able to generate a growth of some 6 percent a year in GDP. After 1989, Pakistan at best could have 3 percent of GDP. The physical infrastructure inherited from the British is maltreated; institutions that supported the good governance have collapsed. All this has led to increased economic inefficiency and to a dysfunctional state, GDP growth rate having come down to 4.2 percent.

The Journal June 2002

Notwithstanding the possible criticism against some of the assertions of Mr. Burki, the decreased share of foreign resources in the national savings from 8 percent in the 1980s to 3 percent in the 1990s shows that the aid received during the period 89-90 to 98-99 has not been used for investment for capital formation. 8.3. The above conclusion is further strengthened by a study of the basic Human Development indicators in respect of Pakistan in the years at the start as well as the end of the study period. A comparative picture emerges as follows.
HDI indicator Life expectancy Adult literacy rate School enrollment 30 1987* 58 30 (1985)

1999** 62 45 (1996) 63.6

(primary only)

** All developing countries 64 80 (1995) 85.7

(primary: 1997)

* Human Development Report, 1990. ** Pakistan Economic Survey, 1999-2000.

The small improvement in the indicators is owing to Social Action Program Projects II & I. SAPP-I with an out-lay of Rs.127.4 billion was started in 1993 with the help of World Bank, the Asian Development Bank, the Netherlands and the UK. Donor assistance amounted to 25 percent of the total outlay. The project was completed in the end of 1996. SAPP-II started in January 1997 with a total out-lay of Rs.498.8 billion for five and a half years. The donor assistance was Rs. 101 billion (22 percent). The emphasis areas of the program were: elementary education; primary health; population control; the rural water supply and sanitation; and population welfare. Had this project been implemented sincerely and effectively, the fate of rural areas could be changed totally, but wishes of the donor agencies did not come true, and because of the massive mismanagement of funds, the program had to be abandoned before the target date on the insistence of the World Bank. 8.4. The prevalence of poverty in the country further strengthens ones disbelief about the aid having been spent productively. In the year 1990, as many as 22.11 percent Pakistanis lived below poverty line (earning of $1 per day). This ratio had shot up to 32.6 percent by 1998. (20a) It is clear from the above figures that the aid in the years 1989 to 1999 was not utilized effectively for poverty reduction. 87

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9. Tracing the Usages: 9.1. One wonders as to what usages the aid was put to, if it was neither utilized for investment nor social welfare of the people. The study is tedious as well as baffling. 9.2. The study of gross disbursements and net receipts of foreign aid shows that a major portion of the aid flows never saw the treasury of State Bank of Pakistan. The figures tell the following story.

Year 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Gross aid 2202 2045 2366 2437 2530 2571 2555 2231 2800 2382

Servicing 1232 1316 1513 1648 1746 2042 2136 2265 2353 1530

Net receipts 970 729 853 789 784 529 419 (34) 447 852

Source: Economic Survey of Pakistan.


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9.3. It is obvious from the above table that in the 1990s the increased liability of external debt servicing has resulted in squeezing the net inflow of foreign aid. Only 15.71 percent of the aid flows landed in the state treasury. The remaining 84.30 percent went back in the pockets of the donors. Thus, in the words of S.Akber Zaidi, those institutions and countries which have lent us money over the last few decades have reaped great rewards from their investments. They are like the money lender or landlord, and Pakistan, the indebted peasant; where just to survive and pay off some of our earlier debt, we are having to borrow, increasing further our debt liabilities in the process. (21) 9.4. After debt servicing, the errant behavior of the successive governments played havoc with the paltry sum received in the state coffers. The 1990s were the years of the politicians, which in fact began, with the general elections of 1988, which ushered in Benazir Bhutto as the prime minister. They felt obliged to spend more and more to please the voters and get re-elected. In this race many un-productive schemes and programs were initiated. The allocative type of development planning wherein MNAs, senators. MPAs were allocated funds for development schemes in their respective prominence. These grants were not spent in transparent way. The infamous taxi scheme started by Mian Nawaz Sharif was a great failure. The taxis vanished too quickly from the roads and some of them ended up in Afghanistan and Central Asian States, or become private cars. And some were ultimately sold to government employees. The scheme greatly disturbed the loaning policy of the banks. Islamabad-Lahore motorway which started in 1991 with an estimated cost of Rs. 28 billion, ended up costing Rs. 40 billion in 1998 due to the vacillating policies of the successive governments. The plan was originally to involve the private sector on BOOT (build, own operated and transfer) basis but ultimately the entire cost was borne by the public exchequer. Obviously, no lessons were learned from this mega project, as the Islamabad-Peshawar motorway was also revived with estimated cost of 36 billion.(22) 9.5. The disastrous Power Policy of Benazir Government in the year 1994. The IPPs policy damaged the economy in two ways. One, the tariff allowed under the Thermal Power Generation policy 1994 was burdensome for the budget as well as balance of payments, as the payment to IPPs is to be made in foreign exchange. Secondly, with power demand lower than the projections, over-capacity has proved an additional burden on the economy. Resultantly, in 96-98, WAPDA was faced with an excessive generation of about 2000 MW during peak hours (5:00 pm to 11:00 pm),

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and about 4000 MW during off-peak hours (11:00 pm to 6:00 pm). However, capacity payments for 60 percent of the installed capacity of about 4000 MW, continue to be made to the IPPs. (23) Further to that, the IPPs use Furnace oil, annual spending on import of oil is around Rs. 265 billion, 35 percent of which is consumed in electric power generation. (24) This heavy and unnecessary expenditure is effecting adversely every sector of the national economy in general and the balance of payment in particular, resulting in trade deficit, which has to be, financed through short term foreign loans. 9.6. The second highest expenditure, in case of Pakistan, has been on defense. This expenditure was more than twice as high as the world standard in 1997. (25) The figures tell as follows.
Year Defense as % of current expend.

90-91 91-92 92-93 95-96 96-97

Source: Pakistan Economic Surveys.

33.0 32.6 31.9 28.2 27.8

9.7. In the case of defense, however, Islamabad has no choice but to be mindful of its relationships with India. The armed forces of two countries have come dangerously close to war several times__Siachin, Operation Brasstacks, Nuclear explosions in May 1998, Kargil, post September 11 and so on. There appears to be a planned effort on the part of some hidden hand to keep the already fragile economy of Pakistan under pressure all the time. The defense expenditure coupled with debt servicing/interest payments have reduced the development expenditure from 25 percent in 1990-91 to just 14.4 percent in the year 992000.(26)


The Journal June 2002

9.8. For the last many years current expenditure has remained more than the total revenues of the country, as is evident from the following table:(Billion Rs.)
Year Current Total revenue Deficit

1995-96 1996-97 1997-98 1998-99

423.9 457.9 529.9 553.4

380.3 388.2 430.0 476.2

(43.6) (69.7) (99.9) (107.2)

Source: Economic Survey of Pakistan.

The table amply explains the disposal of the amounts of foreign aid, which were left after debt servicing. 9.9. The changed and politically motivated role of the financial institutions since 1988 has also played a negative role in the economy of the country. Political necessities have always been over-ruling the economic principles in Pakistan. However, this phenomenon reached abnormal proportions during the period 1989 to 1999. Politically motivated non-guaranteed loans from banks resulted in huge stocks of stuck-up debts. The quantum of these debts increased from Rs. 39 billion in 1988 to Rs. 221 billion in 1999. (27) The written off portion of loans is not even known. The drain on national economy due to bad debts resulted in acquisition of short-term loans to bridge the gap. 9.10. Another revealing feature of the Pakistan economy in the 1990s is the increase in the proportion of short and medium term loans, which is probably responsible for the large annual repayments made each year as debt servicing. In 1990-91, short-term and medium term loans were a mere ten percent of outstanding external debt to official creditors. This amount more than doubled in 1998-99 when it was 22.2 percent. (28) This practice of relying on short term loans was necessitated because of mismanagement of funds reported above. 9.11. Successive regimes in Pakistan since 1988 have always been ready

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to accept the stiff conditionalities of the IMF and the World Bank to get medium term aid packages approved by the donors. And after the government got first tranche or the second, it forgot all about their commitments to the donors. Hence Pakistan came to be known in IMF circles as one-tranche country. SAF (Structural Adjustment Facility) in 1998, ESAF (Extended Structural Adjustment Facility), EFF (Extended Fund Facility) in 1994 all met with the same fate. Such acts on the part of the government overburdened the economy without any returns. 9.12. Half portion of the period under study is covered by the 8th Fiveyear plan (93-98). The plan started with the slogen of good governance. It emphasized on transparency, accountability, merit, mitigation of the heritage of collusion, and promised decisive actions against defaulters of taxes, bank loans and utility bills. Public-private partnership was to be promoted in all the activities, with possible cost sharing and BOT arrangements. The outcome at the end of the Eighth plan was, however, more instability and less growth. (29)
Box.3: Tracing the usages of aid/loans in 1990s
Debt servicing: Islamabad Lahore Motorway: IPPs: 4000 MWs spare electricity. 84% of disbursements Rs. 40 billion

WAPDA to pay @ 60% of capacity. Rs. 92 billion extra annual charges for oil imports Defense expenditure: Current expenditure 1995-1998 gap=Rs. 320 about 27.8% of GDP

10. Conclusions: 10.1. The above stated factors clearly show the mismanagement of economy in the 1990s but it would not be out of place to go a little beyond in the earlier periods, and dig out the reasons that aggravated the debt crisis. The same are identified as:a) The debt burden might not have become so acute if Pakistan had not devalued its currency so heavily bringing it to Rs. 61 to a dollar (currently) from Rs. 9.90 when the rupee was de-linked from the dollar in 1982. (30) 92

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b) The easy availability of food grains under grants and soft loans in 1950s and 1960s led us to accord low priority to agriculture development.(31) It resulted in continued reliance on imported food grain and edible oil, which has been a major head of expenditure and reason of trade deficit. c) Heavy budget deficits resulting from narrow tax base, run-away governmental expenditure, in-efficient public enterprises, forced successive governments to borrow internally as well as externally. d) Capital flight is another factor. Influential elite of the country have built substantial overseas assets. A huge amount of hard currency, $ 100 billion according to one estimate (32) has left the borders of Pakistan in the last two and half decades. e) Pakistans exports have not picked up as desired. As against exports, the demand for import is inelastic; resulting in persistent trade deficits, which necessitate negotiations of short term and medium term debt to foot the bill; f) Corruption is yet another endogenous factor. According to Dr. Mahboob-ul-Haq, corruption in Pakistan causes losses ranging between Rs. 100-Rs. 200 billion annually. (33) 10.2. The debt profile of the country, the debt servicing level, the budget as well as trade deficits and the stuck-up bank advances clearly suggest that the country is entangled in debt trap, as its total debt has risen to a level, which is equivalent to its GDP. Who is to blame? Mr. I.A.K. Lodhi, in his article Why blame the IMF and the World Bank? has rightly suggested that instead of IMF bashing we must realize that it is our own misdeeds a) mismanaging development loans and grants, b) spending on non-development expenses, c) wastage on projects which were not viable and d) on political loaning, which have brought us to this explosive situation. The habit of living beyond means, inward oriented trade policies, lack of financial discipline, missed opportunities and failure to diversify exports, are more to be blamed than any external factor. (33) 11. Way Forward: 11.1. The causes of debt Trap having been identifies, it is time to discuss the options available for debt management as well as the strategy to kick start the economy. Four options for debt management and five-prong strategy

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of the government has come forward in this regard. 11.2. Regarding debt management the following four theories have come forward, namely:a) Based on Noam Chomskys quotation of example of the cancellation of Cubas debt by Spain, Dr. Shahida Wizarat is of the view that Pakistan should repudiate its debt. In this way the country shall be able to get rid of a very big debt burden. According to her the repudiation of debt serves the principle of quid-pro-quo, as the people of Pakistan have not benefited from these debts. Such a strategy might lead to seizure of Pakistani assets held abroad, but in view of the small amounts involved, the costs are likely to be minimal. (32) b) According to Qais. Aslam, Pakistan should plead the case for debt retirement on the basis of HIPC (high indebted poor countries) of the world criteria of the World Bank through a mutually agreed formula and approach. (34) c) According to Tariq Waseem, Pakistan should ask its donors i.e. Paris Club and other to write-off the debt as a reward to Pakistans stand against terrorism and its role as a frontline state as was done by the US-led coalition in case of Egypt in 1991 Gulf war. According to him Pakistans case is stronger than Egypt. (35) d) The Debt Reduction and Management Committee (DRMC) set up by the government under Dr. Pervez Hassan has suggested to the government to arrange for fresh loan of $ 10 billion to avert the default like situation. 11.3. The government has instead gone for debt rescheduling. The Paris Club has rescheduled its share of 12.2 billion and has given many concessions without declaring Pakistan highly indebted country. According to Dr. Ishrat Hussain, Government of Pakistan has five-pronged strategy (36) to deal with the current debt situation, namely:a) Substantial reduction in bilateral debt-stock. U.S. is very receptive in this regard. There are some hurdles which when removed, Pakistan can obtain significant debt relief as well as flow of new concessional money.

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b) c) d) e)

Better access for our exports to foreign markets; Low interest, concessional loans under Poverty Reduction and Growth facility; Pakistan will not foot the bill for the war against terrorism; and Resumption of bilateral assistance, which was stopped by the US in 1991 and by Japan in 1998.

11.4. The policies of the federal government regarding debt management are viewed by the economists with skepticism. The reliance on export earnings is somewhat fallacious. The present reserves of about $ 5 billion are not the result of large increase in exports or a dramatic rise in home remittances. Instead that is the money gained from the US and others for budgetary support. If exports do not pick up appreciably, the foreign exchange reserves built up in recent months would be wiped out after three years when repayment of the resheduled loans begins after the current reprieve given to the country by the Paris Club expires on 30th June, 2004. It is however, an opportunity fallen in the way of Pakistan to improve its economy in the intervening period. It is imperative that positive steps are taken to build the economy on sound footings by mobilizing the internal resources and motivating the general public to save more and at the same time the money which has been saved as a result of reduced repayments to the IMF and other donors is invested in projects of public interest with discreet planning. 11.5. With a proper framework of economic policies based on correct assessment of the nature and dimension of our problems as well as our achievements and failures and supplemented by improvements in economic management and governance, we can certainly reach a stage where we can sustain growth of 6 percent per annum without the support of extraordinary bilateral economic assistance by 2010-11. This would, however, necessitate the articulation and implementation of a coherent development strategy for promoting positive interactions of growth with savings, investment and exports. (37)


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1. 2. 3. 4. Zafar Iqbal, Managing the Economy, Dawn Business Review, March 18-24, 2000. Sultan Ahmed,Excessive Borrowing,massive spending:dailyThe Dawn, Jan28,2000. M. Aslam, Dr, prospective on Development Planning in Pakistan: Bilal Books, Lahore 1992. Khan, Mahfooz Ali, Debt Crisis & Foreign aid syndrome Pakistan Journal of Economics and Management, Jan-April, 2002. 5. Economic Servey of Pakistan, 99-2000 (P-128). 6. Ibid, page-135. 7. Ibid, page-135. 8. Ibid, page-133. 9. M. Aslam, Dr, Prospective on Development Planning in Pakistan:Bilal Books, Lahore, 1992. 10. M. Aslam, Dr, Prospective on Development Planning in Pakistan:Bilal Books, Lahore, 1992. 11. M. Aslam, Dr, Prospective on Development Planning in Pakistan:Bilal Books, Lahore, 1992. 12. From Plan to Market, World Development Report, 1996 (P-85). 13. Human Development Report 1990, Oxford University Press, Boxl.l. 14. Bill Clinton, Speech made at World Economic Forum, Devos, January 2000, reported by Pakistan Horizon April-July 2000 (P-142). 15. Federal Bureau of Statistics, 50 Years of Pakistan Vol.I, Summary: June 1998 (P-57). 16. Longman Dictionary of Contemporary English, Hong Kong edition, 1993. 17. Wanyama Grass-root orginization for sustainable development ... Regional Development Studies Vol.7, 2001 (P-57). 18. Authors calculations based on figures from Pakistan Economic Surveys 93-93,97-98 and 99-2000. 19. State Bank of Pakistan report of various year, quoted by S. Akber Zaidi in the article, What are we paying for our loans, Pakistan Journal of Public Administration, NIPA, Karachi, November 2001 issue. 20. Burki, Shahid Javed, Managing Pakistans Economy: International obligations vs. internal compulsions, Pakistan Horizon, April-July, 2000 (P-18). 20a. daily the Jang Sunday Magazine: March 24, 2002 21. S. Akber Zaidi: What we are paying for our loans. Pakistan Journal of Public Administration. 22. Pervez Tahir: Economic Policy Continuation: A Critical view of the Eighth Plan 1993-1998 The Lahore Journal of Economics, Vol.5, No.1 (P-129) 23. Munawar Baseer, Pakistan power sector daily The Nation March 11, 2002. 24. Aamir Kabir, Emerging energy crisis and Options Dawn Economic and Business Review, March 4-10, 2002. 25. Dr. Mahnaz Fatima: Defence Spending cut-opposite view, Dawn January 15, 2001. 26. Pakistan Economic survey 99-2000 (P-64). 27. Siddiqui Dr. Shahid Hassan: Financial Sector Restructuring, Lecture delivered at NIPA. 28. S. Akbar Zaidi: What we are paying for our loans. Pakistan Journal of Public Administration. 29. Pervez Tahir: Economic Policy Continuation: A critical view of the Eighth Plan 1993-1998 The Lahore Journal of Economics, Vol.5 No.1 (P-129). 30. Sultan Ahmad, Excessive Borrowing, massive spending: daily TheDawn, Jan 28, 2000. 31. Aftab hmad Khan: Role of Foreign aid in Pakistans development daily The News. 32. Dr. Shahida Wizarat: An alternative external debt management strategy, Pakistan Business Review, April 2001. 33. Khan Mahfooz Ali, Debt Crisis & Foreign aid syndrome, Pakistan Journal of Economics and Management Jan-April, 2002. 34. Qasim Aslam, Pakistans debt position and the question of debt retirement, The Lahore Journal of Economics, Vol.6, No.2, July-Dec, 2001. 35. Tariq Waseem, How is Pakistans case for debt write-off stronger than Egypts ? Monthly Vision, March 2002. 36. An interview with Dr. Ishrat Hussian, The Herald, November 2001. 37. Aftab Ahmed Khan: Role of Foreign aid in Pakistans development daily The News.