DEBT CRISIS AND ITS MANAGEMENT IN PAKISTAN

ARTICLE: DR. SHAHIDA WIZARAT

Presented by: Karishma Motiani ( 6817 )

INTRODUCTIO N

Debt: who benefits?

Countries borrow from other countries with the aim of rejuvenating development and improving their economies through foreign aid.. But.. The experience of developing countries has been totally different: Most of the benefits from aid flow out of the recipient country to the donor country tied nature of aid, necessitating the use of the donor countrys companies, consultants, etc. As a result most of the aid money is recycled back to the donor country Conditionalities have had an adverse impact on developing countries: It denies recipients and governments the right to freely choose policies best suited to their economic and social conditions

Debt: who benefits?

Conditionality hampers the development of the countries they are supposed to help and infringe on the countrys democracy and sovereignty Financial and political instability and slows down growth

Conditionalties attached to loans or grants often have negative impacts on the poor countries: They impose inappropriate policies, generate transaction costs and stop or start financing according to donors whims Two important measures for evaluation of aid are democratic ownership and transparency: -- ownership implies not only participation, but quality participation, with transparency, accountability, democratic values, and rights at the heart of governance.

DEBT CRISIS

Onset of Debt Crisis in Pakistan

Adoption of a market-based monetary policy by the Government of Pakistan (GOP) in 1990 - 1991 This was on account of a World Bank (WB)-IMF conditionality that the GOP borrow at the market rate of interest rather than at a concessional rate from the commercial banks and the domestic financial institutions

This inflated the size of the domestic debt, and the offer by the international financial institutions to make credit available at concessional rates gave birth to the debt crisis Ever since then, the size of foreign debt has been on the rise

A large part of this debt benefited the ruling elite and was transferred abroad to buy property and assets in western countries

Total Debt
Total debt has been increasing over the years..
FY 1992 -93 FY 1993 -94 1,451.40 FY 1994 -95 1,592.50 FY 1995 -96 1,864.20 FY 1996 -97 2,147.30 FY 1997 -98 FY98 FY99 3,135.40

Total Debt

1,208.40

2,485.50 2,671.90

FY 00 3,258.40

FY 01 3,791.80

FY 02

FY 03

FY 04

FY 05 4,181.60

FY06

FY 07

FY 08 632.4

Total Debt

3,723.50 3,781.40 3,917.00

4468.6 4957.5

* FY 09 * FY 2010 8,306.7 9,685.9

Debt/GDP Ratio

Total debt as a percentage of the GDP:

1994 - 95 to 1998 - 99 : Rapidly increased, and was almost as large as the GDP in the latter year 1999 - 2000 : Size of debt exceeded the size of the GDP 2001 onwards : Debt/GDP started declining continued throughout the decade, except for a sudden reversal in 2008 * and continued to increase till 2010

Foreign debt as a percentage of total debt: 1990s : Rose continuously throughout the decade 2000 onwards : it started declining (except for the increase in the year 2001 as an after math of 9/11) * 2004 onwards : again it has been increasing tremendously (09-10 figures are quite disturbing)

Table1 :

PROFILE OF DOMESTIC AND EXTERNAL DEBT

FY 1992 -93 FY 1993 -94 1,451.40 702.00 749.40 92.30 44.60 47.60 134.4 90.9 74.9 16 43.5 _ 49.60 36.80 45.80 FY 1994 -95 1,592.50 805.40 787.10 84.60 42.80 41.80 154.4 97.3 76.1 21.2 57.1 59.90 48.60 36.10 44.60 87.00 42.80 44.30 201.8 132.5 106.8 25.7 69.3 66.00 54.80 39.00 47.60 FY 1995 -96 1,864.20 916.10 948.10 87.40 42.70 44.70 258.7 161.2 132.6 28.5 97.5 79.70 67.30 47.80 56.80 FY 1996 -97 2,147.30 1,049.60 1,097.70 90.80 42.40 48.40 278.4 191.7 162.9 28.7 86.7 77.00 63.80 47.20 56.10 FY 1997 -98 in bn . Rs FY98 FY99 3,135.40 1,375.90 1,695.90 106.70 46.80 57.70 343.10 220.10 178.90 38.00 123.00 87.80 73.20 53.00 62.70

Total Debt ( 1 + 2 ) 1 . Domestic Debt 2 . External Debt * ( Short / Medium and Long ) Debt as percent of GDP GDP of GDP of GDP

1,208.40 609.60 598.80

2,485.50 2,671.90 1,159.50 1,176.20 1,326.00 1,483.10 99.80 43.90 55.40 278.30 191.60 160.10 28.70 86.70 78.40 64.80 43.90 52.50

Total Debt as % of 90.10 Domestic Debt as % 45.40 External Debt as % 44.60

Total Debt Servicing ( a + 107.90 b ) ( a ) Total Interest 78.80 Payment ( i + ii ) i . Domestic ii . Foreign ( b ) Repayment of Principal Ratio of Total Debt Servicing to : Tax Revenue Total Revenue Total Expenditure 64.10 14.70 29.10 _ 45.10 31.00

Current Expenditure 39.60

 DOMESTIC

AND EXTERNAL DEBT FY 00

FY 01

FY 02

FY 03

- 09 FY 04 ( SBP 05 08 FY06 FY ** 4,030.50 3,917.00 1,979.50 1,937.50 4,288.90 4,181.60 2,149.90 2,031.70 107.30 66.00 33.10 31.30 1.70 358.8 236.2 181.9 49.1 5.2 122.6 56.70 39.90 32.10 38.00 5.50

Table 1 :

PROFILE OF
*FY 09 8,746.6 8,306.7 4,151 4,155.7 **168.8 65.2 32.6 32.6 **1.3 947.0 669.4 570.2 89.4 **4.5 277.6 **68.4 66.0 34.3 31.8 1,044.9 668.6 575.2 82.2 376.3 *FY 2010 10,196.4 9,685.9 5,027.6 4658.3 6426.4 632.4 3266.1 3036.2 124 61.3 31.2 29 1.2 670.7 549.9 474.5 70.7 4.7 120.8 63.5 44.4 29.9 36.5 6.4

* 07 FY09 - 10 ) FY 08 5046.4

Total Debt & Liabilities Total Debt ( 1 + 2 ) 1 . Domestic Debt 2 . External Debt * 3 . Explicit Liabilities * Debt as percent of GDP Total Debt Domestic Debt External Debt Explicit Liabilities Servicing Total Debt Payment Total Interest Domestic

3,553.90 4,113.30 3,911.60 3,904.00 3,258.40 3,791.80 3,723.50 3,781.40 1,578.80 1,731.00 1,717.90 1,853.70 1,679.60 2,060.80 2,005.60 1,927.70 295.50 92.90 41.30 43.90 7.70 418 292.8 222 321.50 97.70 41.10 49.00 7.60 522.3 280.9 195.4 64 21.5 241.4 118.30 94.40 72.80 80.90 12.40 188.10 87.80 38.60 45.00 4.20 588.7 289 212.5 51.3 25.2 299.7 123.10 94.30 71.20 84.10 13.20 122.60 80.10 38.00 39.50 2.50 436.4 253.1 189 48.1 16 183.3 78.50 60.50 48.60 55.10 9.00

456.1

4468.6 4957.5 2321.7 2601.1 2146.9 2356.3 95.5 59.9 30.5 28.2 1.3 424.4 294 237.1 50.5 6.4 130.4 56.4 39.4 30.3 37.9 5.6 89 57.9 29.8 27 1 531.6 425.5 358.6 61.1 5.8 106.1 59.8 41 31.7 38.7 6.1

113.50 71.50 35.10 34.30 2.00 491.9 241.8 185.3 51.2 5.3 250.1 79.60 61.00 52.30 64.50 8.70

Foreign 54.2 Explicit 16.6 Liabilities of Principal 125.2 Repayment

( foreign )

Ratio of Total Debt Servicing to : Revenue Tax Total Revenue Expenditure Expenditure Total Current GDP

103.10 81.60 58.90 66.70 10.90

**38.6 **45.4 **7.2

Fig . 6 . 3

**49.1

Debt breakdown

The terms on which Pakistan obtained debt can be viewed from the break down of debt into loans and grants :

Table 2 :
S . No . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Grant as a Percentage of Total Aid

Years 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Percentage of Grant 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 45.1 67.2 40 34 39 37 19.1 15 24 11.1 26 28 23 21.4 11 17.3 19.5 17 3.4 20.5 24 44 36 43 S . No . 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Years 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Percentage of Grant 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 41 33 40.2 36.3 23 27.6 15.1 15.3 9.2 9.5 13 8 7 3.5 11.4 29 22 46 23 35 38.1 46 18 14

Grants as a Percentage of Total Aid

DEBT SERVICING

Debt servicing : Repayment of principal + interest payments Increasing at a spectacular rate throughout the period from 1990s till the present This at a time when the country was faced with a recession as a result of IMF imposed tight monetary policy has given rise to serious crises in the country

Debt servicing : - 1994 to 2002 : there was a tremendous increase - 2003 to 2005 : followed by a decline (worse) - 2006 - 08 : followed by a sudden upsurge again - * 2009 - 10 : continuing to increase (but the amount of total debt has drastically increased, compared to which debt servicing is still too low) Debt servicing / Tax revenues : - 1994 - 95 : Almost 60% of tax revenues were used for debt servicing continued rising - 1999 : rose to a little less than 90% - Debt servicing exceeded total taxes collected in country in 2000, rising to 123% by 2002 - But maintaining a steady decline for the next 6 years - 2007 onwards : it has started increasing again, a trend that was maintained in 2008 - * 09 Debt servicing / Total expenditure : - Started increasing from about 36% in 1994 - 5 to about 73 % in 2001 - Declining thereafter, but increased again in * 2009

Table1 :

PROFILE OF DOMESTIC AND EXTERNAL DEBT

FY 1992 -93 FY 1993 -94 1,451.40 702.00 749.40 92.30 44.60 47.60 134.4 90.9 74.9 16 43.5 _ 49.60 36.80 45.80 FY 1994 -95 1,592.50 805.40 787.10 84.60 42.80 41.80 154.4 97.3 76.1 21.2 57.1 59.90 48.60 36.10 44.60 87.00 42.80 44.30 201.8 132.5 106.8 25.7 69.3 66.00 54.80 39.00 47.60 FY 1995 -96 1,864.20 916.10 948.10 87.40 42.70 44.70 258.7 161.2 132.6 28.5 97.5 79.70 67.30 47.80 56.80 FY 1996 -97 2,147.30 1,049.60 1,097.70 90.80 42.40 48.40 278.4 191.7 162.9 28.7 86.7 77.00 63.80 47.20 56.10 FY 1997 -98 in bn . Rs FY98 FY99 3,135.40 1,375.90 1,695.90 106.70 46.80 57.70 343.10 220.10 178.90 38.00 123.00 87.80 73.20 53.00 62.70

Total Debt ( 1 + 2 ) 1 . Domestic Debt 2 . External Debt * ( Short / Medium and Long ) Debt as percent of GDP GDP of GDP of GDP

1,208.40 609.60 598.80

2,485.50 2,671.90 1,159.50 1,176.20 1,326.00 1,483.10 99.80 43.90 55.40 278.30 191.60 160.10 28.70 86.70 78.40 64.80 43.90 52.50

Total Debt as % of 90.10 Domestic Debt as % 45.40 External Debt as % 44.60

Total Debt Servicing ( a + 107.90 b ) ( a ) Total Interest 78.80 Payment ( i + ii ) i . Domestic ii . Foreign ( b ) Repayment of Principal Ratio of Total Debt Servicing to : Tax Revenue Total Revenue Total Expenditure 64.10 14.70 29.10 _ 45.10 31.00

Current Expenditure 39.60

DOMESTIC AND EXTERNAL DEBT FY 00

Total Debt & Liabilities Total Debt ( 1 + 2 ) 1 . Domestic Debt 2 . External Debt * 3 . Explicit Liabilities * Debt as percent of GDP Total Debt Domestic Debt External Debt Explicit Liabilities Servicing Total Debt Payment Total Interest Domestic

FY 01

FY 02

FY 03

- 09 FY 04 ( SBP 05 08 FY06 FY ** 4,030.50 3,917.00 1,979.50 1,937.50 4,288.90 4,181.60 2,149.90 2,031.70 107.30 66.00 33.10 31.30 1.70 358.8 236.2 181.9 49.1 5.2 122.6 56.70 39.90 32.10 38.00 5.50

Table 1 :
456.1

PROFILE OF
*FY 09 8,746.6 8,306.7 4,151 4,155.7 **168.8 *FY 2010 10,196.4 9,685.9 5,027.6 4658.3 6426.4 632.4 3266.1 3.36.2 124 61.3 31.2 29 1.2 670.7 549.9 474.5 70.7 4.7 120.8 63.5 44.4 29.9 36.5 6.4

* 07 FY09 - 10 ) FY 08 5046.4

3,553.90 4,113.30 3,911.60 3,904.00 3,258.40 3,791.80 3,723.50 3,781.40 1,578.80 1,731.00 1,717.90 1,853.70 1,679.60 2,060.80 2,005.60 1,927.70 295.50 92.90 41.30 43.90 7.70 418 292.8 222 321.50 97.70 41.10 49.00 7.60 522.3 280.9 195.4 64 21.5 241.4 118.30 94.40 72.80 80.90 12.40 188.10 87.80 38.60 45.00 4.20 588.7 289 212.5 51.3 25.2 299.7 123.10 94.30 71.20 84.10 13.20 122.60 80.10 38.00 39.50 2.50 436.4 253.1 189 48.1 16 183.3 78.50 60.50 48.60 55.10 9.00

4468.6 4957.5 2321.7 2601.1 2146.9 2356.3 95.5 59.9 30.5 28.2 1.3 424.4 294 237.1 50.5 6.4 130.4 56.4 39.4 30.3 37.9 5.6 89 57.9 29.8 27 1 531.6 425.5 358.6 61.1 5.8 106.1 59.8 41 31.7 38.7 6.1

113.50 71.50 35.10 34.30 2.00 491.9 241.8 185.3 51.2 5.3 250.1 79.60 61.00 52.30 64.50 8.70

65.2 32.6 32.6 **1.3 947.0 669.4 570.2 89.4 **4.5 277.6 **68.4 **49.1 **38.6 **45.4 **7.2

66.0 34.3 31.8 1,044.9 668.6 575.2 82.2 376.3

Foreign 54.2 Explicit 16.6 Liabilities of Principal 125.2 Repayment

( foreign )

Ratio of Total Debt Servicing to : Revenue Tax Total Revenue Expenditure Expenditure Total Current GDP

103.10 81.60 58.90 66.70 10.90

Fig . 6 . 3

Ratios of Debt Serving: * FY09 - FY10

On a positive note, countrys debt servicing indicators recorded a mild improvement during FY10 : Resulted from lowering of interest rates on debt instruments (FY10) due to brief monetary policy easing phase

FY11 : Given challenges faced by the national economy, the countrys debt profile has remained under pressure

Debt servicing, GDP and Exports

Debt servicing as a % of Exports : - A very large amount of export revenues are being used for debt servicing - 1960s : debt servicing rose to > 50% of our export earnings in 1969-70 - 1970s / 1980s : Ratio remained high, although at a slightly lower level as compared to 1960s -1990s : Debt servicing was almost as large as one quarter of our export earnings - 2000 .. : started declining, remained at a lower level than1990s -- except in 2003-04 - * 2010 : Debt servicing to exports of goods and services (DS/XGS) deteriorated

Debt servicing as a % of GDP : - 1960s : Below 2% throughout - 1970s : It crossed the 2 % barrier -- stood at 2.5 % of GDP in 1979-80 - 1980s : Ratio increased further -- was at an all time high at 3.3 % in 1986-87

Table 3 :
S . No . Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84

Debt Servicing as a Percentage of Exports and GDP

as % of Exports 15 27 22 27 26 29 35 31 44 52 43 21 24 19 24 22 27 25 26 25 20 20 24 26 as % of GDP 0.4 0.7 1.0 1.2 1.1 <2 1.1 1.3 1.3 1.8 1.8 1.7 1.3 3.0 2.2 >2 2.2 1.9 2.1 1.8 2.2 2.5 2.1 1.6 2.2 2.3 S . No . Years 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 85 86 87 88 89 90 91 92 93 94 95 97 98 99 2000 01 02 03 04 05 06 07 08 as % of Exports 32 30 30 25 24 25 22 22 24 26 25 27 27 20 18 21 13 12 24 10 10 9 10.3 as % of GDP 2.5 2.8 3.3 2.9 2.8 3.1 2.9 3.1 3.2 >3 3.3 3.4 3.6 3.8 2.6 2.5 2.8 1.6 1.6 3.0 1.3 1.2 1.1 1.2

Debt Servicing as a Percentage of Exports and GDP

PAKISTANS MAJOR DONORS

Consortium countries
Bilateral

Japan largest bilateral donor Followed by USA, Germany, France

1996 - 97

( 11 countries )

2008 - 09

( 17 countries )

Japan continued to be the largest bilateral donor, its share in total bilateral debt sharply

Debt outstanding: $10,015.83 m

Debt outstanding: Germany, USA Followed by France, $ 13,655.14 m

Non - consortium countries

China single largest donor Followed by Saudi Arabia, USSR, Kuwait

1996 - 97

- 8 countries

2008 - 09

- 5 countries

China continued to contribute three quarters of non-consortium loans

Debt outstanding: $ 1,029.71 m

Followed by Saudi Arabia, UAE, Kuwait

Debt outstanding: $ 1,942.00 m

Multilateral donors

1996 - 97

- 7 donors

ADB single largest donor

World Bank (IBRD) has emerged as the largest single donor contributing almost half of total multilateral aid

2008 - 09

- 9 donors

Debt outstanding: $ 10,806.84 m

Debt outstanding: $ 38,835.30 m

Breakdown of Total

Multilateral and bilateral aid accounted for almost half of total aid

1996 - 97

Share of multi lateral sources increased to three quarters

2008 - 09

SOCIO ECNOMIC POLITICAL

IMPACT OF DEBT CRISIS IN PAKISTAN

Debt Crisis economy

severe Crises in

Development Crisis :
Owes its existence to the meager amounts allocated for development during the period 1990s : little amounts spent on development 2000 .. : Development expenditures started increasing -- continued to increase throughout the decade, except for a minor decline in FY 03 * 2009 : declined * 2010 : increased

development crisis is reflected in the form of lack of physical and social infrastructure, scarcity of water, power, road network, telecommunication, education and health facilities
Table 12
( in Billion Rupees ) 1998 - FY 00 FY 01 FY 02 FY 03 ( SBP ** 08 - 09 * 09 - 10 ) ( BE ) 99 144 14 686 152.8 11.8 741.4 131.1 19.1 708.1 149.3 44.1 948.7 146 39.4 768.8 FY 04 FY 05 FY 06 FY 07 ( RE ) 180.5 59.1 898.5 216.3 82.1 1001 241.1 153.4 250.2 236.2 FY 08 * FY 09 329.9 195.7 * FY 10

Expenditure

Federal Government

Total 1995 - 1996 - 97 1997 Expenditure : 96 ( RE ) 98 Defense 119.7 127.4 17.3 131 15 592

375 259.5

Development 26.4

Total 506.9 550.2 Expenditure

1196.4 1253.8

Growth Crisis :
Non-availability of resources for investment is giving rise to serious recessionary tendencies and may be termed as a growth crisis

1980s : Rate of growth of the economy was quite impressive

But the rate of growth of GDP and that of individual sectors has declined throughout the 1990s -- declines in 1992-93, 96-97 and 98 99 were quite disturbing
Table 13
(% Growth at Constant Cost )

Sectoral Growth Performance

Commodity Producing 1980 s 6.5

1990' 1993 - 1994 - 1995 - 1996 - 1997 - 1998 - 1999 - 2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008 s 94 95 96 97 ( P ) 98 99 00 01 02 03 04 05 06 07 08 09 4.6 50.9 5.66 5.6 0.54 5.3 2.2 3 0.2 1.3 4.2 9.3 9.5 5.1 6.6 1.4 0.2 4.4 4.8 4.6 4.6 4 24 18.6 49.1 _ _ 6.57 3.6 4.8 5.24 5.75 5.8 4.8 4.76 5.15 _ 0.06 1.19 2.1 1.3 _ 3.8 7.9 3.2 4.3 4.2 1.9 4.1 _ 3.2 3.2 6.1 1.4 4.8 3.9 3.5 -2.7 8.2 4.8 2.2 2.3 0.1 4.5 4.8 3.1 5.1 4.1 6.9 5.2 4.7 7.5 2.4 14 5.8 7.5 6.4 6.5 15.5 8.5 9 8.7 6.3 8.7 6.5 5.8 5.6 4.1 8.3 7 6.8 6.7 1.1 4.8 6.6 4.1 4.1 4.7 -3.3 3.6 2 2.6

Agriculture 5.4
Manufacturin 8.2 g Services 6.6

GDP ( Constant 6.1

Factor Cost ) GNP ( Constant 5.5 Factor Cost )

Growth Crisis :
The policies have given rise to the most serious growth crisis Pakistan has ever faced This is reflected by a stagnating economy, de-industrialization, unemployment, declining real wages, increase in poverty, etc. However, the rate of growth of GDP, manufacturing and service sectors improved during the period 2002-3 to 2006-7 ^ as debt/GDP, debt servicing/tax revenues, debt servicing/total revenues, debt servicing/total expenditures declined ^(more funds for I) ** 2008-09: growth rates declined as DS ratios increased
DOMESTIC

AND EXTERNAL DEBT 99 FY 98 FY

99.80 78.40 64.80 43.90 106.70 87.80 73.20 53.00

FY 00 92.90

FY 01 97.70

FY 02 87.80

FY 03( SBP 04 08 - 05 FY ** FY 09 80.10 71.50 79.60 61.00 52.30 66.00 56.70 39.90 32.10

Table 1 :
59.9 56.4 39.4 30.3

PROFILE OF
FY 08 61.3 63.5 44.4 29.9 *FY 09 *FY 10 65.2 66.0

* 09 10 FY06 -FY )07 57.9 59.8 41 31.7

Debt as percent of GDP Total Debt Ratio of Total Debt Servicing to : Tax Revenue Total Revenue Total Expenditure

103.10 118.30 81.60 58.90 94.40 72.80

123.10 78.50 94.30 71.20 60.50 48.60

**68.4

**38.6

Fig . 6 . 3

**49.1

Distributional Crisis :
The growth and development crises have thus given effect to a distributional crisis The rich are getting richer and the poor getting poorer

According to an ADB estimate : of the total population living in cities 50 % were living below the poverty line, whereas in rural Sindh the % rose to 85 This is giving rise to social conflict, i.e. conflicts b/w different segments of the population, and b/w different segments of the population and the government There has been an increase in crime rates, robberies, suicides and murders
Governments are perceived as following policies which are not in the best national interest: This is in turn giving rise to political divergence and instability in the country. It has resulted in downfalls of governments as default on debt appeared imminent This is a political crisis, which owes its existence to the debt crisis

IMPACT OF DEBT CRISIS ON LABOUR

Impact on Labour

Paradox : International financial agencies try containing inflation, but the conditionalities that come with loans have an inflationary impact..

International financial institutions prescription of bridging the trade deficit through devaluation: makes imports more expensive -- Pakistan relies heavily on the import of oil cost push inflation - increase in cost of generating electricity - increased transportation cost Monetary tightening, a standard IMF prescription for controlling inflation: (would be a correct measure if inflation is on account of demand pull factors) Pakistan : inflation is due to cost push factors instead of controlling inflation it increases inflation - restricting output, which with unchanged demand causes prices to rise (food prices )

Impact on Labour
As a result: - unemployment increased - average real wage across different sectors has not been able to match the increasing inflationary trends ( since the 1990s till present )

The decline in real wages as a result of price escalation is more pronounced in the recent years and the current situation of price increases is even worse

AVERAGE RETAIL PRICES OF ESSENTIAL ITEMS

year wheat Basmati rice (broken) Gram Pulse (avg.qlty) sugar (open market) kg 11.26 11.62 12.29 12.91 13.74 16.76 21.26 19.54 19.09 21.11 27.11 22.78 20.77 19.01 23.45 31.16 31.85 27.92 27.67 37.45 vegetableghee (Loose) Teain packet(sup.qlty) Beef(cow/buffalo withbone) Kg Chicken (Farm) freshmilk (Liter)

(av.qlty)

kg 3.07 3.62 3.85 4.28 5.07 5.14 6.59 7.96 7.72 8.19 8.67 8.29 8.73 10.25 11.68 11.55 11.96 16.44 17.14 25.39

Kg 6.1 6.97 8.06 8.77 9.09 11.27 12.85 13.4 14.5 15.71 15.35 15.49 18.07 19.04 20.19 20.16 23.11 37.77 34.65 48.03

Kg 7.85 8.7 11.35 11.72 21.77 21.67 15 20.22 22.08 25.07 29.52 34.89 31.13 24.17 29.35 31.12 41.38 44.78 41.85 58.83

Kg 19 20.53 24.08 29.09 38.99 39.38 42.76 45.78 54 49.14 44.82 49.2 55.25 59.84 59.6 58.95 70.81 108.43 103.62 110.69

250gm 20 20.04 23.62 27.65 29.08 30.33 38.31 49.88 51.89 48.95 53.73 57 61.5 64.68 61.99 62.62 68.39 68.28 66.82 97.47

25.51 29.62 32.49 35.63 40.68 47.29 54.01 55.44 55.83 56.78 56.01 55.19 61.21 75.45 94.83 106.84 117.87 123.3 122 141.59

Kg N/A N/A N/A N/A N/A N/A N/A 57.24 54.2 50.9 50.65 52.04 54.01 57.5 66.43 66.08 74.16 83.39 82.93 103

7.71 8.82 9.9 11.07 12.18 13.67 15.12 16.27 17.71 17.91 18.23 17.92 18.35 19.21 21.28 23.9 26.72 30.45 29.82 35.99

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2007-08 2008-09

JULY-APR

DEBT MANAGEMEN T STRATEGY

Debt Management Strategy

The debt crisis is like the mother crises which is giving rise to the : development crisis, growth crisis, distributional crisis, social crisis and political crisis
It is therefore important to address the debt crisis, as a result of which there would be spillover effects to the rest of the economy External debt is the joint responsibility of the international financial institutions and the multi-national banks, governments of the industrialized countries and the governments and ruling classes in the LDCs, (GOP). The cost of debt servicing should therefore be shared b/w these 3 players Pakistan: none of the 3 are bearing the cost of debt servicing ! It is the middle, lower and poor classes that are bearing

o Debt Rescheduling
The rolling over of debt payment to some future date that merely postpones the problem Pakistan has gotten its debt rescheduled in the past Major drawbacks: Cost of debt increases since interest payments are generally added up for the intervening periods Done with the consent of international agencies economic policies are formulated with their consent, hence demand restraining policies are continued at their command Doesnt have a positive effect on the crises (mentioned above) apart from worsening them over the years It is void of the principle of quid pro- quo, as the burden of debt servicing is borne by the people who have not benefited from these debts

o Unilateral Moratorium on Debt

Countries adopt wont pay because cant pay stance with regard to the servicing of their debts and the principle that only a reasonable % of export earnings will be allocated for debt servicing Done unilaterally by the country concerned w/o consent of international donors allows some discretion in policy formulation Amount of debt is maintained at present level and doesnt keep escalating as in debt rescheduling Drawback: Creditor countries may respond in terms of suspension of export supply and opening of Letters of Credit (LCs) exports can be affected
(final impact will be determined by the DD elasticity for exports and elasticity of SS of imports)

o Debt Repudiation

Debt cancellation on the ground that it is imposed on the people w/o their consent under an un-equal power relationship This principle is termed as odious debt in international law: debt is invalid if it is imposed by force Debt burden which is giving rise to serious crises is removed It serves the principle of quid-pro-quo: If ordinary people havent benefited from debt, most of which has already been transferred abroad, why should they bear the debt service burden.
US representative to the IMF stated: If we were to apply the principle of odious debt, most of the Third World debt would simply disappear

Drawback: Creditor countries may counter in terms of suspension of export orders and difficulty in opening LCs will be difficult to export to the outside world

o Debt Servicing from Assets transferred Abroad

According to a former US ambassador: $100 billion have been transferred abroad by Pakistanis .. If a debt management strategy is announced that allocates a certain % of this looted money for debt servicing, the entire amount can be serviced in a short period of time

It meets the quid-quo-pro criteria: puts the burden of debt servicing on people who have benefited from this debt Moreover, it removes a big burden on the economy and can be very effective in tackling the crises (discussed)

POLICY RECOMMENDATI ONS

Recommendations
In-spite of the serious crises afflicting the socio, economic and political structure of Pakistan, no attempt has been made at managing these Since there is a cause-and-effect relationship b/w the various crises, it is important to concentrate on the root cause of these crises and then work through to the rest of them An evaluation of different debt management strategies should be done to see which would result in faster eradication of the debt burden

Considering the severity of the crises afflicting the state of Pakistan, it is necessary that the countrys debts be written off It is only through removing the debt burden that we can address the very serious crises discussed, which have become worse with the passage of time

ALTERNATIVE VIEW

Success of Debt Management Strategies is essential for our survival Presenting Pakistans case for Debt repudiation approval Arranging the import items through barter trade Obtain loans that have relaxed conditions Borrow from countries with friendly relations friends, specially from Middle Eastern Muslim countries GOP should develop a fund raising scheme for Pakistani citizens, with the motto of a debt-free Pakistan All citizens should contribute financially if the scheme is implemented The GOP should be sincere enough and committed towards the goal of eradicating the debt burden on Pakistan, else the country will continue to fall into a debt trap and become a slave nation

Abbreviations
ADB Asian Development Bank BE Budget Estimates CPI Consumer Price Index EIB European Investment Bank FY Financial Year GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development (World Bank) IDA International Development Association IFAD International Fund for Agricultural Development IFC International Finance Corporation IMF International Monetary Fund OPEC Organization of Petroleum Exporting Countries RE Revised Estimates USSR Union of Soviet Socialist Republics WPI Wholesale Price Index

Thank you