Professional Documents
Culture Documents
INTRODUCTIO N
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
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
4468.6 4957.5
Debt/GDP Ratio
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 :
Total Debt ( 1 + 2 ) 1 . Domestic Debt 2 . External Debt * ( Short / Medium and Long ) Debt as percent of GDP GDP of GDP of GDP
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 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
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 :
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
Ratio of Total Debt Servicing to : Revenue Tax Total Revenue Expenditure Expenditure Total Current GDP
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
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 :
Total Debt ( 1 + 2 ) 1 . Domestic Debt 2 . External Debt * ( Short / Medium and Long ) Debt as percent of GDP GDP of GDP of GDP
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 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
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
Ratio of Total Debt Servicing to : Revenue Tax Total Revenue Expenditure Expenditure Total Current GDP
Fig . 6 . 3
FY11 : Given challenges faced by the national economy, the countrys debt profile has remained under pressure
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
Consortium countries
Bilateral
1996 - 97
( 11 countries )
2008 - 09
( 17 countries )
Japan continued to be the largest bilateral donor, its share in total bilateral debt sharply
1996 - 97
- 8 countries
2008 - 09
- 5 countries
Multilateral donors
1996 - 97
- 7 donors
World Bank (IBRD) has emerged as the largest single donor contributing almost half of total multilateral aid
2008 - 09
- 9 donors
Breakdown of Total
Multilateral and bilateral aid accounted for almost half of total aid
1996 - 97
2008 - 09
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
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
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 )
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
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
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
Debt as percent of GDP Total Debt Ratio of Total Debt Servicing to : Tax Revenue Total Revenue Total Expenditure
**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 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
(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
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
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
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)
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
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