The Debt Trap: IMF, World Bank and Pakistan: The Iran Question: ECONOMISTAN Economic Analysis Think Tank

"There should be strict checks and balances in place before approval of any further debts and most importantly our ‘trusty’ allies should bear most of the burden of the war against Taliban and Al-Qaida..."

14th August, a day we celebrate as our independence day is fast approaching amidst ever worsening financial condition and ever growing debt burden. The tradition of taking debt for stimulating growth in our economy was started in early years of Pakistan but these debts have today become a bane rather than a boon for our beloved homeland. As Pakistan entered 21st century, its Public debt exceeded 90% of its GDP, over 600% of its annual revenues, and debt servicing accounted for over half of current revenues. In 2001, Pakistan was the only country in South Asia to be classified as a severely indebted country by the World Bank.

Historically, the Government of Pakistan has faced budget deficit since 1947. Early debts were taken during Ayub regime for building dams and industrialization. It was only during this time that this money acquired from abroad was utilized correctly. However, situation changed after this era and with the loss of East Pakistan and much of our economy after 1971 the events took drastic turn. During the later era’s decisions to acquire debts and to increased budget deficit were influenced by political needs rather than economic priorities. Another huge problem that Pakistan faces even today is the continuation of policies especially positive economic reforms which are often reversed only because they were introduced by a political rival while Pakistan’s government expenditure has been increasing constantly in last four decades.

Such uncontrolled expenditures mainly started during Zia era when foreign aid started to flow in due to Afghan war. The 11 years era of General Zia can be considered worst era of Pakistan’s history not only due to it’s political and socio-cultural disasters it yielded which Pakistanis are still facing today but also due to it’s economic policies. During Zia era the total national debt grew at an average rate of 17.7%. The influx of foreign aid did little to help the debt situation as it soared to 630 billion rupees. In fact One contribution to this was the costly non bank borrowing, e.g. from national saving schemes, and the ratio of debt to GDP kept rising. Interest payments on debt also rocketed to about 28 percent of revenues.

Between 1980 and 1989, Pakistan’s spending almost doubled from 63.6 to 201.2 billion rupees during the time period of just one decade. Most of this spending was directed at fighting the Afghan war as Pakistan’s defense budget more than doubled while development budget increased only by a slight figure. The so called aid given during this period also included massive amount of debt and as a result there was a 630 billion increase in total debt.

The biggest error of Zia era was disproportionate growth between debt, currency inflow versus real growth and production capacity of the economy. The Zia era economy was hinged upon the aid and promises of the most untrustworthy ally that any country can have and its results are still being reaped today. Despite the claims of establishment hawks of afghan war being a victory for Pakistan, its after effects were catastrophic for Pakistan. The massive borrowing and interest rates took their toll in the following decade as a vicious cycle of borrowing more debt to payoff interest which still continues today at the cost of decreased development expenditure and deterioration in quality of life of ordinary people.

The governments of 90’s were not the benefactors that the people of Pakistan had expected and these four successive governments only brought in more debt and economic crisis for the country. These governments failed miserably in reducing the fiscal gap, control, reduce borrowing or induce sustained growth in the economy. Instead the government expenditure continued to grow to 790 billion rupees in year 2000 compared to 260 billion in 1990. Despite this massive increase in budget spending, the development expenditure remained almost unchanged. The increase in debt, deterioration in quality of life of people despite some growth in the overall economy, clearly indicates of poor economic performance of these governments.

During the early years of Musharraf regime, Pakistani economy was in shambles due to tensions with India, high defense expenditures and massive interest payments. In 2001, Pakistan was the only country in South Asia which was classified as a severely indebted country by the World Bank in its report. Due to the inability to service external debt, there were several consecutive rounds of debt rescheduling between Government of Pakistan and donor clubs and organization between 1998 and 2001. Fortunately though, Pakistan received massive financial breathing space because of its participation in the war on terror after September 2001.

The development expenditure declined during the first year of the Musharraf regime from 95.6 billion rupees to 89.8 billion. However it took a great leap next year and went as high as 126 billion rupees and by 2004 it stood at 161 billion. During the same period public debt began to decline and overall economic expenditures began to improve. Debt to GDP ratio declined considerably during this era.

The years 2005 and 2006 were perhaps the most important highlight of Musharraf era. For the first time in more than two decades debt to GDP ratio fell to 56.1% from 81.4% in 2002. This achievement was equally matched by investor friendly policies and massive influx of FDI that lead to IT, Banking and construction boom in the country. These successes were however short lived and soon Pakistani economy once again fell victim to political scuffles and power tussle between political forces. Due to political instability and Taliban insurgency the economic progress made during this period proved to be short lived and once again people of Pakistan were left facing skyrocketing inflation and uncertainty mostly due to Taliban insurgency and war on terror.

In 2008, Pakistan’s total debt stood at 6400 billion rupees which was almost equally shared by domestic and external debt. The total expenditure was 1874 billion and has been rising consistently while the development expenditure is a mere 26 per cent of the total spending.The answer to this murderous Debt trap lies in stimulating real growth in the economy while ensuring stability, security and investor friendly policies. There should be strict checks and balances in place before approval of any further debts and most importantly our ‘trusty’ allies should bear most of the burden of the war against Taliban and Al-Qaida by giving Pakistan more aid while clearly differentiating between the terms Aid and Loan.