Review of Pakistan External Debt(Final)()

8/9/2019 Review of Pakistan External Debt(Final)()

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Reviewof External Debt in PAugust 2012

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Table of Contents

Executive Summary........................................................................................................................... VI

Chapter 1: Introduction.......................................................................................................................1

1.1 Context of the Study ................................................................................................................. 11.2 Trend in Fiscal Deficit ...............................................................................................................21.3 Total Public Debt........................................................................................................................ 6

Chapter 2: evel and !rofile of External "ebt ..................................................................................#

2.1 Size and Burden of xternal Debt ............................................................................................!2.2 Co"#osition of xternal Debt .................................................................................................112.3 Co"#arison of $e%el of xternal Debt.....................................................................................122.& Ter"s of 'e( $oans................................................................................................................132.) Dyna"ics of xternal Debt to *DP +atio................................................................................1&2.6 Ty#e of Forei,n -id..................................................................................................................162. /nflo( of Forei,n -ssistance by +e,i"e..................................................................................1!

2.0Conditions of ultilateral r,anizations...................................................................................22.! /ssues in Debt ana,e"ent....................................................................................................2

Chapter $: "ebt Sustainability %nalysis..........................................................................................22

3.1 /ndicators of Debt Sustainability .............................................................................................223.2 Choice of Debt Sustainability /ndicators..................................................................................2&3.3 Balance of Pay"ents Pro4ections............................................................................................26

Chapter &: Implications of External 'inancial Inflo(s ...................................................................2#

&.1 xternal /nflo(s and the 5Dutch Disease.................................................................................2!&.2 xternal /nflo(s and Do"estic Sa%in,s ..................................................................................31&.3 7tilisation of xternal -ssistance ............................................................................................33

&.& Donor Dri%en Priorities in De%elo#"ent Plans ........................................................................30

Chapter ): The Case for "ebt *elief to !a+istan ............................................................................&2

).1 Cost of *lobal 58ar on Terror .................................................................................................&3).2 cono"ic Cost of 'atural Disasters .......................................................................................&!).3 +isin, Debt Ser%icin, and 5Cro(din, ut of x#enditure on Basic Social Ser%ices ..............)2).& Pre9e"#tion of Benefits by the lite .......................................................................................)&

Chapter ,: !olicy *ecommendations: !otential -echanisms of "ebt *elief to !a+istan...........,

6.1 Does Pa:istan need Debt +elief;............................................................................................66.2 Trend in Bud,et Deficit .........................................................................................................3

Table 1.2> Trend in +e%enues and x#enditures....................................................................................&

Table 1.3> Financin, of Bud,et Deficit ...................................................................................................)Table 1.&> Trend in %erall Public Debt..................................................................................................6


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Table 2.1> Structure of xternal Debt ..................................................................................................1

Table 2.2> Co"#osition of utstandin, xternal Debt of Pa:istan as of Dec 31 211.........................12

Table 2.3> a4or Creditors of Pa:istan as of 3 ?une 211..................................................................12

Table 2.&> Co"#arison of the xternal Debt to *DP +atio in Selected Countries@ 21......................13

Table 2.)> Ter"s of 'e( $oans Contracted ........................................................................................13Table 2.6> Dyna"ics of the %olution of the xternal Debt9to9*DP +atio in Different Periods ............1)

Table 2.> Ty#e of /nflo(s of -id........................................................................................................... 10

Table 2.0> Forei,n -ssistance in Different +e,i"es ............................................................................ 2

Table 3.1> a,nitude of Different Debt Sustainability /ndicators@ 1!01 to 211....................................23

Table 3.2> Aero9rder Correlation Coefficients atrix a"on, Debt9Sustainability /ndicators...............2)

Table 3.3> +e#ay"ent Schedule of the /F $oan................................................................................26

Table 3.&> a,nitude of ey Debt Sustainability /ndicators in 211912 and 212913 ..........................26

Table 3.)> Balance of Pay"ents Pro4ection and F +eser%es Position Su""ary.............................2

Table 3.6> Balance of Pay"ents Pro4ections Detailed.......................................................................20

Table &.1> /nflo(s into Pa:istan ...........................................................................................................3

Table &.2> 'o"inal and +eal xchan,e +ate ......................................................................................3

Table &.3> Balance of Trade ................................................................................................................31

Table &.&> Forei,n -id in the Federal PSDP ........................................................................................ 3&

Table &.)> Forei,n -id by Di%ision@ 211912 ........................................................................................3)

Table &.6> Size Distribution of Forei,n -ided Pro4ects as #er the ori,inal PSDP of 21911...... .......36

Table ).1> 7S Fundin, to Pa:istan since 21.....................................................................................&)

Table ).2> Terrorist -ttac:s in Pa:istan 2)90..................................................................................&)Table ).3> Costs of 8ar on Terror to Pa:istan ..................................................................................... &6

Table ).&> Costs of 'atural Disasters in Pa:istan ...............................................................................&!

Table ).)> sti"ate of Total Da"a,e Costs by Sector@ Dece"ber 211..............................................)

Table ).6> Su""ary of $osses Durin, 211 Floods in Sindh .............................................................. )

Table ).> +eduction in *ro(th +ates as a ConseEuence of Drou,ht.................................................)1

Table ).0> Da"a,e Caused By Cyclone e"yin.................................................................................. )2

Table ).!> Co"#osition of x#enditures by Federal and Pro%incial *o%ern"ents ..............................)3

Table ).1> *o%ern"ent s#endin, on different sectors as #ercent of *DP ......................................)&

Table ).11> Sectoral Shares in Galue -dded .......................................................................................))

Table ).12> Co"#osition of /"#orts......................................................................................................)

Table 6.1> Trend in *ross and 'et -id /nflo( to the *o%ern"ent.........................................................63

ist of 'i/ures

Fi,ure 1.1> Co"#osition of Do"estic and Forei,n Debt........................................................................

Fi,ure 2.1> Ty#es of Debt by Co""it"ents and Disburse"ents.........................................................1

Fi,ure ).1> Sectoral -nnual *ro(th +ates ..........................................................................................))Fi,ure ).2> *ro(th /ncidence Cur%e for Pa:istan ................................................................................)6


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ist of 0oxes

Box 2.1> xternal Debt Definitions ........................................................................................................!

Box &.1> +e,ression +esults of Deter"inants of Do"estic Sa%in,s ...................................................33

Box &.2> Sectoral Priorities in -id by ultilateral and Bilateral -,encies..............................................3

Box &.3> $ea:a,e fro" De%elo#"ent -llocation of +s 1 .................................................................3

Box &.&> *o%ern"ents and 8orld Ban:s Sectoral Priorities ..............................................................3!

Box ).1> Direct Costs of Terroris" ......................................................................................................&

Box ).2> /ndirect Costs of Terroris" ....................................................................................................&

%ppendix

Table -2.1> 'et Bilateral -id flo(s fro" D-C Donors..........................................................................

Table -2.2> $oan Conditions of ultilateral r,anisations................................................................... 1

*eferences...2


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%cronyms

-DB -sian De%elo#"ent Ban:

-DP -nnual De%elo#"ent Pro,ra"

BP Balance f Pay"entsC-DT Co""ittee for the Cancellation of the Third 8orld Debt

C'T Central Treaty r,anization

C' Chinese Yuan

CS- Currency S(a# -,ree"ent

CSF Coalition Su##ort Fund

CS Ci%il Society r,anisations

D-C De%elo#"ent -ssistance Co""ittee

DFC De%elo#"ent Finance Cor#oration-D cono"ic -ffairs Di%ision

D xternal Debt

++- arthEua:e +econstruction H +ehabilitation -uthority

S-F nhanced Structural -d4ust"ent Facility

7 uro#ean 7nion

F-T- Federally -d"inistered Tribal -reas

FB+ Federal Board of +e%enue

FD Finance Di%ision

FD/ Forei,n Direct /n%est"ent

F Forei,n xchan,e

GB *il,it9Baltistan

*DP *ross Do"estic Product

*ST *eneral sales Tax


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'P$ 'on Perfor"in, $oans

'SS 'ational Sa%in,s Sche"e

D- fficial De%elo#"ent -ssistance

CD r,anisation for cono"ic Co9o#eration and De%elo#"ent

PBC Peo#leIs Ban: of China

PKR Pakistani Rupee

PPP Pa:istan Peo#les Party

P+*F Po%erty +eduction and *ro(th Facility

PSDP Public Sector De%elo#"ent Pro,ra"

PS Public Sector nter#rise

SB- Stand9By -rran,e"ents

SBP State Ban: of Pa:istan

S-T Southeast -sia Treaty r,anization

7.. 7nited in,do"

7.S. 7nited States of -"erica

7'CT-D 7nited 'ations Conference on Trade and De%elo#"ent

7'DP 7nited 'ations De%elo#"ent Pro,ra"

7SD 7nites States Dollar

G-T Galue -dded Tax

B orl! Bank

8D/ 8orld De%elo#"ent /ndicators

8T 8ar on Terror

r ear


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Executive Summary

Pa:istan@ in recent years@ has (itnessed "ountin, le%els of both external debt and do"estic

debt. The #osition (ith res#ect to external debt ser%icin, de#ends u#on the ,ro(th of

ex#orts and ho"e re"ittances and contain"ent of the current account deficits in the balance

of #ay"ents. Des#ite ,ro(th of 6 #ercent in ex#orts and 23 #ercent in ho"e re"ittances

durin, the first ei,ht "onths of 211912@ the current account deficit has (idened to J3.

billion as co"#ared to J.2 billion in the corres#ondin, #eriod of last year. n to# of this the

financial account of the balance of #ay"ents has turned ne,ati%e due to the dryin, u# of

forei,n direct in%est"ent and ,ross aid inflo(s in the #resence of fixed debt re#ay"ents.

ConseEuently@ the o%erall balance of #ay"ents #osition has (orsened shar#ly@ leadin, to a

de#letion of forei,n exchan,e reser%es of the State ban: by al"ost J2. billion fro" the le%el

on ?une 3@ 211.

Beyond this@ there is the #ros#ect of increased #ressure on forei,n exchan,e reser%es in a

"ediu" run settin, (ith co""ence"ent of lar,e debt re#ay"ents to the /F. These are

#ro4ected at J2.& billion in 212@ J3.0 billion in 213@ J2.2 billion in 21& and J.) billion in

21). %erall@ ,i%en e%en conser%ati%e #ro4ections@ forei,n exchan,e reser%es of SBP (hich

stood at close to J1) billion at the start of 211912 could fall belo( J11 billion by the end of

the year. They could then decline to critically lo( le%els in 212913@ such that the forei,n

exchan,e co%er of i"#orts sli#s to belo( t(o "onths.

*i%en this state of affairs@ ,o%ern"ent needs to i"#le"ent stron, #olicies for #ro"otin,

"acroecono"ic stabilization@ in #articular@ the forei,n exchan,e #osition.


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to shares in total debt of & and 26 #ercent res#ecti%ely. /n addition@ the debt of the SBP (ith

/F is J6.) billion@ re#resentin, 11 #ercent of the total debt.

8e find that the countrys le%el of debt has ,enerally increased o%er the decades@ at an

a%era,e of "ore than #ercent. /n the #re%ious decade@ ho(e%er@ the trend has beenso"e(hat different@ (ith a fall in the total debt stoc: durin, 2293@ follo(ed by a ra#id

increase@ (ith a ,ro(th of 6. #ercent. xa"inin, the dyna"ics of the debt9to9*DP ratio@

durin, 292 there (as an increase in the external debt to *DP ratio of .0 #ercent #er

annu". oreo%er@ lo( FD/ and lar,e exchan,e rate de#reciation "ade conditions for debt

reduction unfa%ourable for the econo"y. Circu"stances i"#ro%ed follo(in, Pa:istans

#artici#ation in the K8ar on TerrorL in 23@ (hen the econo"y sa( an influx of FD/ fro" the

7nited States@ and conseEuently@ so"e stability in the exchan,e rate. The country (as in the

#osition to brin, do(n the external debt9to9*DP ratio on a%era,e by o%er 3 #ercenta,e

#oints annually.


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"ana,eable. Debt ser%icin, to *DP ratio fell to 2.3 #ercent and further to 1.6 #ercent (hile

debt ser%icin, to ex#ort earnin,s and debt ser%icin, to reser%es ratio sho(ed a decline to 11

#ercent and 23 #ercent res#ecti%ely. The "ost sensiti%e indicators a##ears to be debt

ser%icin, to reser%es ratio and i"#ort co%er ratio and the zero9order correlation coefficients

#resented for the #eriod@ 1!01 to 211 re%eal that the t(o 5sensiti%e indicators N i"#ort

co%er ratio and the external debt ser%ice to reser%es ratio N are fairly hi,hly correlated.

These are the #ri"ary indicators of debt sustainability in the Pa:istani context.

/n order to deter"ine the future outloo: for Pa:istans ability to "eet its debt obli,ations a

for"al set of #ro4ections is "ade of the external balance of #ay"ents (ith the hel# of the

/PP "odel. %en under conser%ati%e assu"#tions about the size of the current account

deficit ,i%en the #ros#ect of hi,h oil #rices it a##ears that the forei,n exchan,e reser%es

could fall to critically lo( le%els by the end of 212913@ i"#lyin, an i"#ort co%er of less thanone "onth.

%erall@ the re#ort concludes that there are serious issues of debt sustainability in the next

t(o years. Clearly@ out of box solutions (ill ha%e to be found includin, the i"#le"entation of

a stron, do"estic refor"s a,enda@ es#ecially focusin, on the curtail"ent@ both directly and

indirectly@ of the lar,e trade deficit. /n addition@ uncon%entional and #erha#s drastic o#tions

for "ana,e"ent of the external debt (ill ha%e to be ex#lored of the ty#e discussed in

Cha#ter 6.

Cha#ter & exa"ines the effect of forei,n aid on Pa:istans econo"y. The re#ort in%esti,ates

the #ossibility of Pa:istan sufferin, fro" the Dutch Disease@ o(in, to the ra#id inflo( of

i"#orts caused by the exchan,e rate a##reciation in 23. - re%ie( the inflo( of forei,n aid

and FD/ into the country durin, the #eriod@ their effect on the no"inal and real exchan,e

rate@ as (ell as the ra#id increase in i"#orts re%eals that the country did indeed has

ex#erienced the Dutch Disease@ su,,estin, that (hile ca#ital inflo(s #er se "ay not be bad@

they should be "ana,ed throu,h a #olicy of buildin, u# reser%es rather than #ro"otin, a

liberal i"#ort #olicy.

The re#ort also analyses the relationshi# bet(een do"estic sa%in,s and forei,n inflo(s in

Pa:istan. %idence su,,ests that there has been a ne,ati%e relationshi# bet(een the t(o.

Forei,n inflo(s slac:en sa%in, effort and encoura,e an increase in consu"#tion@ thereby

da"#enin, #ublic as (ell as #ri%ate sa%in,s. Further"ore@ it is obser%ed that inflo(s ha%e

not been used in sectors (hich ensure "axi"u" #ay bac: in ter"s of enhancin, the

#roducti%e ca#acity and ,ro(th of the econo"y. Their i"#act on the #eo#le of Pa:istan@

es#ecially the #oor@ to that extent is li"ited. The #olitical i"#lications of the inflo(s ha%e alsobeen si,nificant. *o%ern"ents #articularly the dictator re,i"es ha%e #ro"oted donor ,eo9


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#olitical ob4ecti%es so"eti"es at the cost of indi,enous interests. -lso@ (e see e%idence of a

5"oral hazard #roble". asy access to external inflo(s in such re,i"es has discoura,ed

the "oti%ation to brin, about structural refor"s@ (hich ine%itably are not costless but can #ut

the country on "ore sound and stron, foundations.

Cha#ter ) "a:e the #lea that (hile the ,lobal co""unity is rea#in, the fruits of ,lobalisation

and the #ros#erity (hich co"es fro" it@ Pa:istani "asses are handica##ed because> first@

the country has been a frontline state on the ,lobal 5(ar9on9terror 8T. 8hile the 8T

(ill benefit all around the (orld@ the costs are dis#ro#ortionately borne by Pa:istanisM

second@ Pa:istan has been #assin, throu,h a #atch of bad luc:. The country has

ex#erienced three "a4or natural disasters in the last decade9"assi%e earthEua:e in 2)

and "a4or floods in t(o consecuti%e years 21 and 211 9 (hich ha%e left the countrys

se%erely da"a,ed both in ter"s of loss of life and #ro#erty@ and also #er"anent losses of

infrastructureM third@ risin, debt ser%icin, is cro(din,9out ex#enditure on basic social

infrastructure and therefore is li"itin, the o##ortunities not only for the current but also future

,enerationsM fourth@ the benefits of the "oney s#ent ha%e been #re9e"#ted by the elite and

ha%e not benefited the "iddle or lo(er inco"e ,rou#s in the country. Since re#ay"ent (ill

burden these #o#ulation se,"ents@ relief in debt (ill i"#ly relief for the #oor and the "iddle

classes@ andM finally the loan conditions ha%e ad%ersely affected the #oor of the country. The

ne( "illenniu" started (ith the realization by the (orld leaders that ,lobalization has the

dan,er of enhancin, ineEualities across countries and across different strata (ithin

countries due to so"e ,o%ern"ents lac: of ti"ely ada#tion to the chan,in, econo"ic

en%iron"ent. Such ineEualities ha%e to be addressed and eli"inated.

To su" u#@ (hile Pa:istan is not eli,ible for the


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reco,nizes that the o%erall costs of debt re#udiation are #otentially hi,h@ ho(e%er the threat

of default can be used as le%era,e to force creditors to ne,otiate debt relief@ es#ecially ,i%en

Pa:istans ,eo#olitical i"#ortance in the ,lobal (ar on terror. /t also hi,hli,hts the ca"#ai,n

by ad%ocacy ,rou#s for a Kdebt auditL leadin, to %oluntary debt reduction by Pa:istans

creditors.

/n the after"ath of debt relief@ a stron, and (ide ran,in, refor" a,enda "ust be

i"#le"ented (hich i"#oses "ost of the ad4ust"ent burden on the richer se,"ent of society.

This a,enda (ill include #ro#er %aluation of the ru#ee@ cutbac: on luxury i"#orts throu,h an

enhance"ent in i"#ort "ar,in reEuire"ents and i"#osition of re,ulatory duties@ reduction

in i"#orts of ar"s and eEui#"ent by the defence establish"ent@ resort to "ore #ro,ressi%e

taxation@ broad basin, of direct taxes@ eli"ination of exe"#tions and concessions in the tax

syste"@ stron, "easures to curb tax e%asion@ enhance accountability and trans#arency

(hile brin,in, bac: "oney "ade throu,h corru#tion held abroad@ i"#ose austerity in #ublic

ex#enditure@ restructure #ublic enter#rises@ i"#le"ent #riority #ro4ects in the #o(er and

(ater sectors@ ex#and tar,eted #ro,ra"s of social #rotection for the #oor and so on. 7nless

this a,enda is i"#le"ented (ith stron, co""it"ent and effecti%eness Pa:istan (ill "erely

#ost#one te"#orarily the day of rec:onin,.


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Chapter 1

Introduction

1.1Context of the Study

Debt continues to (ei,h do(n "any de%elo#in, countries@ #re%entin, the" fro" bein, able

to brea: out of an endless cycle of #o%erty and in4ustice. ost of these debts ori,inated in

the 1!s and 1!0s@ at the hei,ht of the cold (ar@ (hen 8estern ,o%ern"ents ,ranted

hu,e loans for #olitical rather than sound econo"ic reasons. Further@ international ban:s

(ho found the"sel%es a(ash (ith de#osits durin, #eriods of oil boo" rec:lessly lent hu,e

a"ounts to de%elo#in, countries (ith little re,ard to ris: "ana,e"ent. The bubble burst due

to a co"bination of hi,h interest rates@ declinin, (orld econo"y and drastic fall in

co""odity #rices in the 1!0s leadin, to a debt crisis. n the other hand@ "uch of the

"oney (as lent to dictatorial re,i"es that used it for #ro4ects (hich are of little benefit to

ordinary #eo#le and (hich@ in fact@ ser%ed to increase corru#tion and i"#ro#er #atrona,e.

-s a result of their inability to re#ay the ori,inal debt@ "any de%elo#in, countries (ere forced

to obtain "ore loans andOor restructure their econo"ies often at the ex#ense of their o(n

de%elo#"ent.

/sla"ic +elief /+@ follo(in, the /sla"ic a##roach of ris: sharin, bet(een the lender and

borro(er@ belie%es that the current debt burden of de%elo#in, countries@ (hich arose fro"irres#onsible lendin,@ is un4ust and (orsens #o%erty. /+ 4oins (ith the ?ubilee Debt

Ca"#ai,n ?DC and other #artners to call for their cancellation.

8ithin the last year there has been ,ro(in, interest and acti%ity a"on, ca"#ai,ners in

Pa:istan and uro#e in relation to cancellation of Pa:istans external debt. This ca"#ai,n@

coordinated by the ?DC in uro#e and by its #artner N the Co""ittee for the Cancellation of

the Third 8orld Debt C-DT in Pa:istan N (as ste##ed u# after the de%astatin, flood

disaster that the country ex#erienced in 21.

Pa:istans external debt is esti"ated to be al"ost a third of its *DP. -lthou,h the country

has lo( #er ca#ita inco"e and is hi,hly indebted@ it is not eli,ible for the so9called


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The ob4ecti%e of this study is to ex#lore the case for@ and the o#tions of@ relief of the external

debt of Pa:istan. 8e start (ith a brief on the bac:,round of the debt #roble". -n analysis is

underta:en of the fiscal deficit@ the o%erall size of #ublic debt do"estic and external and the

external sector in Section 1.2. The "a,nitude of the #ublic debt is Euantified in Section 1.3.

1.2 Trend in 'iscal "eficit

ne of the "a4or econo"ic #roble"s confrontin, #olicy "a:ers in the country is the

structural i"balance in #ublic finances (hereby ex#enditures consistently exceed re%enues.

This #heno"enon is not a rando" e%ent occurrin, in so"e years nor is it associated (ith

#articular re,i"es in the country. -s can be seen fro" Table 1.1 bud,et deficit has been

abo%e ) #ercent of the *ross Do"estic Product *DP o%er the last 3 years@ (ith the

exce#tion of so"e years in the last decade. -s a #ercenta,e of the *DP@ bud,et deficit

#ea:ed in 1!!9!1at 0 #ercent. Thereafter (e do see so"e decline u# to the "iddle of the

last decade before it de"onstrates a bi, u#turn a,ain.

Perha#s a "ore useful (ay of exa"inin, the structural fiscal i"balance is to see (hat has

been ha##enin, to the #ri"ary bud,et deficit. Pri"ary bud,et deficit is the o%erall bud,et

deficit@ net of interest #ay"ents. /ncrease in interest #ay"ent besides bein, a cause is also

an effect of an increase in the bud,et deficit. -lso@ these #ay"ents introduce a strict ri,idity

on the ex#enditure side (hich restricts the re"edial o#tions a%ailable. Table 1.1 #resents the

trend in the #ri"ary and o%erall bud,et deficit. Clearly@ the trend in the t(o deficits isso"e(hat different. /n the 0s@ the contribution of #ri"ary bud,et deficit to the o%erall

bud,et deficit (as lar,er. Since then@ interest #ay"ents account for a "a4or share of bud,et

deficit. The #ri"ary deficit has been al"ost hal%ed fro" about 39& #ercent to 192 #ercent of

the *DP. /n fact@ there (as a #ri"ary sur#lus in the late !s and early 2s. %erall@ the

trend clearly hi,hli,hts that the ra#id rise in interest #ay"ents is a "a4or root cause of the

fiscal i"balance in the country. /f it can be sustained at the le%el of say 209!@ then future

reduction in the bud,et deficit (ill reEuire scalin, do(n of interest #ay"ents as a #ercent of

*DP.


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Table 1.2Trend in *evenues and Expenditures

3*s. in 0illion4 3%s percent of 5"!4

6ear*evenue

sExpenditure

s

Expenditures 7et

of Interest!ayments

*evenuesExpenditure

s

Expenditures 7et

of Interest!ayments

1!0901

&. 63.6 9 1&.2 1!.2 9

1!01902

)1.! 1. 9 13.) 10.) 9

1!02903

)!.2 0.1 9 13.6 2.1 9

1!0390&

2.3 1. 0).! 1&.& 1!.! 1.1

1!0&90)

.& 116.0 1.3 13.) 2.3 1.)

1!0)906 0!.! 13&.) 11&. 13.0 2.6 1.6

1!0690

13.! 1)2.& 120.& 1&.3 21. 1.

1!0900

11. 10.& 1&.1 1&.3 22.1 10.

1!0090!

13!.1 21.2 163. 1).2 21.! 1.0

1!0!9!

1)0.0 210. 13.& 1).6 21.& 1.

1!!9!1

163.! 261. 21.! 13.) 21.) 1.3

1!!19

!2216.6 321.) 2)!.1 1). 22.3 1.!

1!!29!3

23!.) 3&0. 26!.0 1). 21.0 16.!

1!!39!&

2. 36&.! 2&. 1&.& 1!.) 1&.6

1!!&9!)

31.! &20.3 331. 1&.2 1!.1 1&.0

1!!)9!6

360.3 )10.1 30).6 1&.& 2.3 1).1

1!!69!

300.2 )&.! 3!.0 13.3 10.) 13.

1!!9!0

&2!.) 63&. &31. 13.) 1!.! 13.)

1!!09!!

&60.6 6&.0 &2. 13.& 10.) 12.2

1!!!9

)36.0 !.1 &&6.! 1&. 10.) 11.

291

))3. 1.! &60.6 13.3 1.2 11.3

2192

62&.& 026.3 ))1. 1&.2 10.0 12.)

2293

2.0 0!0.2 6.& 1&.0 10.& 13.

239&

!&. !)6. 33.6 1&.1 16.! 13.

2&9)

!. 111. 002.2 13.0 1.2 13.6


16/86

2)96

16.6 1&1.! 11&1.! 1&.1 10.& 1).

269

12!0. 10. 1&13.1 1). 2.0 16.3

290

1&!!.& 226.) 16. 1&.6 22.2 1.3

209!

10).! 2)31.3 10). 1&.) 1!.! 1&.

2!91

20.2 3.2 236). 1&. 2.3 1).!

21911 22)2.! 3&&.3 2&!.2 12.) 1!.1 1).2

Source> Pa:istan cono"ic Sur%ey@State Ban: of Pa:istanFiscal #erations@ inistry of Finance

8hat are the factors behind the trends in re%enues and ex#enditures; +e%enues of federal

and #ro%incial ,o%ern"ents in Pa:istan ha%e re"ained lar,ely sta,nant@ and in fact@ ha%e

fallen in 21911. This is because tax re%enues@ (hich account for about #ercent of totalre%enues@ ha%e not been able to increase at a faster rate than the *DP. Factors contributin,

to the lo( elasticity of taxes include narro( and non9buoyant tax bases@ lar,e nu"ber of

exe"#tions@ re%enue lea:a,es due to inefficient tax ad"inistration@ e%asion and corru#tion

and lo( le%el of fiscal effort@

#articularly in the case of #ro%incial

,o%ern"ents.

-s hi,hli,hted abo%e@ the decline in

the ,ro(th rate of ex#enditures has

been the :ey to the reduction of

#ri"ary bud,et deficit in Pa:istan.

8hile this "ay be a fa%ourable

de%elo#"ent fro" the bud,etary #oint

of %ie( it needs to be e"#hasized that

#ublic ex#enditures@ in #articular on

de%elo#"ent@ enhance the ,ro(th

#otential of the econo"y. This is thecase because #ublic sector continues

to be the #ri"e #ro%ider of the :ey

econo"ic and social infrastructure

(hich constitutes an i"#ortant #re9

reEuisite to ,ro(th in any econo"y.

Therefore@ it is i"#ortant that fiscal

considerations do not totally

o%er(hel" ,ro(th ob4ecti%es. This is

best achie%ed if fiscal concerns are

Table 1.$'inancin/ of 0ud/et "eficit

6earShare of

External'inancin/

Internal'inancin/

1!0901 &. )2.31!01902 31.1 60.!1!02903 2.1 !.!1!0390& 1!.! 0.11!0&90) 1&.1 0).!1!0)906 2.6 !.&1!0690 10. 02.1!0900 22. 0.1!0090! 32. 60.1!0!9! &.! )!.11!!9!1 2&.0 ).21!!19!2 2. 0.

1!!29!3 22.6 .&1!!39!& 26. 3.31!!&9!) 2.0 2.21!!)9!6 2. !.31!!69! 1.6 02.&1!!9!0 10.! 01.11!!09!! )&.2 &).01!!!9 33.0 66.2291 6.2 32.02192 &3.) )6.)2293 62.6 3.&239& 93.3 13.3

2&9) )).) &&.)2)96 &).0 )&.2269 3!. 61.


17/86

addressed lar,ely by reduction in non9#roducti%e ex#enditure and #ublic sector de%elo#"ent

outlays are not se%erely curtailed.

The o##osite has been ha##enin, in Pa:istan. /t a##ears that the strate,y for controllin,

ex#enditure ,ro(th has focused lar,ely on de%elo#"ent ex#enditure (hich has resulted in

about 1.) #ercent annual ,ro(th in de%elo#"ent outlays co"#ared to 1&.) #ercent in non9

interest current ex#enditure. ConseEuently@ de%elo#"ent ex#enditures ha%e a%era,ed at

only about &.& #ercent of the *DP o%er the last three decades or so as co"#ared to non9

interest current ex#enditures at 11.6 #ercent. +a#id ,ro(th in interest #ay"ents is also

re%ealed by the hi,h ,ro(th in interest #ay"ents durin, this #eriod@ of about 1).) #ercent.

Table 1.3 ,i%es the financin, of the bud,et deficit. *o%ern"ents o%er that last three decades

ha%e financed one9fifths and "ore of their bud,et deficit throu,h external resources@

#rinci#ally throu,h borro(in,. /t is only in the last year that less than 1 #ercent of thefinancin, (as external. /t a##ears that ,o%ern"ents ha%e #referred external debt@ if

a%ailable@ lar,ely because it is less costly in ter" of the rate of interest.


18/86


19/86

/n conclusion@ Pa:istan has been in a ,ri# of hi,h bud,et deficit o%er the last fe( decades.

ConseEuently@ the "acroecono"ic indicators sho( si,n of stress. The o%erall debt burden is

ra#idly beco"in, unsustainable@ debt ser%icin, is #re9e"#tin, scarce resources resultin, in

inadeEuate in%est"ent in and "aintenance of :ey econo"ic and social infrastructure@ the

inflation rate is in double di,its@ interest rates are on the hi,h side@ ad%ersely affectin,

in%est"ent and thereby the ,ro(th rate of the econo"y. The existin, circular debt in the

ener,y sector@ (hich has already stressed econo"ic acti%ity@ (ould further co"#ound the

#roble". -dditional co"#lications (ould arise@ es#ecially for the #oor and "iddle inco"e

classes@ due to deterioration of #ublic infrastructure and hi,h food #rices.

/t is therefore essential to exa"ine factors res#onsible for the #ersistence of the debt

#roble"M in #articular@ a re%ie( of the external debt is essential to establish a case for and to

ex#lore "echanis"s of findin, debt relief. 8e start first (ith an analysis of the le%el and

#rofile of external debt in Cha#ter 2. Cha#ter 3 discusses the i"#ortant issue of debt

sustainability. Pro4ections are "ade of the external balance of #ay"ents. Cha#ter & analyses

the i"#lications of external flo(s of resources on Pa:istans econo"y. Cha#ter ) de%elo#s a

case for debt relief based on a nu"ber of factors li:e the costs of the (ar on terror and

natural disasters. Finally@ cha#ter 6 #resents #olicy reco""endations@ s#ecifically discussin,

#ossible "echanis"s for debt relief to Pa:istan.


20/86

Chapter 2

evel and !rofile of External "ebt

xternal debt is the total debt in a country that is o(ed to creditors outside the country. The

debtors can be the ,o%ern"ent@ cor#orations or #ri%ate households. /t includes "oney o(ed

to #ri%ate "ulti9national co""ercial ban:s@ other ,o%ern"ents@ or international financial

institutions such as the /nternational onetary Fund /F and 8orld Ban: or bond flotations

in the international ca#ital "ar:et. The co%era,e of external debt by the 8orld Ban:O/F

and the State Ban: of Pa:istan@ the Central Ban:@ is ,i%en in Box 2.1. 8e ha%e ado#ted the

definition of the 8orld Ban:O/F (hich excludes external liabilities. xternal borro(in,s are

closely lin:ed to the deficit in the current account of the balance of #ay"ents. This

relationshi# is exa"ined in section 3.3.

0ox 2.1External "ebt "efinitions

;orld 0an+:su" of #ublic@ #ublicly ,uaranteed and #ri%ate non,uaranteed lon,9ter" debt@ use of /F

credit@ and short9ter" debt "aturity less than one year. /F has the sa"e definition.

Ron/


21/86

#ercent is (itnessed in 1!) and the subseEuent years. - so"e(hat hi,her #ro#ortion of

debt accu"ulated durin, the #eriod@ ho(e%er@ (as concessional.

Table 2.1

Structure of External "ebt

6ears External "ebt 3E"43> -illion4

E"?5"!

Concessional "ebtas percent of Total

"ebt

Short Term "ebt as apercent of Total "ebt

1! 3&6 6&.1 60.! 3.11!1 30! &!.! 6.& 3.21!2 &)3 &2.6 6.! 3.21!3 &)1 3. 66.1 3.31!& )) 36.2 6.0 3.31!) )6 3.2 .1 3.31!6 6 3).1 3. 3.31! &)! 3&.! &.3 2.&

1!0 01!! 31.1 ).6 2.61!! 003 2!.3 ). ).1!0 !0& 3.3 1.2 .)1!01 1&36 33. 6!.1 0.61!02 11)1 31.0 6).) 6.21!03 110& 31.0 6). 6.1!0& 120 33. 6&.2 .1!0) 1333 3).2 6&.2 !.01!06 1&036 3).! 6&.2 12.)1!0 1660 3).) 6&.1 13.1!00 16!33 30.3 6&.! 1&.31!0! 1023& 3.! 6. 1).21!! 2))1 33.6 )0.& 1).)1!!1 23222 33. )&.1 1.1!!2 2&2 32.! )1. 1.1!!3 2&20! 31.3 )&.) 0.1!!& 2)0 32.! )).6 .11!!) 2!02! 32.! )3.0 1.1!!6 2!& 33.0 )3.& !.)1!! 2!60 3).0 &!.! 0.31!!0 31!1& 30.1 )2.1 6.1!!! 3321) 30.1 )&.) ).&2 3220 &3.) )). &.621 311)! 3!.! 62.1 &.122 33266 36.1 6&. &.6

23 3)&6 32.1 66.0 3.)2& 3)11! 2).! .! 3.)2) 32!&3 2).1 1.) 3.26 3)060 2&.0 .6 3.2 &62 2!.6 60.& ).&20 &01) 3. 61.! 2.02! )31& 32. )0.0 2.21 )16! 32. 9 9211 )0&!2Q 2.0 9 9

Source> 8orld De%elo#"ent /ndicators 21Q-s of 3th?une 211


22/86

/n the 1!0s "ost of the de%elo#in, countries around the (orld ex#erienced an increase in

debt accu"ulation. Pa:istan (as no exce#tion. /n so"e years@ li:e 1!0690 and 1!0900@

debt ,re( at 11.2 #ercent and 12.) #ercent res#ecti%ely. The structure of the debt also

under(ent so"e chan,e@ (ith an increase in short ter" loans as a #ercenta,e of *DP.

Concessional loans as #ercenta,e of total debt declined fro" about ) #ercent in 1!!90 to

6) #ercent in 1!02903. -t the end of the decade debt stoc: stood at J10.23 billion.

The external debt increased at a so"e(hat "oderate rate in the !s. -t the end of the

decade it (as J33.2 billion@ eEui%alent to &) #ercent of the *DP. The #ro#ortion of

concessional loans (ith lon, ,race #eriods and lo( interest rates li:e /D- fro" the 8orld

Ban: fell further to )& #ercent. /t a##ears that the ,o%ern"ent resorted "ore to short9ter"

borro(in, in the be,innin, of decade as the rate (ith res#ect to *DP increased fro" 1)

#ercent to o%er 1 #ercent fro" 1!!9!1 to 1!!19!2.

The ne( "illenniu" sa( a so"e(hat different trend as co"#ared to the last decade. /t

started off (ith a debt stoc: of J32.2 billion in 2 but in the next t(o years@ 2192 and

2293@ the debt stoc: ex#erienced a ne,ati%e ,ro(th and declined to J31.1 billion.


23/86

Turnin, to indi%idual creditors the lar,est "ultilateral is -DB as of 3 ?une 211 (ith

outstandin, loans to Pa:istan of J12.3 billion@ follo(ed by /D- at J0.! billion as sho(n in

Table 2.3. The lar,est Paris bilateral is ?a#an at J.0 billion. -"on, other bilaterals the

lar,est creditor is China at J2. billion. The total a"ount o(ed to /F by the ,o%ern"ent and

SBP co"bined as of 3 ?une 211 is J0.! billion.

The i"#lications of the #rofile

of Pa:istans debt are that

(hile %ulnerability is reduced

by the %ery li"ited stoc: of

short ter" and #ri%ate debt@ the

hi,h le%el of de#endence on

"ultilaterals li:e the -DB@

8orld Ban: and /F i"#lies

fixed obli,ations. *enerally

these a,encies are seen as

5#referred creditors@ es#ecially

in relation to #ri%ate creditors

and recei%e hi,h #riority in

debt ser%icin, if there is

difficulty in honorin, theseobli,ations.

2.$ Comparison of evel of External "ebtThe le%el of external debt as of

21 in selected de%elo#in,

countries@ es#ecially fro" South

-sia@ is #resented in Table 2.&.

Pa:istan a##ears to be a

relati%ely hi,hly indebted country@

at 32 #ercent co"#ared to 1!

#ercent for South -sian countries

and 2 #ercent of the *DP for

lo( and "iddle inco"e

countries. The external debt to

*DP ratio is 1 #ercent in /ndia@

2) #ercent in Ban,ladesh and

&1#ercent in Sri $an:a.

Table 2.2Composition of

8utstandin/ External "ebt of!a+istan as of "ec $1 211

J illion8utstandin/

"ebt!ercenta/e

314 5overnment "ebt &,2 #.)

(a -edium and on/Term 3@ 1 year4

&),2& A.A

Paris Club 1)2!0 26.&ultilateral 2)62 &&.2ther Bilateral 233! &.uroOSu:u: Bonds 1)) 2.thers 03) 1.&&

(b Short Term $#, .,A324'rom I-' A&&& 1&.,

a of Federal *o%ern"ent 1!16 3.3b of Central Ban: 6)20 11.3

3$4 !ublic 5uaranteeda and7on SBPa"ostly #ublic sector enter#rises

Table 2.$-aBor9 Creditors of !a+istan

%s of $ une 211J illion

8utstandin/ "ebt !ercenta/e!aris Club 1)&,$ 2#.2

?a#an 0)3 1&.0

France 232& &.&*er"any 1!&) 3.7S- 1&! 2.0thers 101 3.)

8ther 0ilateral 2,,, ).China 22 3.0thers 6&6 1.2

-ultilateral $&A21 ,).A

-DB 1232& 23.3/D- 111&! 21./F 0!& 16.!/B+D 16& 3.1thers 61 1.&

Total 8f %bove )2#) 1.

Source> SBP@ PSQ the outstandin, debt of Pa:istan to (hich exceeds J1 billion.


24/86

/n ter"s of debt ser%icin, burden@ Pa:istan is in the inter"ediate ran,e at 2.& #ercent of the

*DP co"#ared to 1 #ercent in Ban,ladesh@ 1.2 #ercent in /ndia and 2.0 #ercent of *DP for

the lo( and "iddle inco"e countries.

Table 2.&Comparison of the External "ebt and "ebt Servicin/ to

5"! *atio in Selected CountriesD 21

External "ebtServicin/3> 0illion4

%s of5"!

External"ebt

3> 0illion4

5"!3> 0illion4

!ercenta/eof "ebt

Ban,ladesh 1. 1. 2). 1.3 2&.!,y#t 3. 1.& 3&.0 210.! 1).!/ndia 2.1 1.2 2!.3 12.1 16.0/ndonesia 2!.3 &.1 1!.1 6.0 2).&Pa:istan &.3 2.& )6.0 16.0 32.1Phili##ines 12.! 6.) 2.3 1!!.) 36.2

Sri $an:a 1.& 3. 2.& &6.! &1.1Tur:ey )0. 0. 2!3.! 3&.& &.South %sia 2.& 1.$ &., 2#.& 1#.2o( and -iddle

Income Countries

)A$.$ 2.A &,.$ 2., 2.$

Source> 8D/

2.& Terms of 7e( oansThe 8orld De%elo#"ent /ndicators 211 data base ,i%es the ter"s of ne( loans

contracted by Pa:istan@ sho(n in Table 2.). The concessional ele"ent (as hi,h in earlier

decades at al"ost 6 #ercent but fell shar#ly in the !s and the earlier #art of last decade. /thas risen once a,ain in recent years due@ in #articular@ to the hi,her Euantu" of aid fro" the

7.S. and ,rants fro" the 7.. Si"ilarly@ the a%era,e interest rate has chan,ed in line (ith

the concessional ele"ent.

The a%era,e "aturity #eriod of loans has fallen fro" o%er 33 years to 22 years by 21@ due@

in #articular@ to the shortenin, of the ,race #eriods. ConseEuently@ the share of concessional

debt has declined o%er the forty years.

Table 2.)Terms of 7e( oans Contracted

1# 1#A 1## 2 21

-%era,e *rant le"ent )!. 62.2 3).) 2. )).1-%era,e /nterest +ate 2. 2.) ).2 6.2 2.3-%era,e aturity Period r 33.) 3).) 22.! 12.0 22.Share of Concessional Debt 60.! 1.2 )0.& )). )!.1Source> 8D/

The effecti%eness of de%elo#"ent assistance by donors is exa"ined in9de#th in sections &.2and &.3.

2.) "ynamics of External "ebt to 5"! *atio


25/86

Pasha and *haus 1!!6 ha%e analysed the #attern of chan,e in the external debt9to9*DP

ratio durin, the decade of the s. The first influencin, factor (as the "assi%e de%aluation.

a. the le%el of the non9interest current account deficit as a #ercenta,e of *DPb. the le%el of non9debt creatin, ca#ital inflo(s@ es#ecially forei,n #ri%ate in%est"ent@ as a

#ercenta,e of *DPc. the endo,enous dyna"ics of external debt to *DP ratio due to the interest #ay"ents on

external debt@ i"#act of real ,ro(th in the econo"y ad #rice and exchan,e rate

chan,esd. chan,es in the le%el of forei,n exchan,e reser%es and o%erall in net forei,n assets.

The results@ based on esti"ates by /F@ are ,i%en in Table 2.6 for the last decade. Different

#eriods can be distin,uished as follo(s>

Table 2.,"ynamics of the Evolution of the External

"ebt


26/86

21


27/86

se%ere de#letion due to oil #rice shoc: in 20 and Pa:istan had to ,o to the /F for a lar,e

Stand9by facility. %er the last three years the non9interest current deficit has re"ained

"oderately hi,h@ althou,h conditions i"#ro%ed dra"atically in 21911 (hen a sur#lus (as

recorded due to exce#tional buoyancy in ex#orts and ho"e re"ittances.

The endo,enous debt dyna"ics (as not so fa%orable due to the shar# fall in the *DP

,ro(th rate to 3 #ercent fro" o%er #ercent in the #re%ious #eriod. "#hasis (as also

#laced on a relati%ely lar,e accu"ulation of forei,n exchan,e reser%es. -s such@ there (as a

"odest increase in the external debt9to9*DP ratio. %erall fro" 291 to 21911 the ratio

has fallen shar#ly by o%er 16 #ercenta,e #oints.

2., Type of 'orei/n %id

The next Euestion is (hat ty#e of loans and ,rants has the ,o%ern"ent recei%ed o%er theyears; To better understand the #attern of Pa:istans aid flo(s and debt accu"ulation it is

i"#ortant to loo: into the different sectors that the aid and loans are utilised on.

Currently@ 62 #ercent of the co""itted flo( and 66 #ercent of the disburse"ents are #ro4ect

related flo(s. 'on9Pro4ect aid@ (hich can be either for food@ balance of #ay"ents su##ort@

relief or non9food aid accounted for the re"ainin, 30 #ercent and 3& #ercent in the case of

co""it"ents or disburse"ents see Fi,ure 2.1.

There a##ears to be a lin:a,e bet(een the ty#e of aid that the country recei%es and the ,eo9

#olitical interests of the donor a,encies. Table 2. #resents an illustration of ho( the #attern

of aid has %aried (ith the chan,es in relationshi# of Pa:istan (ith other nations and

"ultilateral or,anisations in the last three decades.

/n the 1!0s the country recei%ed a considerable a"ount of loans@ "ostly in the for" of

#ro4ect aid and non9food aid@ (hich reflects 7S- interests durin, the -f,han 8ar.

-ccordin,ly@ relief aid (as also hi,h in those years@ (hich lar,ely co"#rised of -f,han

+efu,ees +elief -ssistance. The country also obtained /F loans to finance BP needs andto #ay off old debts in 1!0090! and 1!!9!1. For "ost of the t(o decades other(ise@ there

(ere no loans for BP. The non9food and relief loans ,enerally (ent do(n after the "id9!s

(ith the cessation of the (ar@ cou#led (ith the reduction of forei,n aid fro" 7S- to Pa:istan

follo(in, the Pressler -"end"ent and the sanctions i"#osed in the after"ath of nuclear

tests in the late !s.

'i/ure 2.1Types of "ebt by Commitments and "isbursements


28/86

76!

4!

14! 6!

CommitmentD 1##

Pr"#e$t Ai% &""% '"n&""% )*P

63!5!

22!

9!

"isbursementD 1##

Pr"#e$t Ai% &""% '"n&""% )*P

67!

33!

0!

CommitmentD 21

Pr"#e$t Ai% )*P +elief

39!

61!

0!

"isbursementD 21

Pr"#e$t Ai% )*P

+elief

Commitment

s

"isbursements

787 '88" '88" 08! *EIE'

Commitme

nts

"isburs /F $oan'ote> Pro4ect -id includes Co""it"ents and Disburse"ents for arthEua:e +ehabilitation H Construction SourceBP includes Co""it"ent and Disburse"ents for /DB Short Ter" and To:yo Pled,es

Source: !a+istan Economic Survey


30/86

2. Inflo( of 'orei/n %ssistance by *e/imePa:istan has alternated bet(een de"ocratic and "ilitary re,i"es o%er the last 6& years

since /nde#endence. There is a #o#ular #erce#tion that aid inflo(s in "ilitary re,i"es ha%e

been hi,her than (hen the country "a:es a transition to a de"ocratic setu# and that@conseEuently@ the *DP ,ro(th rate is hi,her. /t this #erce#tion borne out by the facts;

Table 2.0 #resents the "a,nitude of net aid inflo(s indifferent #eriods. Broadly s#ea:in,@ the

secular lon, ter" trend is for net forei,n assistance to decline as a #ercenta,e of *DP o%er

the last fi%e decades@ althou,h there are substantial year9to9year %ariations.

The #rinci#al conclusions that e"er,e fro" the analysis of aid inflo(s in different re,i"es

are as follo(s>

i The net flo( of forei,n assistance (as indeed the hi,hest as a #ercenta,e of the

*DP in the 6s under the "ilitary re,i"e of -yub han@ at o%er #ercent. Durin, this

#eriod@ Pa:istan (as a "e"ber of "ilitary #acts (ith the 7S- in or,anizations li:e

the C'T and S-T. 8ith the onset of the #rocess of industrialization and the

,reen re%olution in a,riculture@ the *DP ,ro(th rate (as hi,h at o%er #ercent in the

6s.ii Beyond the 6s@ there a##ears to be little correlation bet(een the le%el of forei,n

assistance and the ty#e of re,i"e.iii De"ocratic ,o%ern"ents ha%e been "ore successful in di%ersifyin, sources of

forei,n aid. The Bhutto ,o%ern"ent in the s (as able to ,et "ore su##ort fro"

/sla"ic countries in the (a:e of the #heno"enal 4u"# in oil #rices in 1!3. Si"ilarly@

the Benazir Bhutto and 'a(az Sharif ,o%ern"ents (ere able to build a stron,er

econo"ic relationshi# (ith bilaterals li:e China and Saudi -rabia@ (ho are not

"e"bers of the Paris Club.i% Si,nificant assistance@ es#ecially fro" the 7S@ has been lin:ed #ri"arily to security

considerations. First@ Pa:istan su##orted 7S stron,ly in the Cold 8ar. Second@

Pa:istan acti%ely su##orted the -f,han freedo" fi,hters in the liberation (ar in the

0s a,ainst So%iet occu#ation. Third@ after !O11 Pa:istan beca"e an acti%e

#artici#ant in the (ar on terror (ith the 7S. This has led to substantial inflo(s since

22 of ,rant assistance fro" 7S throu,h the Coalition Su##ort Fund CSF as

co"#ensation for costs incurred by the Pa:istan ar"y in (ar o#erations in the 'orth

of Pa:istan and the #ros#ect of "ore aid under the erry9$u,ar Bill.% /nterestin,ly@ if there is a correlation it is in the share of ,rants in total inflo( and the

ty#e of re,i"es. -s sho(n in Table 2.0 these tend to be hi,her in "ilitary re,i"es at

about one fifth to one third@ as co"#ared to the share in the A- Bhutto #eriod in the

s and in the !s. Durin, the last fe( years the ,rant co"#onent has re"ained hi,h


31/86

because of ,rants fro" the CSF. Therefore@ (e ha%e the conclusion that ,i%en the

le%el of inflo(s the resultin, debt obli,ations ha%e been reduced durin, "ilitary

re,i"es by a lar,er ,rant co"#onent.

Table 2.A'orei/n %ssistance in "ifferent *e/imes7et %nnual Inflo( of 5rants

and oans5rant

Component as of Inflo(

%nnual %vera/e3> -illion4

of 5"!

1#,


32/86


33/86

Chapter $

"ebt Sustainability %nalysis

$.1 Indicators of "ebt Sustainability

This cha#ter ado#ts t(o a##roaches to assess the sustainability le%el of the forei,n debt inPa:istan> the first a##roach is based on the (idely used traditional threshold debt ratios@ also

ado#ted by inistry of Finance@ and the /F as in the recent re#ort follo(in, -rticle /G

consultations . The second a##roach is based on the BP #ro4ections under different

scenarios in the "ediu" ter" based on the a##lication of the acroecono"ic odel of

Pa:istan de%elo#ed by /nstitute of Public Policy@ B'7. The section atte"#ts to exa"ine

(hether Pa:istan (ould be able to ser%ice its external debt obli,ations in co"in, years.

Sustainability of debt has been defined as> K%ustaina&le !e&t is the le'el of !e&t whi#h

allows a !e&tor #ountry to meet its #urrent an! future !e&t ser'i#e o&ligations in full( without

re#ourse to further!e&t reliefor res#he!uling( a'oi!ing a##umulation of arrears( while

allowing an a##epta&le le'el of e#onomi# growth) *+NC,AD-+NDP( .//012

There are %arious indicators for deter"inin, a sustainable le%el of external debt (ith each

containin, s#ecific "essa,es. These indicators are in the for" of ratios of different

"acroecono"ic indicators and can be thou,ht of as "easures of the countrys Ksol%encyL in

that they consider the stoc: of debt at certain ti"e in relation to the countrys ability to

,enerate resources to re#ay the outstandin, balance.

xa"#les of debt burden indicators include the follo(in,>a. Forei,n debt to *DP ratio

b. Forei,n debt to ex#ort ratio

c. Forei,n debt to total reser%es

- second set of indicators focuses on the short9ter" liEuidity reEuire"ents of the country

(ith res#ect to its debt ser%ice obli,ations. They are also a "easure of the costs of debt and

the ability of countries to #ay. These indicators are useful early9(arnin, si,ns of debt ser%ice

#roble"s. xa"#les of liEuidity "onitorin, indicators include the follo(in,>

a. Forei,n debt ser%ice to *DP ratio@

b. Forei,n debt ser%ice to ex#orts ratio@

c. Forei,n debt ser%ice to Total +eser%es@

The abo%e "a,nitudes are Euantified for Pa:istan fro" 1!01 on(ards in Table 3.1. xternal

debt ser%ice re#ay"ent #lus interest to re%enues is also a useful "easure and currently

stands at less than 1) #ercent.

xternal debt in the 0s and !s (as eEui%alent to about one9third to al"ost half of the

countrys econo"y. -s a #ro#ortion of ex#ort earnin,M the ratio (as about 3 #ercent@
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34/86

clearly de"onstratin, a hea%y burden. -nother@ #erha#s "ore disturbin, statistics (as that

at ti"es@ external debt (as o%er 1) to 2 #ercent of the size of the countrys reser%es.

Table $.1-a/nitude of "ifferent "ebt Sustainability IndicatorsD 1#A1 to 2

6earImport

Cover *atio3months4

External "ebt social de%elo#"ent@ & #ercentM infrastructure@ 2& #ercent and others

includin, disaster related assistance@ 2! #ercent. The sectoral distribution of cu"ulati%e lendin, by

the -sian De%elo#"ent Ban: to Pa:istan is as follo(s> social de%elo#"ent@ 1 #ercentM infrastructure@

&6 #ercentM #roducti%e sectors@ 21 #ercent and others@ 23 #ercent. -ccordin, to CD9D-C data@

sectoral co"#osition of D- by bilateral donors to Pa:istan in 20 and 2! is as follo(s> social

de%elo#"ent@ &) #ercentM infrastructure@ 2) #ercentM #roducti%e acti%ities@ 0 #ercentM others includin,

hu"anitarian assistance@ 22 #ercent. Therefore@ (hile 8orld Ban: and the bilateral donors are

focusin, "ore on social de%elo#"ent@ -DB has tended to concentrate "ore on infrastructure and the

#roducti%e sectors.

The re#ort also underta:es a co"#onent of costs analysis of existin, #ortfolios of #ro4ects. The

Euestion is ho( "uch of the

de%elo#"ent outlay reaches the

#eo#le in ter"s of direct

ex#enditure on the #ro%ision of

ser%ices. This is an i"#ortant

Euestion as the ob4ecti%e "ust

be to ensure that the "axi"u"

#art of the PSDP is used for

conferrin, benefits to the

#eo#le.

Box &.3 indicates the %arious

ty#es of lea:a,es that create a

(ed,e bet(een the initial PSDPallocation and the a"ount finally s#ent on the #ro%ision of ser%ices. %erall@ the conclusion is it

a##ears that the esti"ates of the lea:a,es ran,e fro" 2!.1 #ercent to 3.) #ercent. Therefore@

for e%ery 1 ru#ees allocated fro" the PSDP 63 to ) ru#ees e%entually reach the #eo#le. This

i"#lies that if +s. 3 billion is the size of the PSDP@ than an a"ount of +s. 6 to +s. 112 billion

is not of direct benefit to the #eo#le.

&.& "onor PSDP 211


49/86

s#ecific aid increases the transaction cost of aid bet(een the international or,anisations and

donor countries@ and at the sa"e ti"e it (ea:ens the reci#ient countries o(nershi# of aid.

Donor a,encies tend to concentrate on de%elo#in, s#ecific sectors. -s hi,hli,hted earlier@ t he

8orld Ban: and se%eral bilateral donors ,enerally sho( an interest in de%elo#in, the social

sector of econo"ies@ (hile the -sian De%elo#"ent Ban: focuses on #ro%idin, aid for

infrastructure and #roducti%e sectors. The sectoral distribution of loans by the -,encies is

#resented earlier in Box &.2.

/n Pa:istans context of ho( donor aid ear"ar:ed for certain #ur#oses under"ines aid

effecti%eness@ a ,ood exa"#le is the flood disaster of 21@ (hen the allocated funds could not

be used to address other #ressin, issues that flood %icti"s (ere faced (ith@ e%en (hen funds

(ere a%ailable else(here in the 7' Syste". That restriction i"#eded the aid #rocess as a

nu"ber of issues resultin, fro" the floods@ but not directly related to the flood@ could not be

funded. Pro4ects such as those based on cli"atic chan,e alle%iation and ada#tation need toessentially be country9o(ned and inclusi%e instead of bein, donor9dri%en. /deally@ such funds

should #ro%ide external resources to hel# a countrys de%elo#"ent strate,y %ia "a:in, use of

the countrys intrinsic facilities.

Forei,n relations "ay #lay a si,nificant role in deter"inin, the for" of aid a country recei%es.

Donor countries often #ro%ide aid on the basis of their ,eo#olitical interests in the reci#ient

country@ and hence their assistance tends to be short9si,hted. Pro4ects funded by the" are set

u# to deli%ery i""ediate results@ thus focus "o%es a(ay fro" ca#acity9buildin, and lon, ter"

sustainable ,ro(th. This (as the case of the 7nited States aid for disaster "ana,e"ent and

rehabilitation durin, the -f,han 8ar of the 1!s. The relief aid (ent do(n soon after the (ar

ended@ lea%in, Pa:istan to deal (ith a substantial refu,ee crisis.

-nother exa"#le #erha#s is Pa:istans Social -ction Pro,ra" S-P of 1!!3. /t (as a fi%e year

#ro4ect directed to(ards i"#ro%in, the conditions of the basic social ser%ices of the country at

that ti"e@ includin, education@ health and e"#o(er"ent of the under#ri%ile,ed #o#ulation. The

#ro,ra" (as funded by the ,o%ern"ent as (ell as the 8orld Ban:@ and had the #ri"ary ai" of

increasin, #ublic s#endin, on social ser%ices.

7nfortunately@ the #ro,ra"@ althou,h %ery extensi%e and (ell for"ulated initially@ (as lar,elyunsuccessful. x#erts feel that the "ain cause of this (as the difference in the #riorities of the

Ban: and the ,o%ern"ent ad"inistration. Policy"a:ers in Pa:istan could not reconcile (ith the

donor ,o%ern"ents Ban:9su##orted refor" #ro,ra"s in alle%iatin, #o%erty. Bur:i 22 ,i%es a

co"#rehensi%e analysis of this@ statin, that Kthe Ban: ,rou#s be,an to a,,ressi%ely #ursue a

de%elo#"ent a,enda that did not (in easy o(nershi# a"on,st Pa:istani #olicy"a:ersL see

Box &.&.

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0ox &.&5overnments and ;orld 0an+Ks Sectoral !riorities in oans

!eriod 5overnmentKs !riorities ;orld 0an+ 5roupKs !riorities

1!)19)0 V +efu,ee rehabilitationV +a#id industrialization to deal (ith the

scarcities created by a trade (ar (ith /ndia

V aintenance and i"#ro%e"ent of irri,ationinfrastructure inherited fro" the British

V Trans#ort infrastructureV /rri,ationV Ca#ital for industrialization throu,h #ublic

sector inter"ediaries de%elo#"ent financecor#oration1!)096! V /ndustrialization by ,uidin, #ri%ate sector

intro %arious industriesV *eneratin, rural e"#loy"entV Creatin, rural infrastructure such as far" to

"ar:et roadsV /ncreasin, a,ricultural #roducti%ity

V /rri,ationV De%elo#"ent Finance Cor#orationV Trans#ort hi,h(ays@ rail(aysV 'atural ,as de%elo#"entV ducationV Food stora,e

1!6!9 V 'ationalization of lar,e #ri%ately o(nedfinancial and co""ercial houses

V 'ationalization of so"e #ri%ate schools andcolle,es

V Public sector in%est"ent in lar,e industrialenter#rises

V Further ex#ansion of DFC #ro,ra"sV 'e( sectors introduced in to lendin,

#ro,ra"s includin, li%estoc:@ seedde%elo#"ent@ and urban se(era,e

V First #ro,ra" loan ai"ed at su##ortin, #olicyrefor"

1!900 V +e%italization of the #ri%ate sector

V x#ansion of #ublic sector ex#enditure byhea%y do"estic borro(in,

V /ntroduction of so"e /sla"ic features intothe econo"y

V 'e( set of acti%ities su##orted by the Ban:@

continuin, the earlier traditionV Decision to #hase out the su##ort of #ublic

sector ex#enditures in salinity control andrecla"ation

1!009!! V /nitial o#enin, of the econo"y to the outsideV +e"o%al of controls on #ri%ate sector

in%est"entV /nitiation of a #ro,ra" of #ri%atizationV Further #ro,ress (ith /sla"izationV 7se of #ublic sector ban:s and cor#orations

for #olitical #ur#osesV x#enditure on lar,e #ro4ects of dubious

econo"ic %alueV Policy to encoura,e #ri%ate sector

#artici#ation in #o(er ,eneration

V Social action #ro,ra"s launched to addressthe #roble" of #ersistent socialbac:(ardness

V Policy ad%ice on i"#ro%in, the efficiency of#ublic sector enter#rises

V Policy ad%ice and lendin, for #o(er,eneration by the #ri%ate sector

1!!!922

V Successful i"#le"entation of a #ro,ra"ai"ed at stabilization

V Shar# reduction in #ublic sectorex#enditures includin, those on

V de%elo#"entV stablish"ent of local ,o%ern"ents (ith

#o(er to tax and s#end

V +efocusin, Ban: *rou#s lendin, to #ro"oteecono"ic@ social@ and institutional refor"s

V Technical ad%ice on refor"in, the CentralBoard of re%enues

V Policy ad%ice@ technical assistance andfinancial su##ort to the #ro%ince

/n order to stren,then country o(nershi# of de%elo#"ent #lans and ensure better a##lication of

their o#erational #olicy@ se%eral "ultilateral or,anisations ha%e established their o(n #rinci#les

that allo( the" to disburse de%elo#"ent funds efficiently. The CDs De%elo#"ent -ssistance

Co""ittee D-C desi,ned the Paris Declaration on -id ffecti%eness in 2)@ (ith the

follo(in, ob4ecti%es>

V $wnership4 ffecti%e leadershi# fro" de%elo#in, countriesV 3utual AlignmentV Harmoni5ation of !onors4 Plannin,@ fundin, and i"#le"entin, de%elo#"ent

#ro,ra"s@ as (ell as "ana,in, for resultsV 3utual a##ounta&ility /"#ro%e"ent of trans#arency both fro" donors and

Page | 39


51/86

reci#ients

Si"ilarly the 8orld Ban: desi,ned the *ood Practice Princi#les for stren,thenin, the Euality of

the Ban:s de%elo#"ent #olicy lendin, in 2)96>

V $wnership> +einforce country o(nershi#V Harmoni5ation -,ree u#9front (ith ,o%ern"ents and other financial

#artners on a coordinated accountability fra"e(or:V Customi5ation Custo"ize the accountability fra"e(or: and "odalities of

Ban: su##ort to country circu"stances.V Criti#ality Choose only actions critical for achie%in, results as

conditions for disburse"ent.V ,ransparen#y an! pre!i#ta&ility Conduct trans#arent #ro,ress re%ie(s conduci%e to

#redictable and #erfor"ance9based financial su##ort.

/n a study conducted by the Ban: on the re%ie( of its ,ood #ractice #rinci#les in 2@ it (as

noted that ci%il society or,anisations CSs in%ol%ed in de%elo#"ent #ro,ra"s of reci#ient

countries@ notably Pa:istan@ doubted that o(nershi# had increased in the recent years@ since the

CSs contribution in desi,nin, #olicies and #ro4ects (as :e#t to a "ini"u". Si"ultaneously@

CSs felt that the donors Kcould do "ore to har"onize their su##ort@ (hich all #arties thou,ht

(as fra,"ented and relied on different instru"ents.L 8orld Ban:@ 2. /n #articular the

CSs felt that in offerin, their su##ort to Pa:istan the bilateral donors had a #olitical a,enda

rather than an interest in socioecono"ic i"#ro%e"ents@ (hich naturally li"ited #ossibilities of

har"onization bet(een the country and the donors. Further"ore@ #olicy "a:ers ar,ued that

country o(nershi# of #ro,ra"s could increase if donor a,encies focused on i"#ro%in, local

ca#acity. The re#ort re%ealed that there (as a feelin, a"on, local authorities that (hile the

Ban: #ro%ided financial and analytical assistance in desi,nin, de%elo#"ent #ro,ra"s@ it needed

to allo( ,reater in%ol%e"ent of ,o%ern"ent counter#art and other local ex#erts in draftin, the

#ro,ra"s.

/n order to i"#ro%e the effecti%eness of aid@ atte"#ts to do so should not 4ust focus on the #olicy

a,enda associated (ith aid but also on the nature of the relationshi# bet(een the donor and

reci#ient itself. Forei,n aid can si,nificantly hel# i"#ro%e the econo"y if a co"#lete rethin:in,

of these t(o factors is a,reed u#on. -id reci#ients should be beEueathed ,reater o(nershi#o%er the desi,n of do"estic #olicy. -t the sa"e ti"e@ the #olitical econo"y of the de%elo#in,

country deter"ines the distributi%e outco"es of #olicy@ and often the nature of the aid

relationshi# i"#in,es on itM restoration of reci#ient o(nershi# o%er aid #olicy needs to ta:e that

in account. ost conte"#orary discussions on aid a##ear to o%erloo: this di"ension of #olitical

econo"y.

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52/86

To conclude@ forei,n inflo(s (hile brid,in, the sa%in,9in%est"ent and external ,a# in Pa:istan

ha%e had so"e not so #ositi%e i"#lications. These include the 5Dutch9disease #heno"enon

and the ad%erse i"#act on "obilization of do"estic sa%in,s. -lso@ inflo(s ha%e not been used

in sectors (hich ensure "axi"u" #ay bac: in ter"s of enhancin, the #roducti%e ca#acity and

,ro(th of the econo"y #artially because of donor #riorities. Their i"#act on the #eo#le of

Pa:istan@ es#ecially the #oor@ to that extent is li"ited. The #olitical i"#lications of the inflo(s

ha%e also been si,nificant. *o%ern"ents #articularly the dictator re,i"es ha%e #ro"oted donor

,eo9#olitical ob4ecti%es so"eti"es at the cost of indi,enous interests. -lso@ (e see e%idence of

a 5"oral hazard #roble". asy access to external inflo(s in such re,i"es has discoura,ed the

"oti%ation to brin, about structural refor"s@ (hich ine%itably are not costless but can #ut the

country on "ore sound and stron, foundations.

Chapter )

The Case for "ebt *elief to !a+istan

The #re%ious cha#ters ha%e de"onstrated that the burden of external debt has not only #ut the

econo"y under increasin, stress@ it has had@ alon, (ith other forei,n inflo(s@ so"e undesirable

conseEuences@ li:e the Dutch Disease@ affect on do"estic sa%in,s co"#ro"isin, the benefits

conferred in ter"s of boostin, the econo"ic "o"entu" and #roduction ca#acity. ConseEuently@

the country has had li"ited success in #er"anently o%erco"in, the %ices of #o%erty and

inadeEuate o##ortunities for the #oor and %ulnerable sectors of society. The "onies ha%e been

s#entM in al"ost half of the forty year #eriod analyzed by "ilitary re,i"esM on sectorsO#ro4ects

Page | 41


53/86

(hich either did not enhance the #roducti%e ca#acity of the econo"y as it could ha%eM on

#riorities less reflecti%e of indi,enous need and #riorities than the donor co""unity@ and@ ha%e

only #artially benefited the #oor and lo(er inco"e se,"ents of the #o#ulation.

The ar,u"ent can #erha#s be "ade that (hile the ,lobal co""unity is e"bar:in, on the road

to #ros#erity@ the #eo#le of Pa:istan la, behind@ #artly due to #olicies ado#ted by leaders (ho

did not fully li%e u# to the as#irations of the #eo#le. Pa:istans ,ro(th rate is currently one9third

of /ndia and al"ost half of Ban,ladesh. The co""on "an of Pa:istan needs the o##ortunity

#ro%ided by a le%el #layin, field to i"#ro%e his bein,. The le%el #layin, field co"#rises@ a"on,

other thin,s@ #ro#er education and health facilities@ ener,y #o(er and ,as to turn the (heels of

industry@ irri,ation (ater for a far"ers fields and safety for his life and #ro#erty. Pa:istan needs

to e"bar: on an econo"ic structural refor" #ro,ra" and needs financial s#ace to be able to do

so. -lthou,h it has lo( #er ca#ita inco"e and is hi,hly indebted (ith a debt9to *DP ratio of 6

#ercent@ it is not eli,ible for the


54/86

%. Finally the loan conditions ha%e ad%ersely affected the #oor of the country. The ne(

"illenniu" started (ith the realization by the (orld leaders that ,lobalization has the

dan,er of enhancin, ineEualities across countries and across different strata (ithin

countries due to so"e ,o%ern"ents lac: of ti"ely ada#tion to the chan,in, econo"ic

en%iron"ent. Such ineEualities ha%e to be addressed and eli"inated. The 1!2 heads of

States si,ned the illenniu" Declaration@ (hich stands out as a "ilestone in history.

8e further de%elo# these ar,u"ents in the subseEuent sectors.

).1 Costs of the 5lobal J;ar on TerrorK

Follo(in, !O11@ and Pa:istans in%ol%e"ent in the ,lobal initiati%e a,ainst terror@ an i"#ortant

#roble" that has co"e to li"e li,ht is the ,ro(in, #resence of extre"ist ele"ents in the society.

-n increasin, nu"ber of the #eo#le in the country belie%e that the #resent structure of the

society is not ser%in, their interests and #resents to the" a future they are unli:ely to besatisfied as they are (illin, to resort to al"ost any "eans@ e%en to li"it less %iolence to disturb

the existin, social order. They are a,,rie%ed about certain ,lobal de%elo#"ents and feel

%icti"ized by the ,lobal efforts ai"ed at ensurin, K(orld excludin, the" safety and #ros#erityL.

The recent de%elo#"ents in S(at (hich ha%e resulted in a "o%e to(ards the ado#tion of a le,al

syste" that stands a#art fro" the one follo(ed in the other #arts of the country is one

"anifestation of the ,ro(in, influence of the extre"ist forces. The reach of these extre"ist

ele"ents in the society "ay ex#and further. Failure of the econo"y to #ro%ide adeEuately for

the #eo#le at the botto" end of the inco"e scale or li%in, in the "ore bac:(ard re,ions of thecountry accelerates the rise of extre"is". The failure of the #olitical syste" (hich does not

ha%e the institutions the disaffected can use to %oice their discontent further increases the sense

of alienation and "ar,inalization.

The acts of terroris" are further a,,re,atin, the econo"ic stress by leadin, to loss of life and

#ro#erty@ dri%in, a(ay both do"estic and forei,n in%estors@ increasin, the fiscal needs throu,h

enhanced ex#enditures on security@ di%ertin, resources fro" #roducti%e uses and increasin, the

cost of doin, business. Security brea:do(n@ not only a,,re,ates the econo"ic crises but in

facts@ feeds into and co"#ounds so"e of the other #roble"s facin, the country@ li:e #olitical

instability and ,o%ernance decay. The latter i"#act results in challen,es to the (rit of the

,o%ern"ent.

7ntil recently@ the focus on the 58ar on Terror (as lar,ely on hi,hli,htin, the benefits in ter"s

of increased su##ort fro" the international co""unity@ es#ecially the 7S-. But increasin,ly

Page | 43


55/86

there is concern that the costs of #artici#ation are risin, ex#onentially and leadin, to se%ere

dislocation of econo"ic acti%ity and unacce#tably hi,h losses of life and #ro#erty. Conce#tually@

these costs can be classified into a nu"ber of cate,ories@ lar,ely de#endin, on their nature

direct and indirect and on the ti"e #eriod exa"ined i""ediate@ "ediu"9ter" or lon,9ter".

The decision to #artici#ate in the I8ar on TerrorI did lead to a "a4or out#ourin, of international

su##ort to Pa:istan. /n 21 Pa:istan (as e"er,in, fro" a tou,h stabilization #ro,ra" (ith the

/F (hich in the #rocess of reducin, "acroecono"ic i"balances had@ "ore or less@ IsuffocatedI

the #rocess of ,ro(th. Per ca#ita inco"e (as sta,nant and there had been a substantial

increase in une"#loy"ent and #o%erty. Forei,n exchan,e resources (ere scarce and at the

be,innin, of 2192@ (ere enou,h only to finance three "onths of i"#orts of ,oods and

ser%ices.

Partici#ation in the (ar effort led to a substantial increase in the inflo( of concessional

assistance@ es#ecially in the for" of ,rants fro" the 7S-. -s sho(n in Table).1@ since 2192

Pa:istan has cu"ulati%ely recei%ed J 12.2 billion fundin, fro" the 7S-. This has consisted

#ri"arily al"ost #ercent@ of rei"burse"ent for the costs incurred by the "ilitary in

counterterroris" o#erations in the 'orth of the country. De%elo#"ent and econo"ic assistance

has a,,re,ated to J 3.2 billion durin, the #eriod. Therefore@ the direct contribution to the ,ro(th

#rocess in the country has been li"ited.


56/86

Di#lo"acy 3 & 6 ! ! 1 3!Total 2232 16 112! 12& 1!)1 1)0 1066 122&)Source> 7S *o%ern"ent -ccountability ffice@ Securin,@ Stabilizin, and De%elo#in, Pa:istanIs Border (ith

-f,hanistan@ February 2!

But the lar,e inflo(s of aid@ alon, (ith hi,her re"ittances and@ "ore recently@ forei,n direct

in%est"ent@ led to sy"#to"s of IDutch DiseaseI in the Pa:istani econo"y as already discussed

in the #re%ious cha#ter. The benefits ha%e

lar,ely been frittered a(ay in risin,

consu"#tion le%els@ es#ecially of the richer

sections of Pa:istani society.

Turnin, next to the costs@ (hich hin,e on

the le%el of incidence of the acts of

terroris" in the country@ the trend in thenu"ber and incidence of these acts is also

a basic indicator of the lac: of success of

the counter9terroris" strate,y.

The Pa:istan Security +e#ort #re#ared by

the Pa:istan /nstitute of Peace Studies P/PS Euantifies carefully the incidence of terroris" in

the country on the basis of day to9day "onitorin, of the national and local #rint and electronic

"edia. The esti"ated nu"ber of attac:s o%er the #eriod 2) to 21 alon, (ith the nu"bers

:illed and in4ured is ,i%en in Table ).2. There ha%e been a total of about 12 attac:s in the

se%en year #eriod@ :illin, "ore than 21 #eo#le and lea%in, "ore than 3) in4ured. The

bul: of the incidents (ere in the nature of terrorist attac:s. /n 21 an esti"ated 2!13 #eo#le

(ere :illed in these terrorist attac:s and )02& (ere in4ured. /n addition@ Io#erational attac:sI

security forceIs o#erations a,ainst terrorists ha%e led to 2 deaths and 00 in4ured "ostly

IcollateralI da"a,e in 21. -ccordin, to so"e esti"ates@ "issile attac:s by 7S drones ha%e

:illed al"ost !61 innocent ci%ilians in 21.

The inistry of Finance of the *P has #re#ared esti"ates of the cost of the I8ar on TerrorI toPa:istan in the P+SP9// docu"ent. The follo(in, indirect costs ha%e been identified in addition

to the direct costs> i Delay in i"#le"entation of de%elo#"ent #ro4ects in affected areas@ li:e

'8FP and F-T-@ leadin, to cost o%erruns. ii /ncreasin, uncertainty leadin, to ca#ital fli,ht and

affectin, FD/. iii Slo(in, do(n of do"estic econo"ic acti%ity. i% xcessi%e increase in the

Page | 45

Table ).2Terrorist %ttac+s in !a+istan 2)


57/86

countryIs credit ris:@ "a:in, borro(in, %ery ex#ensi%e. % /ncreased une"#loy"ent in affected

re,ions. %i Costs of dis#lace"ent of local #o#ulation.

-ccordin, to Table ).3@ costs of the I8ar on TerrorI are ex#ected to a##roach +s. 60 billion

a##roxi"ately J0.& billion in 209!@ eEui%alent to o%er ) #ercent of the #ro4ected *DP.

/ndirect costs on account of loss of ex#orts@ forei,n in%est"ent@ industrial out#ut@ etc.@ re#resent

bul: of the costs@ (ith a share of o%er 03 #ercent. Cu"ulati%ely@ accordin, to ,o%ern"ent the

cu"ulati%e cost of the I8ar on TerrorI since 2&9) is J 31.& billion@ substantially in excess of

the flo( of concessional assistance esti"ated at about J 1. billion annually@ but this still

re"ains substantially less than the costs of the I8ar on TerrorI.

Table ).$Costs of ;ar on terror to !a+istan

+s in Billion

21


58/86

the "o%e"ent of consi,n"ents@ costs of "aintainin, of hi,her in%entories and lar,er ti"e costs

at air#orts etc. ha%e not been Euantified due to lac: of data.

%erall the total costs of

terroris" in Pa:istan arehi,h@ esti"ated at +s

30 billion@ at the 29

0 base. - subseEuent

study by SPDC 211

esti"ates the costs to

be about +s ) billion

in 2!. The

distributionalconseEuences of these

costs on the I8ar on

TerrorI need to be

hi,hli,hted.


59/86

-n i"#ortant conclusion that e"er,es fro" the analysis is that Pa:istan has been substantial

underco"#ensated for #artici#ation in the 58ar on Terror (ith the cost three ti"es of the

assistance concession recei%ed. The co"#ensation has been li"ited lar,ely to rei"burse"ent

only for the costs of "ilitary o#erations. This@ at least@ #artly ex#lains the lac: of so"e

o(nershi# of the (ar effort. ur #ast ex#erience (ith utilization of the concessional su##ort isnot %ery #ositi%e as de"onstrated earlier. Fro" the %ie(#oint of achie%in, sustainable hi,her

,ro(th and #ro"otin, e"#loy"ent@ es#ecially for alle%iatin, #o%erty@ it is #erha#s better if

Pa:istan is #ro%ided relief throu,h other "echanis" li:e debt relief and #referential access to

"ar:ets@ es#ecially for textiles@ in the 7S-@ 7 and ?a#an. -s for as trade access is concerned

(hile the #ro#osal for +econstruction ##ortunity Aones +As in the affected areas@ en4oyin,

#referential access@ is (orthy@ it is unli:ely that in the short run "uch in%est"ent (ill be di%erted

to these areas des#ite the incenti%e ,i%en the #re%ailin, situation. The facility "ay be extended

to other bac:(ard re,ions also fiscal s#ace created by debt relief can be used for #ublic

in%est"ents in infrastructure and basic ser%ices and e"#loy"ent9intensi%e #ublic (or:s in

affected areas (hich are cleared u# either throu,h "ilitary o#erations or #eace a,ree"ents in

order to #ro%ide an early I#eace di%idendI. -t the national as (ell as local le%el@ the #roble" of

"ilitancy can be tac:led effecti%ely by fast i"#le"entation of a outh S:ill De%elo#"ent and

"#loy"ent Pro,ra"@ (hich ai"s to absorb the o%er 1.) "illion une"#loyed youth in the

country.

To conclude@ the analysis in this section a"#ly de"onstrates that the country is #ayin, a hea%y

#rice for the delay in the effecti%e resolution of these enor"ous challen,es facin, it. Potentially@

*DP could ha%e been hi,her by al"ost +s. 30 billion if the #roble"s of security (ere not

ad%ersely i"#actin, on the econo"y. The conco"itant re#ercussions for ex#orts@ e"#loy"ent

and #o%erty are also sizable. -ny further inaction or inadeEuateOina##ro#riate #olicy action can

further frustrate the countryIs ,ro(th #otential@ (hich it can ill afford in these ti"es of

increasin,ly unfa%ourable ,lobal de%elo#"ents. *lobal action of relief on Pa:istans debt can be

one (ay of ac:no(led,in, Pa:istanis sacrifice for the 8orld Co""unity and be a #artial

co"#ensation #articularly for the youn, and the #oor.

).2. Economic Costs of 7atural "isasters

Pa:istan unfortunately durin, the last decade ex#erienced se%eral natural disasters includin,

the drou,ht of 21@ earthEua:e of 2)@ cyclones of 2 and floods in 21 and 211. The

floods of 211 and 21 (ere a"on, the (orst natural disasters seen in Pa:istans history. /n

21 a##roxi"ately one9fifth of the country (as under(ater@ startin, fro" hyber Pa:htun:h(a

in the 'orth to the -rabian Sea in the South.

Page | 48


60/86

'atural disasters not only result in a loss of li%es@ da"a,e to the infrastructure and loss in

econo"ic enter#rise@ but they also lead to ho"elessness@ as those affected are forced to

abandon their ho"es and in "ost cases lose their inco"e ,eneratin, assets. /n the absence of

efforts to rehabilitate the dis#laced #o#ulation@ there is an increase in the s#read of disease@

hei,htenin, health and food insecurity. Therefore@ insecurity in ter"s of econo"ic@ health@#ersonal@ and food security is hei,htened in the e%ent of natural disasters.

'atural disasters also #lace

si,nificant burden on the state@

as it has to #ro%ide for relief@

rehabilitation and

reconstruction. This leads to

di%ersion of funds fro" other

areasM the o##ortunity cost ofsuch di%ersion is %ery hi,h for

de%elo#in, countries li:e Pa:istan. The freEuency of natural disasters in Pa:istan and the extent

of da"a,e they cause are ,i%en in Table ).&. The da"a,es (ere in the sha#e of loss of hu"an

li%es and #ri%ate #ro#ertyM destruction of infrastructureM da"a,e to standin, cro#s and li%estoc:@

ho"elessness and internally dis#laced #eo#le.

Ta:in, a closer loo: at each of these@ the -sian De%elo#"ent Ban: -DB and the 8orld Ban:

undertoo: a Da"a,e and 'eeds -ssess"ent of the 21 floods. The esti"ated da"a,e fro"

the floods stood at J1.1 billion or ).0 #ercent of *'P in 2!91@ (ith the reconstruction costsran,in, fro" J0. billion to J1.! billion. This includes both the direct and indirect da"a,e to

#hysical and social /nfrastructure and econo"ic sectors. The ca#ital loss (as around & #ercent

Page | 49

Table ).&Costs of 7atural "isasters in !a+istan

in "illions7atural"isaster

%ffected37umber in

-illions4

Gilled37umber inThousands4

EconomicCosts

3-illion HS>4Floods 21 2.2 2. !)arthEua:e ).1 3.3 )3Stor" 1. '.- 162

Drou,ht 2.2 '.- 2&


61/86

of *DP for 2!91.

*ro(th rates are

ex#ected to be lo(

until the da"a,es

are re#aired@ by at

least 1. #ercent to

1.3 #ercent #er

annu". The rate of

,ro(th in the

co"in, years (ould

de#end on the

seriousness and

efficiency (ith (hich

the reconstruction

done@ (ith the

ex#ectation that the

reconstruction

ex#enditure is there

in addition to the

nor"al in%est"ent

s#endin,.

%erall@ the da"a,e

caused by the

arthEua:e of 2) (as less se%ere than the floods of 21. The "ost badly affected areas

(ere -zad ?a""u and ash"ir@ and

hyber Pa:htun:h(a. /t left at least 3@

dead and "ore than 3.3 "illion #eo#le

ho"eless@ and the ,reatest da"a,e and

reconstruction costs (ere on housin,. The

hi,hest econo"ic da"a,e (as in the

trans#ort and the a,riculture and li%estoc:

sector. The reconstruction of the

infrastructure continues till today.

Page | 50

Table ).)Estimate of Total "ama/e Costs by SectorD

"ecember 21

Sector

"irect

"ama/e3*s. -il4

Indirect

osses3*s. -il4

Total "ama/e

!G*millions

HS"millions

1. Social Infrastructure

Pri%ate


62/86

The incidence of drou,ht in Pa:istan is increasin, insecurity@ due to less hydro#o(er

,eneration. -round 6 #ercent of the area of the country is classified as arid@ recei%in, less than

2 "" of rainfall. The #ri"ary arid ran,elands include Cholistan@ D.*.han@ ohistan@

Thar#ar:ar and 8estern Baluchistan. The %olu"e of rainfall and %ariability is hi,h both for

Baluchistan and Sindh.

Pa:istan has inter"ittently been sufferin, fro" se%ere drou,ht since 1!!0. -s a conseEuence of

drou,ht the ,ro(th rates of cro#s@ both "a4or and "inor ha%e sho(n a do(n(ard trend. -s

esti"ated in Table ).@ the ,ro(th rate of "a4or and "inor cro#s in 291 declined by 13.

#ercenta,e #oints@ and #ercenta,e #oints res#ecti%ely@ due to the se%ere drou,ht. The i"#act

of drou,ht #ersisted in the follo(in, year.

ConseEuently@ the drou,ht has been

%ery costly for the country@ as it has

resulted in a loss of +s. 26 billion to

the econo"y in reduced a,ricultural

out#ut. The total loss fro" "a4or and

"inor cro#s for 291 (as 11

billion@ (hile it stood at 0! billion for 2192.

Pa:istan has throu,hout its history been hit by se%ere cyclones (hich ha%e caused lar,e scale

da"a,e. The coastal belt of Pa:istan is extre"ely %ulnerable to cyclones and stor"s. Fourteen

cyclones ha%e been re#orted bet(een 1!1 and 21. The cyclone of 1!!! in Thatta and Badindistricts :illed around 160 #eo#le and nearly .6 "illion (ere affected.

ore recently@ in 2)@ Pa:istan (as stuc: by cyclone e"yin. This cyclone and subseEuent

floods affected around 2.) "illion #eo#le in the south and central #arts of Baluchistan and

ad4oinin, re,ions of Sindh. *i%en the nature of the terrain@ (ater cascaded do(n the hills

to(ards the /ndus and -rabian Sea. Table ).0 #ro%ides esti"ates of loss of li%es and

infrastructure for both Balochistan and Sindh.

-ccordin, to 7'DP 212 the i"#act of ,lobal cli"ate chan,e on Pa:istan is li:ely to be an

increase in the %ariability of "onsoon rains and enhance"ent in the freEuency and se%erity of

extre"e e%ents such as floods and drou,hts. This tendency has already beco"e %isible in the

last decade.

Table ).A

"ama/e Caused 0y Cyclone 6emyinEffect 0alochistan Sindh Total

Page | 51

Table ).

*eduction in 5ro(th *ates as a ConseNuence of

"rou/ht2


63/86

Gilla,es affected ) 1&&! 6&&!


64/86

Expenditure

ture iture ment dies ture iture 3A4

1 2 3 & ) 6 0 ! 1 11

1!039

0&

1. 20.1 1.! 3.2 1!. 6.) 0.3 13.6 1&. 6).2

1!0&9

0)

116.0 20.3 1. 30. 1!. 6.& .0 12.) 1).) 6).)

1!0)9

06

13&.) 2!.6 .& 3.6 2.0 6. .0 13.1 1&. 66.2

1!069

0

1)2.& 23.0 6.2 3).6 2.6 ). 0.! 13.3 16.6 6).

Documents

Review of Pakistan External Debt(Final)()