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Old Wednesday, March 23, 2011
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Default Net foreign aid flow turns negative

Net foreign aid flow turns negative

By Yousuf Nazar


IN recent years, the net official aid flows —disbursements from multilateral institutions and govern ments —have turned negative because the Government of Pakistan has been paying more in debt servicing —principal and interest— than it has been receiving in new loans or aid.
For example, as shown in the Graph, the total aid received by the government ( excluding borrowings by the private sector) was $4,143 million during the financial year ending June 30, 2010 but during the same period, the government had to pay $5,107 million in debt (principal and interest) repayments. It means that the net impact of the aid is actually negative on Pakistan’s economy because the government had to pay a net amount of $964 million to the external donors.

This shows that while Pakistan has been piling up debt, it has not used the borrowings properly as is reflected by its growing incapacity to service the debt. Latin America faced a similar debt trap in the 1980s and like some of the Latin countries, Pakistan’s only practical way out may be to seek cancellation of part, if not, whole of the debt.

Another major reason for the rise of external debt has been mismanagement and incompetence. According to the Debt Policy Statement 2010-2011 published (November 2010) by the ministry of finance, “the currency exposure of foreign debt originates from two sources: dollar/other foreign currencies and rupee/dollar. This two-pronged exchange rate risk has been a major source of increase in the stock of external debt over a period of time in contrast to actual inflows.
For example, foreign exchange losses contributed to about $3.1 billion increase in Pakistan’s external debt during 2007-2008 alone. Many economists, journalists, politicians, analysts, leading columnists, TV anchors, and some former generals do not seem to be aware that:

(a) actual quantum of net aid flows is small (less than one per cent) compared to the size of Pakistan’s economy,

(b) almost all the “visible aid” is used to repay the past loans,

(c) the biggest foreign exchange utilisation in the past decade seems to have been for the purchase of arms, and

(d) one reason for the rapid rise in the external debt in 2008-2010 was the currency losses (and not ‘new aid’) which could have been avoided if the ministry of finance and/or the State Bank of Pakistan had the necessary expertise to do so.

The above figures do not include Coalition Support Fund (CSF) payments made by the US government as reimbursements for the expenses incurred by the government of Pakistan. The CSF payments cannot be termed as aid not only because they were reimbursements of actual expenses but also because they mask the more important fact that CSF monies have been insignificant when compared with the actual economic (not to mention the human losses ) costs of the “War of Terror” suffered by Pakistan. These are as follows:

Consequently, Pakistan now spends more on debt servicing than on defence, and seven times more on arms than on primary schools. In October, the government projected that it would increase its defence budget by 25 per cent, or Rs110 billion, to Rs552 billion for the current fiscal year while slashing spending on education, healthcare, and infrastructure.

The country has been lucky that that overseas Pakistanis have sent billions home and have been and are the largest source of external financing and foreign exchange. Remittances from overseas Pakistanis increased from $4.6 billion in 2006 to nearly $9 billion in 2010. It is this source, more than any other source of ‘aid’ that has helped Pakistan to face difficult times. But the establishment should not rely on this bonanza. It should reappraise its priorities and take the lead in steering Pakistan away from conflicts and refocus the political economy on generating growth and employment than on arms spending and borrowing.
Pakistan is borrowing to buy and build arms and sinking into debt while maintaining the myth that it needs to borrow for its economic survival and development.

During 2002-2009, Pakistan was the sixth largest buyer of conventional weapons in the world with total purchases of $12.5 billion, according to the US Congress documents. This excludes spending on its nuclear programme.

Is it just a coincidence that during this period, Pakistan’s total external debt increased by $13.7 billion to $45.8 billion in the beginning of 2009. While the spending on the nuclear programme remains shrouded in secrecy and is not subject to any parliamentary or judicial oversight.
Historically, the army has not shown enough realisation that the cessation of all external and domestic conflicts is the most critical and essential pre-condition for Pakistan to survive as a viable nation-state. The security state of Pakistan’s number one problem is not extremism. It is its security establishment and its addiction to arms and debt.

The army leadership can and must take the lead and put India, Afghanistan, Kashmir, and nuclear issues on the back burner and focus on nation rebuilding. It can begin this process setting an example through making deep and voluntary cuts in military expenditure and then by asking the civilians to do the same.

Pakistan needs to make investments to repair and rebuild its administrative and physical infrastructure. The economy cannot achieve a sustainable growth rate necessary to support its around two per cent population growth rate and reduce poverty without huge investment in basic infrastructure and human resources.

A February 2008 report by the World Bank warned, “Without adequate irrigation resources, power, and transport infrastructure, the very sustainability of Pakistan as an independent nation may be at stake as shortages could lead to increased social discontent and disharmony amongst the federation and the provinces.”

Since Pakistan is so significantly behind other Asian countries with whom it competes in international trade and for investment capital, it should invest much more than the averages to catch up. Pakistan needs to spend 8-10 per cent of its GDP on education and infrastructure. This is not possible without drastic cuts in defence and establishment expenditure, reducing corruption, and more and better tax collection.

We need peace and to put an end to all external and internal conflicts in order to restore conditions that are conducive to economic development. The army has to stop its arms spending spree and find a way to transform Pakistan from a dysfunctional debt and arms-addicted national-security state – which has been and continues to be in a state of constant tension and sometimes at war with its neighbouring countries and with itself.
Army holds the country together. If it does not take the lead and make the right initiatives in the right direction, there may not be any rational reason or room for hope for Pakistan. It may be too much to expect power-broking and scheming mortals with limited intellect and vision to become saviours and nation builders overnight. But the choice is quickly becoming stark.
Act to resurrect the state of Pakistan and dispel the perception that it will wither away under the weight of its own history and blunders of the self-serving and short-sighted ruling elites.

Source: Economic and Business Review, 21 March 2011, Dawn
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