Falling into the debt trap?

The latest figures on foreign debt of the country appear to be disturbing. According to the data released by the State Bank, Pakistan's total external debt and liabilities rose to $40.172 billion at the end of June, 2007 as against $35.474 billion in 2003-04. During the last four years, the government borrowed a staggering amount of over $15 billion while it paid a principal amount of $9.706 billion to the foreign creditors.
An amount of $3.553 billion was paid only as interest during this period. Huge borrowings were made to finance continuous current account deficits, including debt-servicing which has started rising after a substantial decrease in 2004-05 to $2.715 billion from $4.969 billion in 2003-04. The current account deficit for year 2006-07 was as high as $7.016 billion, showing an increase of 41 percent over 2005-06.
This was despite the fact that both FDI and home remittances reached record levels of $8.42 billion and $6.5 billion respectively during the year. Pakistan's dependence on multilateral donors also increased significantly as the country borrowed $2.157 billion from this source last year.
Reverse remittances from the country are also increasing due to rise in foreign investment. During the last fiscal, the outflow of foreign exchange in the form of profits and dividends increased sharply by 60 percent, reaching close to $1 billion mark.
Commenting on the trend of foreign indebtedness of the country, Ahsan Iqbal, information secretary of the PML-N said that the Musharraf regime has broken all records of borrowings and is pushing the country into a debt trap despite the fact that present dispensation benefited from the highest foreign exchange inflows in the country's history because of the post-9/11 incidents.
In 2003-04, total external debt of the country was $33.35 billion. If the government had really stopped borrowing, as it kept claiming having broken the "debt bowl", Pakistan's debt would have declined to $23.65 billion after payment of principal.
The opportunity was, however, squandered. The cost of borrowing could pose a threat to national economy and the government policies are pushing the country towards a serious crisis. Country's exports did not offset the rising trend of imports, resulting in an all-time high trade deficit, he charged.
Although the government could dismiss such comments as an outburst from an opposition member of the parliament for understandable reasons, we feel that the matter is too serious to be easily ignored.
The increasing level of foreign debt and external liabilities year after year would naturally result in higher debt servicing which, with the passage of time, will become a big drag-net for the prospects of the economy. The more worrying aspect is that the government seems to be, more or less, indifferent to the evolving situation.
The widening trade gap, which is the basic reason for increasing current account forcing the country to borrow heavily from foreign sources, continues to worsen and no policies are put in place or appear to be contemplated to reverse this trend. This deficit is partly met by sources which are not sustainable in the long-run. During the current fiscal, for example, the government plans to launch GDRs of National Bank, Habib Bank and Kapco but there is a limit to such financing sources.
Authorities are also trying to attract foreign investment, but the country has to pay a cost in terms of higher remittances in future. The government functionaries would argue on the basis of percentage of overall debt and debt servicing in terms of GDP and the outstanding level of net foreign liabilities (after adjusting for the increase in foreign exchange reserves) and try to assert that the external debt position of the country is very much in control.
Although such arguments are justifiable in economics, the fact is that higher debt servicing resulting from increasing debt levels would increasingly devour foreign exchange earnings and deprive the country of resources required for development in future.
Also, the present government has all along been propagating about high degree of success in various areas of the economy, but it would have been better to keep a close watch and maintain a tight control on the outstanding external debt and liabilities of the country as well. After all, countries, like individuals, are supposed to retire a part of their old debt or at least live within their means when the going is good.