CSS 2019 Question: Pakistan is going to the International Monetary Fund (IMF) for its bailout package to resolve its financial problems through prudent management. Discuss Pakistan’s external debt problems & domestic liabilities to stabilize the country’s economic uncertainty.
Table of Contents
Like many other developing countries, Pakistan is a highly indebted country & is facing serious hardships in external debt servicing. The problem of public debt in Pakistan is very grave & is almost of a similar nature. Although Pakistan’s external debt has increased because of misuse of loans & many developmental projects remained uncompleted due to political instability & changes in government policies because each new government plans their new projects & new policies further over-burden the economy.
Pakistan’s External Debt Problems
Pakistan is the heaviest debt country in the world with $60 billion external debts. Pakistan’s population increases very rapidly & therefore demand increases. Pakistan is not self-sufficient in food & even imports wheat from abroad. A strong defense is imperative for a country, but the spending of the huge amount on defense increases external debt further. The economic status of Pakistan is very unsafe with unsustainable external debt. Pakistan’s external debt is seen to be the cause of all problems badly affecting the economy. The alarming figures indicate the government’s inability to ensure enough non-debt creating inflows to meet external accountability requirements. Due to huge domestic & foreign borrowings, debt servicing is now the single largest charge on the federal budget.
IMF Bailout & Reforms in Pakistan
The IMF advises member countries on economic & financial policies that promote stability, reduce vulnerability to crises & encourage sustained growth & high living standards. It monitors global economic trends & developments that affect the health of the international monetary & financial system & promotes dialogue among countries on the global consequences of their policies. The IMF will no doubt push Pakistan towards implementing structural reforms in economic management. Now the IMF seems focused on raising the power tariffs to deal with debt. PTI government has already increased the interest rates & devalued the Pakistani currency, as IMF might have demanded it. There is also a need to determine whether the IMF demanded structural reforms are going to promote the welfare of people & strengthen the institutions of Pakistan.
Domestic Liabilities to stabilize Pakistan’s Economic Uncertainties
Pakistan’s debt & liabilities rose sharply to nearly Rs30 trillion or 87% of the total size of the economy at the end of 2018, largely due to the last government’s expansionary fiscal policies & its failure to reform tax administration. Pakistan’s total debt & liabilities were Rs16.4 trillion. Domestic liabilities increased from Rs470 billion to Rs819 billion. Such a rise in a short period of time is of course disturbing. It would demand higher bank borrowings for debt servicing which is already a major chunk of budget expenditures. It would crowd out private sector credit, which could spur growth & increase employment in the country. Pakistan, unfortunately, is a country where even primary fiscal balance is in deficit & most of the development expenditures are to be met through domestic & external borrowings. The size of domestic liabilities needs to be reduced to sustainable levels, which is only possible through a reduction in the budget deficit. The government had taken several measures in the last budget to increase tax revenues & contain expenditures, aimed at reducing the deficit, but higher borrowings shows that these steps have not been that successful & the deficit is going to be larger than the target.
Pakistan has been unsuccessful in controlling a balance between expenditure & revenue. High & rising external debt burden constitutes a serious constraint for development; a major barrier to macroeconomic stability & hence, to growth & poverty reduction; a discouragement to foreign investment because it creates a high-risk environment & exchange rate depreciation & discouragement for government to carry out reforms in various sectors of the economy.
For similar notes click here.