Thwarting Pakistan Economic Outlook

By Ahmed, Nadeem | Economic Review, June-July 2010 | Go to article overview
Save to active project

Thwarting Pakistan Economic Outlook


Ahmed, Nadeem, Economic Review


With the growing macroeconomic imbalances, the issue of debt sustainability in Pakistan has become a vital aspect of government stabilization policy. Historically, Pakistan economy ably absorbed domestic or international economic shocks and maintained acceptable level of real growth rate. This exceptional trait of the economy is gradually diminishing with the integration of world economy. The internal economic structural vulnerabilities such as high budget deficit, low tax-to-GDP ratio, inadequate national saving, higher input cost, etc. were exposed with a relatively mild impact of the recent global economic crisis. Some of the consequence been high inflation, unemployment, increased budget deficit, decline in real GDP and per capita income growth.

[ILLUSTRATION OMITTED]

There is a direct relationship between budget deficit and growth in public debt. In Pakistan, total stock of public debt will reach at unsustainable level if the government did not respond prudently. In future, larger and persistent budget deficit, coupled with sluggish economic growth, may induce chronic public debt crisis in Pakistan. The economy will be in a debt trap when the sources of financing of budget deficit further increases the future debt liabilities. Budget deficit may be financed by deficit financing, bank borrowing, and external sources.

Domestic financing of budget deficit (deficit financing and bank borrowing) will induce inflation and crowding out of private investment respectively that could cause major macro-economic imbalance in the economy.

External financing, on the other hand, would help stabilize the economic imperatives at the cost of enhanced future debt burden liabilities.

Pakistan, over the years has experienced a relatively high budget deficit. In 1997-98 it stood at 7.7 percent of GDP, came down to 2,3 percent in 2003-04 while it again increased to 7.4 percent in 2007-08. With international economic recession and low level of economic growth in coming years, the indicators signify that public debt in Pakistan would become unsustainable in next five years.

Public debt composition in Pakistan has two broad categories, i.e. domestic debt and external debt. Domestic debt includes permanent debt, floating debt and unfunded debt, whereas the external debt consists of medium and long-term, short-term, and private non-guaranteed debt, loans from the IMF and foreign exchange liabilities. Domestic debt as percentage of GDP was only 17 percent in 1980-81 that increased to 37 percent in 1989-90. Due to large budget deficit in 1990s. the domestic debt to GDP ratio reached to 43 percent in 1999-2000. The cruciating affect of debt issue, perhaps, provided grounds to the then military government to form a debt sustainability strategy to take advantage of high growth rate in the GDP and per capita income. Consequentially, Pakistan economy did experience a decrease in the domestic debt to 31 percent of the GDP, whereas, the foreign debt, which was 49 percent of the GDP in 1989-90, drastically came down to 28.5 percent of the GDP. The government then also managed to lower the total public debt-to-GDP ratio to 60 percent from alarming 86 percent in 1989-90.

Multiple factors associated with the debt sustainability that are:

(a) if the country confronting macroeconomic imbalances, such as low economic growth, shortfall in total tax collection, increase in government expenditures, high interest rate on debt, decline in exports and remittances and high budget deficit than debt-to-GDP ratio would increase all require more finances for debt repayment,

(b) Whereas reliance on external sources to finance its budget deficit would further increase the stock of external debt and subsequently increase pressure on the country's foreign exchange reserves. In the absence of foreign exchange earnings, depletion of foreign exchange reserves and depreciation of rupee value can be prevented by rationalizing imports and providing efficient banking services to expatriates for foreign remittances,

(c) Cost of debt repayment would increase with the increase in real interest rate.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Thwarting Pakistan Economic Outlook
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?