0

Report
Economy of Pakistan

Submitted to
Ma’am Mehreen

Submitted by
Murtaza Naqvi (44)
Kamla Shahzad (40)
Ushna Qureshi (34)

Master’s in Business Administrations (NBE)

2nd Semester
Session: 2020-22

Institute of Management Sciences

BAHAUDDIN ZAKARIYA UNIVERSITY, MULTAN

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Table of Content:

Sr No Topic Name Page No

01 Summary 02

02 Key Words 02

03 Objectives 03

04 Introduction 03

05 Foreign Trade 04

06 Foreign Trade of Pakistan 05

07 External Debt 06

08 External Debt of Pakistan 06

09 Impact of External Debt in Economy of Pakistan 08

10 SWOT Analysis 09

11 Current Trends 11

12 Recommendations 13

13 Conclusion 16

14 References 16

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Foreign Trade: Impact of External Debt in Economy of Pakistan

Summary:

External debt or foreign aid is considered a significant source of income for developing
countries. Pakistan has relied much on foreign debt to finance its balance of payments (BOP)
deficit and saving investment gap. This heavily dependence on external resources became
uncontrollable in late 1980s. Primary objective of this report is to explore the relationship
between external debt and economic growth in Pakistan using time series econometric
technique and the impacts of foreign trade as well. We took a point of glance of external debt
and economic performance of Pakistan from 1947 to till now. The report shows that external
debt is negatively and significantly related with economic growth Pakistan. [ CITATION Far14 \l
1033 ] The evidence suggests that increase in external debt will lead to decline in economic
growth of the country. Debt servicing has also significant and negative impact on GDP
growth rate. As the debt servicing tends to increase, there will be fewer opportunities for
economic growth. Since 1980s, the mounting debts and debt payment service of Pakistan due
focus and consideration from the Policy makers and economists. This report also elaborate
foreign trade of Pakistan with some latest statistical data and also find the relationship
between foreign trade and external debt in Pakistan. To hunt the target of report, five
variables i.e. Growth, external debt servicing, saving, net export, Foreign Direct Investment
were taken to focus their fact association with the GDP or development of the Pakistan's
economy.[ CITATION Ama16 \l 1033 ] Annual panel data was taken from the source World Bank
indicator from the period of 1980 to 2019 and was manipulated through least square multiple
regression models. The main variable external debt has significantly negative impact on
dependent variable GDP so it’s concluded that Pakistan should go for the option of debt
forgiveness and must invite FDI but not much as their overloading may hurt the economy.
Adjusting saving (ADS) highly significant positive relation with GDP reveals that habit of
saving extremely boost up economy growth. Exports is basically good to helping hand for
economy so they must be lifted up. The impact of external debt is quite hostile on growth so
steps must be taken to abolish it in order to growth of economy.[ CITATION Awa20 \l 1033 ]

Key Words:

Foreign Trade; GDP; External debt; Adjusting Saving (ADS); Export; Pakistan; Trends and
Impacts.

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Objectives:

The main objectives of report are given below:

 To study the causes of high volume of Pakistan’s external debt.

 To determine the volume of Pakistan’s external debt.
 To elaborate the latest trends of foreign trade
 To explore the impact of external debt on the economic growth of Pakistan.
 To suggest how to control growing foreign debt.

Introduction:

External debt plays both an optimistic and destructive part in forming Economic growth,
especially of the developing nations. External debt is useful when the legislature uses it for
investment-oriented tasks, for example Power sector, base and the horticultural segment.
Then again, it would influence contrarily when it is utilized for private and open utilization
purposes, which don't bring any return. Also, a low level of external debt sways financial
development absolutely; however this relationship gets to be negative at a larger amount. The
particular defining moments are 35-40% of the obligation terrible residential item (GDP)
proportion, and 160-170% of the export debt ratio Pakistan's external debt is seen to be the
reason for all ills besetting the economy. In 1980 the external debt was $869 billion now
external debt expanded from $1901.90 million in 1990 to $2944.80 million in 1999 and
further to $37.362 billion by 2007. Furthermore as indicated by the State Bank of Pakistan
(SBP) the nation's aggregate external debt and liabilities have contracted, by nearly 6 percent,
amid the last logbook year. Pakistan's aggregate external debt and liabilities declined to
$59.383 billion as on December 31, 2013 contrasted with $63.377 billion as on December 31,
2012.[ CITATION Sta19 \l 1033 ] Also, in the greater part of the monetary years since freedom,
the Government's Revenue has not exactly its consumption, which would result in financial
deficiency which could be spanned through acquiring from both interior and external debt
(obligation). At the same time the circumstances gets to be more awful when the nation is not
able to reimburse its debt overhauling. On the other hand, Musharraf's government made
numerous moves to defeat this gigantic external debt including "the debt limitation law"
which is intended to manage diminished of this trouble of external debt, beginning in 2000.
Moreover, after 9/11, the world's key arrangements changed, and Pakistan turned into a
bleeding edge state in the worldwide war on fear. Pakistan was thus capable either to discount

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or reschedule the outer obligation liabilities. The measure of settlements and outside awards
additionally expanded complex amid this period. Pakistan was in this way ready to reimburse
obligation administrations and enthusiasm of the IMF and the World Bank. Also, if the
government has the capacity follow up on the obligation constraint law, which has been
passed by parliament, it would have the capacity to dispose of obligation owed to both the
IMF and the World Bank. On the other hand, there remains the need of empowering divisions
like industry and agribusiness to overcome the fiscal gap. Shahid Hasan Khan, Special
Assistant on Economic Affairs to the PM of Pakistan in the Benazir Bhuto government in
1993, said that "the monetary shortfall is the essential driver of every last one of ills of the
economy. Therefore, any exertion went for restoring the economy would have the disposal of
monetary deficiency as the most obvious thing on the agenda." (Baksh, 1994). Every single
IMF and World Bank report on Pakistan additionally says that the outside obligation trouble
has been the essential driver of every last one of ills of economy, particularly since the begin
of the structural change programs in 1988 [ CITATION FAR19 \l 1033 ] . As per the World Bank
downright external debt may be characterized as obligation owed to non-resident repayable as
far as foreign currency, services and goods. External debt is the piece of long haul obligation
(open and freely ensured obligation in addition to private non ensured obligation), fleeting
business obligation and International Monetary Fund (IMF) advances. Preceding early 1970s
the outer obligation of creating nations was essentially little and authority sensation, the
larger part of banks being outside governments and worldwide money related organizations
offer advance for development project [ CITATION Eff15 \l 1033 ]

What is Foreign Trade?

Foreign trade is exchange of capital, goods, and services across international borders or
territories. In most countries, it represents a significant share of gross domestic product
(GDP). While international trade has been present throughout much of history, its economic,
social, and political importance has been on the rise in recent centuries. All countries need
goods and services to satisfy wants of their people. Production of goods and services requires
resources. Every country has only limited resources. No country can produce all the goods
and services that it requires. It has to buy from other countries what it cannot produce or can
produce less than its requirements. Similarly, it sells to other countries the goods which it has
in surplus quantities. India too, buys from and sells to other countries various types of goods
and services. Generally no country is self-sufficient. It has to depend upon other countries for
importing the goods which are either non-available with it or are available in insufficient

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quantities. Similarly, it can export goods, which are in excess quantity with it and are in high
demand outside. International trade means trade between the two or more countries.
International trade involves different currencies of different countries and is regulated by
laws, rules and regulations of the concerned countries. Thus, International trade is more
complex. [ CITATION For21 \l 1033 ]

Importance of Foreign or International trade:

International trade is in principle not different from domestic trade as the motivation and the
behavior of parties involved in a trade do not change fundamentally regardless of whether
trade is across a border or not. The main difference is that international trade is typically
more costly than domestic trade. The reason is that a border typically imposes additional
costs such as tariffs, time costs due to border delays and costs associated with country
differences such as language, the legal system or culture. International trade consists of
‘export trade’ and ‘import trade’. Export involves sale of goods and services to other
countries. Import consists of purchases from other countries.

International or Foreign trade is recognized as the most significant determinants of economic

development of a country, all over the world. The foreign trade of a country consists of
inward (import) and outward (export) movement of goods and services, which results into.
Outflow and inflow of foreign exchange. Thus it is also called EXIM Trade. For providing,
regulating and creating necessary environment for its orderly growth, several Acts have been
put in place. The foreign trade of India is governed by the Foreign Trade (Development &
Regulation) Act, 1992 and the rules and orders issued there under. Payments for import and
export transactions are governed by Foreign Exchange Management Act, 1999. Customs Act,
1962 governs the physical movement of goods and services through various modes of
transportation.[ CITATION For21 \l 1033 ]

Foreign Trade of Pakistan:

Pakistan has bilateral and multilateral trade agreements with many nations and international
organizations. It is a member of the World Trade Organization, part of the South Asian Free
Trade Area agreement and the China–Pakistan Free Trade Agreement. Fluctuating world
demand for its exports, domestic political uncertainty, and the impact of occasional droughts
on its agricultural production have all contributed to variability in Pakistan's trade deficit. The
trade deficit for the fiscal year 2013/14 is $7.743 billion, exports are $10.367 billion in July–

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November 2013 and imports are $18.110 billion. Pakistan's exports continue to be dominated
by men power export in the subcontinent, cotton textiles and apparel. Imports include
petroleum and petroleum products, chemicals, fertilizer, capital goods, industrial raw
materials, and consumer products. On 12 December 2013, the European Union granted GSP
Plus status to Pakistan until 2017, which enabled it to export 20% of its good with 0 tariff and
70 percent at preferential rates to the EU market. This status was given after the European
Parliament passed the resolution by 406-186 votes.[ CITATION Lan20 \l 1033 ]

What is External Debt?

External debt (or foreign debt) is the total debt which the residents of a country owe to

foreign creditors; its complement is internal debt, which is owed to domestic lenders. The
debtors can be the government, corporations or citizens of that country. In simply words the
external debt as percentage of Gross Domestic Product (GDP) is the ratio between the debt a
country owes to non-resident creditors and its nominal GDP. External debt is the part of a
country’s total debt that was borrowed from foreign lenders, including commercial banks,
governments or international financial institutions. Debtors can be individuals, corporations
or the government. The external debt comprises the outstanding amount of those actual
current and not contingent, liabilities owed to non-residents by residents of country, which

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require the debtor to pay principal and/or interest at some point(s) in the future. External debt
is also referred to as foreign debt.[ CITATION Eff15 \l 1033 ]

External Debt of Pakistan:

External Debt in Pakistan increased to 115756 USD Million in the fourth quarter of 2020
from 113803 USD Million in the third quarter of 2020. Similarly, as of December
2020, external Debt of Pakistan is now around US$115.7 billion. Pakistan owes US$11.3
billion to Paris Club, US$33.1 billion to multilateral donors, US$7.4 billion to International
Monetary Fund, and US$12 billion to international bonds such as Eurobond, and skunk.
Pakistan External Debt reached 113.8 USD billion in Sep 2020, compared with 112.9 USD
billion in the previous quarter. Pakistan External Debt: USD million data is updated
quarterly, available from Jun 2006 to Sep 2020. The data reached an all-time high of 113.8
USD billion in Sep 2020 and a record low of 37.2 USD billion in Jun 2006.
In the latest reports of Pakistan, Current Account recorded a surplus of 266.0 USD milion in
Dec 2020. Foreign Direct Investment (FDI) increased by 317.4 USD million in Oct 2020.
Pakistan Direct Investment Abroad expanded by 4.0 USD million in Dec 2020. Its Foreign
Portfolio Investment fell by 292.0 USD million in Dec 2020. The country's Nominal GDP
was reported at 264.1 USD billion in Jun 2020.[ CITATION Rif12 \l 1033 ]

Total external debt is debt owed to nonresidents repayable in currency, goods, or services.
Total external debt is the sum of public, publicly guaranteed, and private nonguaranteed long-
term debt, use of IMF credit, and short-term debt. Short-term debt includes all debt having an

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original maturity of one year or less and interest in arrears on long-term debt. Data are in
current U.S. dollars. [ CITATION Awa20 \l 1033 ]

 Pakistan external debt for 2019 was $100,818,526,514, a 7.79% increase from 2021.

 Pakistan external debt for 2018 was $93,531,752,991, a 8.72% increase from 2020.

 Pakistan external debt for 2017 was $86,031,955,223, a 17.79% increase from 2019.

 Pakistan external debt for 2016 was $73,041,126,773, a 9.52% increase from 2018.

Impact of External Debt in economy of Pakistan:

The external debt exerts significant negative impact on economic growth. This confirmed the
existence of debt overhang in Pakistan in both long and short run. Labor force affect GNP
negatively in long run and short run as well, but in short run impact is insignificant. Pakistan
faces serious debt problem, which threaten the economic future of the country. External debt
to GDP ratio declined by a 0.8 percentage point to stand at 59.3 percent during FY2011,
below the ceiling of 60 percent envisaged in the FRDL Act 2005. Fiscal control and a limit
on borrowing from SBP facilitated this reduction. However, public debt to GDP may be
understated as this ratio does not include any estimates of contingent liabilities, which might
materialize in future. Unfortunately, government has not installed any system to quantify and
manage the fiscal impact of these contingent liabilities, rather these liabilities are created
essentially on an ad hoc basis and without regard to fiscal consequences. Pakistan’s external
debt and debt servicing in terms of foreign exchange earnings stood at 1.3 times and 11.4
percent during 2011-12 compared to 1.5 times and 16.5 percent respectively in 20010-11,
within the acceptable threshold of 2 times and debt servicing below 20 percent of foreign
exchange earnings. However, repayment of IMF debt starting from 2HFY2013 will put
pressure on external debt servicing in coming years, therefore it is imperative for the
government to take measures for attracting both debt and non-debt foreign currency flows. In
the current global economic scenario it will be uphill task for the government to manage
external account solvency. Burden of external debt and debt servicing have continued to grow
over time.[ CITATION Ama16 \l 1033 ]

There are different indicators of debt service burden such as;

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 Debt servicing as percentage of export receipts measures the ability of debt repayment
and creditworthiness of a country. According to the World Bank, when debt servicing
of a country go beyond 20 percent of its export earnings then its debt becomes
unsustainable.
 Debt servicing as a percentage of foreign exchange earnings is another important
indicator of ineptness of a country.
 The most important indicator determining long-run results is the ratio of debt service
to GDP which determines the burden of debt service burden on the country’s income.
As this ratio goes up, increases the burden. As a research by Chris Nagassam (2020)
employed a logit model and indicated that higher the debt service ratio will be, the
lower the GDP will be and it will develop constraint for external debt servicing
capacity of African Nations.

The fiscal and real sectors of the economy are strongly linked to internal and external debt
through certain economic variables. On one hand, it appears that the budget deficit is the
major cause of domestic debt. While, on the other hand, it turns out that the deficiency in
savings and its effects on the balance of payments is the basis of foreign debt.
Notwithstanding the rationale behind the occurrence of debt, the level and rate of growth of
public debt should not unduly limit the country’s monetary, fiscal and exchange rate
flexibility.[ CITATION FAR19 \l 1033 ]

SWOT analysis of external debt in economy of Pakistan:

Pakistan’s debt dynamics has undergone substantial changes since FY2007. Higher fiscal
deficit led to accumulation of huge debt both in absolute and relative terms. Due to non-
availability of sufficient funds from the external sources, the financing focus shifted towards
domestic sources that led to shortening of maturity profile of public debt. A confluence of
unfavorable factors including lower GDP growth, devastating floods, severe energy
shortages, hemorrhaging PSEs (public sector enterprises), high inflation, weak security
situation and global economic recession resulted in higher fiscal deficits in the recent past.
The level of debt depends on the debt servicing capacity of the economy i.e. export earnings
and revenue generation. The debt burden can be expressed in terms of stock ratio i.e. Debt to
GDP, external Debt to GDP or flow ratios i.e. Debt to revenue, external Debt to Foreign
exchange Earnings. It is common practice to measure public debt burden as a percentage of
GDP; however, it makes more sense to measure debt burden in terms of flow ratios because

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earning potential reflects more accurately on repayment capacity as GDP changes do not
fully translate in to revenues particularly in case of Pakistan where taxation systems are
inelastic and taxation machinery is weak.

 Strength:

The External debt does not only provide foreign capital for development, but also provide
technology, technical expertise as well as access to international markets. The impact of
annual changes in net economic assistance receipts on changes in two indicators of economic
development; domestic savings and economic growth of Pakistan. The analysis incorporates
regression of OLS using the sample years 1990 to 2020. The estimated regression equations
for domestic savings provided negative coefficients of correlation between foreign aid and
domestic efforts for resource mobilization. Aid in grant also exhibits a positive effect on
economic growth after one year of actual disbursement.

 Weaknesses:

External debt plays both an optimistic and destructive part in forming Economic growth of
Pakistan. In order to protect its future credit-worthiness, Pakistan like many other countries of
the world has initiated certain restraining measures to limit inflationary pressures and to
protect the competitiveness of its exports. However, since there is a substantial time-lag for
these measures to work their way through the economy, its growth gets affected negatively
from delays in their effectiveness. Then again, it would influence contrarily when it is utilized
for private and open utilization purposes, which don't bring any return. Also, a low level of
external debt sways financial development absolutely; however this relationship gets to be
negative at a larger amount. The particular defining moments are 35-40% of the obligation
terrible residential item (GDP) proportion, and 160-170% of the export debt ratio.

 Opportunities:

The external debt may cause in the increasing of financial circulation activities in economy of
Pakistan. However, biggest opportunities of Pakistan through external debts is to increase its
Human Develop Index. The other opportunity of Pakistan is to control on inflation. The
critiques may argued on increasing external debts but it also biggest opportunity for the

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developmental aspects of Pakistan e.g. health, education sector can be developed if some
portion of external debt has been spend developmental factors in Pakistan.

 Threads:

The biggest thread of external debts in economy of Pakistan is rapidly increasing the ratio of
interest day by day that may cause on the partially control of creditors on the formulation of
financial policies. Similarly, International Monitory Funds (IMF) demands to increase the
inflation and it badly effected on the economy of Pakistan. Also, if the government has the
capacity follow up on the obligation constraint law, which has been passed by parliament, it
would have the capacity to dispose of obligation owed to both the IMF and the World Bank.
On the other hand, there remains the need of empowering divisions like industry and
agribusiness to overcome the fiscal gap.

Current trend of external debts and foreign trade of Pakistan:

Divergent trends between growth in foreign exchange earnings and government revenues on
one hand, and foreign exchange payments and expenditure on the other hand, point towards
underlying structural issues which need to be addressed. Export receipts and other foreign
currency non-debt creating flows need to be increased above and beyond the growth of
foreign exchange payments and growth of external debt and liabilities. By doing so, the
government will be able to restrict the non-interest current account deficit, and ensure the
sustainability of present levels of external debt. Failure to arrest the widening gap between
foreign exchange inflows and outflows will severely hamper the government’s room to man
oeuvre in case of future external shocks and may possibly lead to a balance of payment crisis
and explosive debt path. Additionally, given access to cheap external finance, in the form of
concessionary loans and grants from international financial institutions, governments
preferably avoid seemingly expensive domestic borrowing. To limit the growth of public debt
burden and to avoid future debt traps, it is essential that significant real growth in revenues is
achieved while undertaking a simultaneous rationalization of expenditure. Pakistan is a
member of the World Trade Organization (WTO). Though not a member of any regional free
trade arrangement, the country is party to 2 arrangements which are progressing toward
regional trade liberalization. The Economic Cooperation Organization (ECO), whose
founding members are Pakistan, Turkey, and Iran, grants a 10 percent tariff preference on
several goods. ECO membership was expanded to 10 in 2019, when Afghanistan, Azerbaijan,

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and the 5 former Soviet Muslim republics of central Asia were admitted. The second
arrangement, the South Asian Association for Regional Cooperation (SAARC), is comprised
of India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives. Because of
competition in key export sectors such as textiles among the larger member states, this
association is not expected to stimulate regional trade flows. Pakistan's leading regional
trading partners are Bangladesh (its former eastern part), India, and Sri Lanka. Pakistan is
also a member (along with India and Nepal) of the Asian Clearing Union, which was founded
in 2020 and aims to facilitate multilateral payments through the use of currencies of
participating countries in regional transactions in order to expand intra-regional trade and
save convertible foreign exchange.[ CITATION Eff15 \l 1033 ]

External Debt in Pakistan increased to 115756 USD Million in the fourth quarter of 2020

from 113803 USD Million in the third quarter of 2020. External Debt in Pakistan averaged
62085.89 USD Million from 2002 until 2020, reaching an all-time high of 115756 USD
Million in the fourth quarter of 2020 and a record low of 33172 USD Million in the third
quarter of 2004. The given table is the current statistical data of economic factors of Pakistan
of June, 2020.[ CITATION Sta19 \l 1033 ]

Pakistan Trade Last Previous Highest Lowest Unit

Balance of Trade -511290.00 -406493.00 6457.00 -511290.00 PKR Million [+]

Current Account 266.00 865.00 1418.00 -6308.00 USD Million [+]

Current Account to GDP -1.10 -4.80 4.90 -8.50 percent [+]

Imports 880439.00 728004.00 880439.00 96.00 PKR Million [+]

Exports 369149.00 326656.00 378792.00 51.00 PKR Million [+]

External Debt 115756.00 113803.00 115756.00 33172.00 USD Million [+]

Terms of Trade 65.10 64.30 94.80 49.20 points [+]

Remittances 7060.00 7147.00 7147.00 906.00 USD Million [+]

Gold Reserves 64.64 64.64 65.43 64.39 Tones [+]

Crude Oil Production 85.00 85.00 97.00 50.00 BBL/D/1K [+]

Capital Flows -848.00 818.00 1620.00 -5364.00 USD Million [+]

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Pakistan Trade Last Previous Highest Lowest Unit

Foreign Direct Investment 155.10 192.70 1262.90 -390.90 USD Million [+]

Terrorism Index 7.54 7.89 9.07 6.12

Pakistan's trade and external debt structure has been structurally in deficit, with exports
remaining sluggish on the back of low global demand for Pakistani crops. Trade deficit,
including services, widened to USD 32.6 billion in 2018 (WTO) as imports grew much faster
than exports. The imports of goods reached USD 60.5 billion in 2018, while the exports were
only USD 23.5 billion. Concerning the trade of services, imports were USD 9.6 billion,
whereas exports amounted to USD 4 billion. Nonetheless, trade deficit narrowed to USD 11.6
billion in the first half of 2019-20 fiscal year from USD 16.8 billion in the same time a year
earlier (Pakistan’s fiscal year runs from 1 July until 30 June) (Pakistan Bureau of Statistics -
PBS). However, this was mainly due to lower imports as exports edged up by a mere USD
354 million to USD 11.5 billion during the period despite the depreciation of the Pakistani
rupee. At the same time, imports contracted by USD 4.8 billion to USD 23.2 billion. Exports
reached 43% of the annual target of USD 26.8 billion while imports were at 45% of the target
of USD 51.7 billion.[ CITATION She19 \l 1033 ]

Recommendations:

We would argue that, external debt adjusting balances the ventures by making a swarming
out impact and debt overhang issue. FDI helps a considerable measure in accumulating the
foreign trade and investment and livelihood and innovative and business structure in the
nation however this impact gets dismissed because of an excess of foreign direct investment
and their exertions of sparing from charges and offering benefits to the host nation.
Administration the external debt, amidst this dim back road, export comes as a beam of light
and aides in boosting the growth. FDI and export are supporting great the development of the
under developing country like Pakistan yet the real piece of these profits is, no doubt
counterbalance by raised FDIs and external debt overhauling. Funds and inward investment
rates have nothing to do with the development in the vicinity of external debt overhauling for
Pakistan and hence, they are not becoming admirably. As per our own findings and
understanding there are some recommendations as follow.

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 Government of Pakistan should not rely just on external debt and should make
productive policies to improve gross domestic product. Capital formation, Exports are
main drivers to improve GDP.
 Government should encourage private investment. For this purpose, some subsidies
may be given to certain potential sectors.
 Govt. should prefer to avail external financing having low interest rate and long
period of repayment in order to reduce burden on economy and to keep exchange rate
stable.
 Government should prevent wastage of resources, eliminate corruption and create
efficiency in productivity. Agriculture section must be encouraged to boost yield by
opting latest technology and seeds.
 Tax base must be expanded to mobilize more resources.
 Entrepreneurship must be encouraging in the country through financial incentives in
order to reduce pressure on government to create employment for unemployed
educated labor force.
 Overseas Pakistan must be provided incentives and security to invest in Pakistan
rather than keeping their money in foreign banks or investing in other countries.
 Pakistan must benefit the alternative of debt absolution as it may diminish the debt
levels due on them to pay and may give an opportunity to thrive.
 They must assemble and channelize their private investment and assets in a manner
that their generation builds so they can export immense number of items and gain
incomes to pay off debt.
 They must pull in FDI but not over swarm it furthermore cease from giving a
considerable measure of subsidies. Most likely, FDI will bring a great deal of business
advancements and opportunities which will help low wage nations to become
however a ton of subsidies will consume up their due measure of incomes.
 Energize people for saving trend by issuing government bonds that will be positive
impact on economic growth.
 To try to reduce the expenditures on debt servicing. It can be achieved with the better
professional and skilled negotiation with the donor agencies and countries.
 To efficiently allocate and to develop constraints to utilize the amount of external debt
on more productive and development expenditures. So that it might be a source of

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increase in net investment in the country and, hence, to increase the exports of the
economy and, further, to reduce the trade deficit and overall government deficit.
 To reduce the population growth rate, since it has been found to have significant
positive correlation with unemployment rate in the economy. This reduction in growth
rate of population will not only cause to improve per capita income of Pakistan, but
also be helpful to improve the living standard of the people.
 To control the hyperinflation, and to make price stability sustainable with GDP
growth rate of the economy.
 The external debt must be allocated to increase the technical skill and professional
capabilities of the people. So that they might be able to increase the manufacturing
sector growth rate of the economy


The modern theory for public debt sustainability discerns a fundamental relationship between
economic stability and debt sustainability in a country. The inadequate debt management and
a permanent and unlimited growth of debt to GDP ratio may result in some negative
tendencies and changes in main macroeconomic indicators, like crowding out of investment,
financial system instability, inflationary pressures, exchange rate fluctuations etc. There are
also social and political implications of unsustainable debt burden. Persistent and high public
debt calls for a large piece of budgetary resources for debt servicing. Ergo, the conventional
wisdom focuses the management of debt, rather debt itself.

Debt is not a stigma in itself, yet the management of debt is important. Debt is an important
measure of bridging the financing gaps. Prudent utilization of debt leads to higher economic
growth and it also helps the government to accomplish its social and developmental goals. As
a rule of thumb, as long as the real growth of revenue is higher than the real growth of debt,
the Debt to Revenue ratio will not increase. Crucially, future levels of debt hinge around the
primary balance of the government. In this regard we would like to say that there were only
inappropriate debt management government’s policies which made the debt to work
ineffectively. Because policies also plays an important role in the effectiveness of foreign
debt, as aid has more positive impact on the growth with good policies. On the other hand
debt will not work effectively if the policies are poor. Not only good policies but the
implementation of these policies as well as the proper monitoring of debt utilization are very
important to avoid the poor utilization and mismanagement of foreign inflows.

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Conclusion:

Soundness of Pakistan’s debt position, as given by various sustainability ratios, while

deteriorating slightly in the previous fiscal year, remains higher than the internationally
accepted thresholds. Total Public debt levels around 3.5 times and debt servicing below 30
percent of government revenue are generally believed to be within the bounds of
sustainability. Total public debt in terms of revenues has increased to 4.7 times during 2010-
11, as opposed to 4.3 times in the previous fiscal year whereas the debt serving to revenue
has declined to 37.7 percent in 2010-11 from 40.4 percent in 2009-10. Regardless, the
widening gap between the real growth of revenues and real growth of Total Public Debt
needs to be aggressively addressed to reduce the debt burden and improve the debt carrying
capacity of the country to finance the growth and development needs. Excessive debt affects
a country’s economic development in a number of ways. Firstly, the large debt service
requirements dry up foreign exchange and capital, because they are transferred to lenders to
payback principal and interest. A country benefits only partially from an increase in output or
exports because a growing fraction of the increase gets used to service the accrued debt.
Secondly, when the debtor countries are unable to fulfil their debt service obligations
promptly, the debtor countries are considered high risk countries and they find it difficult to
borrow. As a result, debtor countries have to pay high interest rates to obtain new credit.
Thirdly, the accumulation of debt causes a reduction in an economy’s efficiency, since it is
difficult to adjust efficaciously to some shocks and international financial fluctuations.
Finally, to save more foreign exchange so as to meet debt obligations many debtor countries
cut down on imports and restrict trade which leads to poor trade performance.

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Economy of Pakistan MBA (NBE)

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Economy of Pakistan MBA (NBE)