DEBT

MANAGEMENT
IN PAKISTAN
PRESENTED BY

HIRA WAHLA
SAEED ANSARI
ATIKA IMTIAZ
UMAIR SIDDIQUI
Introduction
 Borrowing becomes a necessity when the
country fails to finance itself from its own
savings
 For this reason Government can raise either
Domestic Debt or External Debt
 Forms of Domestic Debt include
 Permanent Debt
 Floating Debt
 Unfunded Debt
 The borrowed funds should be used such that
they not only help in the productivity, but also help
in repayment of the principal and interest
 The objectives of Debt Servicing are
 Interest payments in relation to Domestic Debt
 Interest payments in relation to External Debt
 Repayment of Principal in relation to External Debt
 Some part of external debt can be repaid by
foreign exchange
 Since Pakistan doesn’t not has an rupee-
equivalent of its external debt, it must rely on the
US Dollar.
 Indicators of the debt servicing capacity
include
 Government Revenues
 Exchange Earnings
 Exchange reserves
Historical Background
 Part 1 - 1947-72

 The position of savings/investment gaps

and its implications for the period 1947-72
are as follows:

 i) The level of investment :

 ii) The level of domestic savings
 The level of foreign resource inflow
Consolidated Revenue Deficit
 1947-48 : Both the Federal Government and
Government of West Pakistan had revenue deficits.

1949-50 : The Government of East Pakistan and the
Government of West Pakistan had revenue deficits.

 1952-53 : -do-
1952-54 : -do-
 1954-55 : The Government of East
Pakistan had a revenue deficit.
1965-66 : Federal Government had a
revenue deficit.
1970-71 : Both the Government of East
Pakistan and the Government of West
Pakistan had revenue deficits.
1971-72 : Both the Federal Government
and Government of West Pakistan had
revenue deficits.
Pakistan's Trade Balance
surplus
 the surplus years being :
 1947-48,
 1948-49,
 1950-51,
 1952-53,
 1953-54
 and 1954-55
 current account balance surplus
 the surplus years being:
 1950-51, 1954-55,
 1955-56, 1958-59 and 1959-60.

 Trade Deficit in 1970-71 equaled to

Rs.1816 million .
Accumulated domestic borrowings
constituted domestic debt of 3 types:

 i) Permanent debt
 ii) Floating debt
 iii) Unfounded debt
 External Debt and External Debt Servicing Liability :
 i) that the external debt never exceeded $1 billion till
1964-65.
ii) that from 1964-65 to 1967-68, in 3 years it doubled
to about $2 billion.
iii) - that during the next 5 years i.e. by mid 1972, it
was $3.766 billion.
 In a nut-shell, the position of Pakistan's total
public debt stock (internal and external) as of
31st March, 1972 was as follows:

Internal Debt: Rs.7.62 billion
External Debt: Rs.39.85 billion
Total: Rs.47.47 billion
Pakistan's Foreign Debt: The
External Environment
 Introduction :
substitution of foreign savings for domestic
effort
 Signing of a Mutual Defense Agreement with
USA in 1954
 External resource inflow has many faces
 Pakistan is under obligation to pay back to a
wide variety of banks and other agencies.
Terms and Conditions of Foreign
Debt
 The terms and conditions of foreign debt have
become more stringent over the years.

 The global debt problem…

 Debt servicing increased sharply in the eighties

Policies For Structural Adjustment Loan
 conditionalities attached to the structural
adjustment loan
 privatization policies including
 (i) liberalization of the trade regime,
 (ii) greater incentives to promote private
investment, and
 (iii) disinvestment of public sector
enterprises.
Impact And Consequences Of Public
Debt Particularly External Debt
 generated primary as well as secondary
impacts and consequences for Pakistan.
 Composition of the rising debt stock has
changed from long-term, low cost to short-
term/ high cost
 The rising debt servicing has squeezed out
development expenditure drastically in the
face of stagnant revenue.
 Since fiscal deficits are financed via
current account they influence the levels of
current account and foreign borrowings.
 Pakistan was caught in the debt trap and
became more vulnerable.
 External lenders' conditionalties
contributed to cost push inflation
 Constant devaluation and consequential
inflation
 The effectiveness of external loans on
economic growth during the last fifty years
OPTIONS & STRATEGIES FOR
DEBT MANAGEMENT
Need for a coordinated public debt policy.
 Multiple authorities involved in process
Ministry of Finance
 DPCO
 Budget Wing
 External Finance Wing
 Central Directorate of National Savings
State Bank of Pakistan
Economic Affairs Division
ESTIMATION OF PUBLIC DEBT
 It is not possible to manage/retire debt without
knowing exactly the precise figures of the public debt
itself.
 Two approaches are used in pakistan.
1.Finance Division
2.SBP
 Eliminate ES (fd) approach and use SBP
methodology alongside WB approach to remain in
touch with the lender way of appraising our external
debt liability .
EXTERNAL DEBT MANAGEMENT
DEBT RESCHEDULING
1. Debt rescheduling postpones payments of present liabilities to a
future date and provides only transitory relief.
2. Enhances the debt burden as the total quantum of external debt
actually rises.
3. The burden is passed on to the future generations.

4. Debt rescheduling leads to subjection of the economy to

deflationary policies of the lenders.
1990’S POVERTY & UMEMPLOYMENT
EXTERNAL DEBT MANAGEMENT
PRIVATIZATION/DEBT EQUITY SWAP:

 Selling of publically owned assets to retire external debt, (portrayed as

best strategy to get rid of external debt
 Sale of “family silver” generated Rs.11 billion($1 billion in US$).
Negligible amount spend out of it in retiring debt.
 Costs of privatizing family silver were high:
disposal of the best of family silver,
rise in unemployment,
rise in prices of commodities such as ‘cement’.
 Public debt is too high to be covered through privatization
 Lastly, the pace of privatization has been extremely slow during the past
years and is unlikely to pick up significantly in the near future.
EXTERNAL DEBT MANAGEMENT
DEBT/EDUCATION/HEALTH/ENVIRONMENT/POVERTY
SWAP :
 It advocates investment of accruing debt installments
into the social sectors of the debtor economy.
 It would build up the physical and human capital stock of
the poor countries and thereby, facilitate repayment of
their future liabilities.
 It will also ensure that no wasteful expenses are incurred
by the ruling elites of the poor countries as the utilization
of such funds would be restricted to the social and
economic uplift of the target groups.
DOMESTIC DEBT MANAGEMENT
 Deficit financing in 1980’s 1990’s

 High domestic borrowings to finance budgetary disequilibrium.

 Low tax revenues in relation to sharply increasing debt servicing

expenditures.
 DOMESTIC DEBT MANAGEMENT

 In terms of state sovereignty and repayment urgency,

domestic debt may not look as pressing as that of the
external debt.
 domestic debt is denominated in rupees and not in
foreign exchange
 it is owed to the local lenders and not to the foreign
states, international organizations or commercial banks.
 the repayment of domestic debt can be done by the
SBP by merely printing rupee currency notes, if the
option of raising funds from other domestic sources is
not available. (Inflation )
BENEFITS OF DOMESTIC DEBT
 Repayment of domestic loans flows back into the domestic
economy and generates internal economic activity rather than the
transfer of wealth abroad caused by retirement of the external debt.
 repayment of domestic debt brings about a transfer of resources
from the lender to the borrower i.e. from the private sector to the
state as the real value of debt after adjusting for inflation decreases
over the years.
 Unlike the external debt, whose real value may or may not decline,
the decline in the real value of the domestic debt benefits the state.
Change and Structural Reforms

The permanent solution for the debt problem

lies, however, in an overall restructuring of
the economy, in a medium to long term
macroeconomic framework, with the main
objective of reducing the debt burden to
manageable levels.
THE THREE IMBALANCES

1. SAVINGS-INVESTMENT GAP

2. IMBALANCE BETWEEN PUBLIC

EXPENDITURES & REVENUES

3. BALANCE OF PAYMENTS IMBALANCE

The three Imbalances
1. SAVINGS-INVESTMENT GAP
 Savings-Investments at abysmal levels
 Savings 13%, Investment <20%
 China, Korea and other East Asian countries
have savings around 30%
 At best, rates of savings are 40-45%
The three Imbalances
2. The budgetary deficit
 Gap between govt revenues and expenditures is
financed by external and internal resources
 Deficit financing is 7% of GDP
3. The balance of payment
 High imports and inadequate level of exports
 External borrowing to pay the import bills
 High fiscal deficit
Challenges
 Low Tax‐to‐GDP places greater emphasis on debt
creation.
 Lack of long‐term investment avenue in domestic
markets.
 Cost of domestic non‐bank borrowing.
 Reliance on foreign currency debt.
 Number of bodies/departments involved in debt
process/policy
 Strengthening of DPCO
Conclusion and Recommendation

 Increase tax to GDP ratio

 Untaxed portion to be brought to taxes
 Rs. 796 billion tax evaded (07-08)
 Reduce unnecessary govt. expenses
 Aggressive export strategy to eliminate
current account deficit.