Chronicle of Crises_Shabbir Ali

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THE CHRONICLE OF CRISES

An Alternative Debt Management Strategy for PakistanBy: Dr. Shahida Wizarat

Mohammad Shabbir Ali

ID # 2005-2-14-4762


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Presentation Outline

Historical Background

Introduction

Balance of Payment

Chronicle of Crises

Recommendations


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Historical Background

Economic policies adopted by politicalregimes in Pakistan

Market based monetary and liberalizationpolicies

Increase in the external debt


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Introduction

The neo-liberal model is concerned with the balancing of short termflows of income and expenditure in the various markets

It completely ignores questions related with economic development

It has given rise to a profound development crisis of a structural andlong term nature (Griffith-Jones and Sunkel, 1989)in the developingcountries (LDCs)

Generating substantial domestic savings and their conversion in to atrade surplus which is transferred abroad for debt servicing

Problems for LDCs First, mobilizations of domestic savings to generate a trade surplus

Second, the transfer problem associated with conversion of internalsaving into hard currency


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Balance of Payments


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In spite of a strong emphasis of policies onexport expansion, exports as a percentage of theGDP have remained almost stagnant around 13%

during the period 1990-91 to 1997-98. Whileimports increased from 16.7 % to 18.9% during1990-91 to 1996-97, declining there after. Thetrade deficit also increased continuously duringthis period, except for a fall in 1993-94 and 97-98.


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Chronicle of Crises

The debt crisis is the mother of all crises

It is imperative to turn attention to the debt crisis, which wasaggravated with the adoption of a market based monetary policy bythe Government of Pakistan (GOP) in 1990-1991

World Bank (WB)-IMF conditionality that the GOP borrows at themarket rate of interest rather than at a concessional rate from thecommercial banks and the domestic financial institutions

Increased the size of the domestic debt at a time when foreign creditwas made available at concessional rates

A large part of this debt benefited the ruling elite and wastransferred abroad to buy property and assets in western countries


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Total debt as a percentage of the GDP has risen rapidly over theyears

An increase in the percentage of foreign debt in total debt

The vast surplus that has to be created in the present recessionaryenvironment to service debt has given rise to the debt crisis

Of the total tax revenues 83% were used for debt servicing whichcomes to about 66% of total revenues generated in the country in1998-99

In terms of total expenditure incurred in Pakistan, about 55% was ondebt servicing, which came to about 64% of current expenditure in

1998-99 Meager amounts allocated for development during the period under

review

The development crisis is reflected in the form of scarcity of water,power, road network, telecommunication, education and healthfacilities


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The defense expenditure which was considered sacred has been onthe decline in real terms

Increase in defense expenditure by our arch rival India during theperiod

A security crisis for the country in not very distant future


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Government Expenditure on Defense and

Development

1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Defense 104.5 119.7 127.4 131.3 128.0 142.0

Development 22.6 26.4 17.4 15.9 15.9 28.0

Source: State Bank of Pakistan, Annual Reports, 1997-98 and 1998-99.

(Billion Rupees)


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The non-availability of resources for investment is giving rise toserious recessionary tendencies and may be termed as a growthcrisis

Apart from occasional upturns, the rate of GDP growth has been on

the decline

Declines in 1992-93, 96-97 and 9899 are quite disturbing

The policies have given rise to the most serious growth crisisPakistan has ever faced.

This is reflected by a stagnating economy, de-industrialization,unemployment, declining real wages, increase in poverty, etc.


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The debt crisis gives rise to both the development crisis and the

growth crisis, which then gives rise to the distributional crisis

The distributional crisis gives rise to a social crisis, which along withthe debt crisis directly affects the political crisis

An increase in crime rates, robberies, suicides, kidnappings and

murders Governments are perceived as following policies which are not in the

best national interest.

Political polarization and instability in the country

Downfalls of governments as default on debt appeared imminent

In-spite of the serious crises afflicting the socio economic andpolitical structure of Pakistan, no attempt has been made atmanaging these

The crises will worsen over the years and may even take us to a point

of no return


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Recommendations

Concentrate on the root cause of these crises and then workthrough to the rest of them

Adopt various debt management strategies

Study the pros and cons of each strategy before implementing

Government should formulate polices in the best nationalinterests

Make long term strategic investments for development such asdams, power plants, industries and preservation of natural

resources etc.


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Thank you!


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