ISLAMABAD: American politician Alexander Hamilton says: "National debt, if not excessive, will be a national blessing."
External debt refers to the money borrowed by a country and
institution from other nations, foreign institutions and individuals. In
the early phase of economic development, the developing countries
acquired piles of foreign debt because of high deficits, shortfall in
savings and capital stock.
External debt is utilised as a tool to reduce the gap in domestic
savings, investments, exports and imports. It allows economic
policymakers to spend and invest more by providing surplus resources for
If such financial resources are put to use in a productive way, they
make a positive contribution to the economy and bring down the level of
poverty in countries where economic growth rates stand low.
On the other hand, if debt is distributed uneconomically, the cost of
borrowing goes higher and macro-economic management problems emerge. In
general, the applied standard for external public debt is that its net
present value should be less than 150% of the country’s exports or 250%
In developing countries, an increase in external debt is regarded as a
common phenomenon. A country with low savings needs to borrow more to
propel its economic growth as domestic resources are not enough that
could substantially support the economy. Pakistan is among these
developing nations and faces serious debt woes.
At the time of independence in 1947, domestic savings stood quite low
and the country faced a dearth of productive investment. This prompted
Pakistan’s government to search for external borrowing avenues in an
effort to boost economic growth with expectations that economic
expansion in the future will help increase savings, create a commodity
surplus for exports and ease the debt burden.
Until 1960, this strategy proved successful as it helped achieve a
high level of economic growth. Later, the country started encountering
serious debt problems because of a host of factors.
First, oil prices shot up in 1973-74, undermining the oil-importing
developing countries’ ability to repay foreign debt and forcing many of
them, including Pakistan, to heavily borrow more. These global events
put a severe strain on Pakistan’s balance of payments and debt
Second, internal factors like inappropriate implementation of
macro-economic policies, political instability, corruption and poor law
and order led to a rapid growth in the country’s external debt.
In 1970, the external debt was calculated at $3.4 billion, which went
up to $9.93 billion in 1980 and later doubled to $20.66 billion. After
the start of the current century, the debt level rose at an
extraordinary pace and reached $54.60 billion in 2010. According to the
World Bank Report for 2014, Pakistan’s external debt had surged to $65.5
To tackle the crippling debt, the country needs to focus on higher
domestic savings and export earnings, which will boost economic growth
and lessen the reliance on external debt. It is quite important that a
favourable environment is created for investment and policies are
primarily focused on the inflow of foreign direct investment.
With all this, strict monitoring and consistent debt management
strategies should be followed in order to prevent wrongful use of
Policymakers and experts should come up with appropriate marketing
strategies in a bid to push up overseas sales. A key factor that must be
kept in mind is that if inflation is higher than price levels in
trading partners, it will leave Pakistan’s goods uncompetitive in these
Exporters must also strive for greater access to foreign markets,
particularly those of the European Union and US for textile shipments.
Apart from these, the country, in a policy shift, should switch from
the import of consumer products to capital goods as the latter enhances
productivity and generates high returns on investment.
To woo foreign investors, the government must make a marked
improvement in law and order conditions and paint an encouraging
business environment. Also, external trade strategies should get support
from the policies aimed at mobilising domestic savings and foreign
Source : http://tribune.com.pk/story/771814/piling-up-foreign-debt-burden-mounting-at-rapid-pace/
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.