Amortisation - Yusuf H Shirazi - Wednesday, February 02, 2011

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The settlement of foreign debt has become a problem of prime concern for many developing countries, in particular Pakistan. The terms of the debt are becoming even more onerous than under the Marshall Plan. The sums needed to repay loans and credits received from the developed countries are snowballing. The developing countries are compelled to spend an even greater part of their national income for repaying debts to foreign creditors.

In order to tighten their politico-economic grip over the developing countries, the developed countries make the terms of loans increasingly harsher. The interest rates are snowballing even in the case of the World Bank. The underdeveloped countries as a whole must now devote more than one-tenth of their foreign exchange earnings to debt servicing. The percentage is much higher in case of Pakistan. These payments are continuing to rise at a rapid rate and debt repayment offsets the current inflow of aid. This creates a vicious circle for many developing countries threatened with the prospect of losing all means of financing economic development. Yet, the USA, and, for that matter, all the donor countries, is disinclined to come to their rescue. Finding themselves in such a predicament, the developing countries are requesting creditors to defer payments on old debts and, if possible, to grant new ones on favourable terms.

Pakistan is expected to take every possible care to ensure that its external debt servicing charges do not exceed the danger point of export receipts.

In the early years after independence, the average annual balance of trade was favourable to Pakistan. In this period, Pakistan had a negative balance of trade only on two occasions. The first time was in 1949-50 when the first post-War economic recession looked like becoming worldwide and the second time in 1951-52, when there was a slump because of the Korean War and Pakistan continued the OGL (open general licence) imports of consumer goods for too long.

During the period of the First Five-Year Plan, the balance of trade became adverse. The only year during this period when Pakistan had a favourable balance of trade was 1955-56, when exports received a temporary fillip from the devaluation of the Pakistani rupee. Since then, the balance of trade, on the whole, has been worsening, and is now at an all time high.

In no year during this period did Pakistan have a favourable balance of trade. This deterioration took place despite a phenomenal rise of value of exports under the powerful impetus of the Export Bonus Scheme introduced in the mid-1950s. However, imports had risen even faster. The association between massive inflows of foreign aid and equally massive adverse balances of trade during this period is not coincidental. This aid took the form of not only developmental goods but also of huge quantities of surplus food-grains and other agricultural commodities from the United States and other developed countries. During the course of this, the self-reliance index of Pakistan’s foreign trade dropped rapidly to an all-time low.

During the first three years of the Third Plan, the average adverse balance of trade reduced somewhat. This was achieved in 1964-65, as much by expanding exports as by cutting down imports. Pakistan is now finding it far more difficult to slash imports than to expand exports. This is explained mainly by the fact that the massive inflows of foreign aid have greatly increased Pakistan’s dependence on imports from the donor countries, not only in respect of machinery and other capital goods but also of basic industrial materials. This situation may take quite sometime to be corrected, because the development of indigenous basic industries is quite a painstaking and time-consuming task.

For too long, no conscious attempt to improve Pakistan’s external balance has been discernible and the initiative seems to lie entirely in the hands of the donor countries. The value of Pakistan’s imports rose when foreign aid inflows grew somewhat. It is thus no wonder that the adverse trade balance was also higher year after year. In short, the value of imports was rising and the value of exports declining. Since then, the adverse balance has been rising, the highest being during these years. Unless the imports are balanced with exports and loan, credit and aid homogenised, the country’s lack of socio-economic sovereignty may lead to lack of politico-economic sovereignty. This is a thought which must concern economic thinkers and planners, and the sooner the better.

The writer is the founder/chairman of the Atlas group of companies. Email: yhs@

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