Question

What is the debt burden? Think of imaginative scheme to relieve the debt - servicing problem/burden to developing countries. Explain your answer with reference to the economy of Pakistan.

Answer 1

Answer:

debt burden

A debt burden is a large amount of money that one country or organization owes to another and which they find very difficult to repay. The massive debt burden of the Third World.

The debt position of the Third World is far more precarious than the picture reflected in the problems of those few developing countries that have attracted widespread attention as the largest debtors. In recent years the debt burden ratios for practically all developing countries have deteriorated dramatically and the number of rescheduling operations has rocketed a hard core of loans taken up after the first oil price increase and which at that time helped to overcome the crisis of adjustment relatively easily and quickly.

There are four major sources of capital availability to a country:

• capital may be raised through surplus budgeting;
• the profits earned from the public enterprises may be utilized for financing the projects; the government may borrow for supplementing domestic saving and investment
• the government may receive economic assistance or loans from other

In most of the developing countries, the first three sources of raising capital are not adequate to accelerate the rate of development to the desired extent. The less developed countries, therefore, have to depend upon the last source i.e., the foreign economic assistance for breaking out from the vicious circle of low purchasing power and saving capacity.

External debt burden could badly affect a developing country's economic and political sovereignty. If the foreign debt is not repaid, the country may either defaults or has to borrow more to repay the debt.

The debt situation which had become serious over the years, further aggravated after the country's nuclear test in 1998 and subsequent military coup in 1999. Before September, 11, 2001 the economy of Pakistan was in serious web debt as committed outflow of foreign exchange exceeded inflow by $4.56 billion. Pakistan could only get rescheduled $3.96 billion out of $4.56 billion on short term basis under strict conditions.

The main purpose of this article is to review the past progress and circumstances under which Pakistan was caught in the web of heavy debt. And this not only pushes the country back into the row of developing countries but also affect the country's sovereignty.

The average annual growth of foreign exchange earnings remained 5.7 per cent while debt servicing growth rate stood at 11 per cent annually. Subsequently it continued to decline because of the Paris Club rescheduling, surplus in current account coupled with a continued build-up in foreign exchange reserves and increase in foreign exchange earnings.

There are number of factors responsible for the build-up of the debt problem. The central problems are large and persistent fiscal and current account deficits as well as imprudent use of borrowed funds.

The latter includes "wasteful government spending, resort to borrowing for non-development expenditures and poor implementation of foreign aided projects." It also mentions weakening debt carrying capacity - in terms of "stagnation and or decline in government revenues and exports - and rising real cost of government borrowing."

Pakistan is no longer on the threshold of an external debt crisis due to better economic policies. Pakistan witnessed a current account surplus over the last three years in row, increase in exports, large increase inflow of remittances, the receipt of considerable grant assistance and inflow of foreign direct investment.

However, a number of issues pertaining to the country's external debt burden still need to be addressed. Sustainable debt servicing requires more than the reduction of the net present value of debt.