Unsustainable debt burden and poverty in Pakistan: a case for enhancing HIPC initiative

The paper examines the unsustainable debt burden of Pakistan. It discusses the external debt burden of Pakistan and compares Pakistan’s debt burden with the other developing countries including heavily indebted poor countries. It then investigates the causes of debt crisis in Pakistan, focuses on revival of economic growth and debt reduction in Pakistan, and discusses the Enhanced HIPCs Initiative and Pakistan’s eligibility for debt relief under the Initiative.<B>Conclusions<B>the heavy reliance on foreign resources especially on short-term loans following the IMF structural adjustment programs in the 1990s has contributed to the external financial vulnerability resulting in debt rescheduling in 1998-99Mwhile export remained stagnant, the devaluation of domestic currency against US dollar has directly added to rupee value of foreign debt resulting in dramatic increase in debt service burdenthe experience of Pakistan suggests that if trade liberalisation is carried out in such a manner that a country is not ready or able to cope and faces conditions that are unfavourable, it can contribute to financial instability and debt and recessionbefore liberalising trade regime, it is important to examine the quality, timing, sequencing and scope of liberalisation (especially import liberalisation), and how the process will accompany by other factors such as the strengthening of local enterprises and farms, human resource and technological development as well as the build up of export capacity and marketsto design a debt reduction strategy, it is imperative to address the fundamental causes that triggered the debt build up sharply leading to lower economic growth and higher poverty level. There is a need to adopt an integrated approach that focuses on recovery of economic growth and reduction in stock of debt as well as the debt servicingfor effective debt management, fiscal consolidation including tax reform to strengthen the fiscal payments capacity is essential in achieving debt sustainability. Attention should be given to eliminate the dependent on a very narrow production and export basediversifying the export base is the best insurance against terms of trade shocks. Pakistan's external debt service problem is much severe compared with all countries including the heavily indebted poor countries reflecting the gravity of debt crisis in the countrycountries with viable poverty reduction strategies like Pakistan should be entitled to immediate debt relief. The eligibility criteria for debt relief should be shifted away from the traditional emphasis on balance of payments indicators and other financial criteria towards greater emphasis on the use of social performance indicatorsthe availability and efficient use of foreign resource is crucial in conjunction with terms and conditions under which the foreign financing is obtained to maintain a sustainable debt situation for growth prospects and poverty reduction in Pakistanthe challenge for Pakistan is to establish a favourable climate for private investors-both for domestic and foreign investors. However, even with strong private sector growth, a sizable part of development expenditure will remain to be financed externally by the governmentto secure the financing need for development and poverty reduction in Pakistan, the concerted efforts are required by creditors and donors as well as the governmentThe paper is not arguing against debt rescheduling but the alternatives should be explored to achieve external debt sustainability with faster and deeper debt reduction along with the revival of economic growth and poverty reduction in Pakistan[Adapted from the author]