Many developing and developed countries borrow money for various reasons, but one that stands out is economic development. External debt is a vital source of public financing and can help developing countries achieve economic growth. However, improper debt management can create serious problems for a borrowing account.
On its surface, external debt doesn’t mean that a country’s economic growth is slow. However, the inability of a country to pay back the loan is worrisome. The debt position of Pakistan and other countries, including Sri Lanka and Venezuela, hints that developing countries, at times, find it difficult to make timely debt payments.
Current account deficit of Pakistan is widening at an unprecedented rate. In 2013, the country’s debt stood at $60.9 billion, which over the period of almost four years, have reached at $75.7 billion. Although, it is argued that external debts are good for economic development, but the rising external debt is alarming.
For the current financial year, the incumbent government argues that the main reason for the widening of current account is the import of heavy machinery from abroad. The machinery will be used in various CPEC (China-Pakistan Economic Corridor) related projects. Experts believe that CPEC is a game changer for Pakistan and the entire region.
However, before the country claims that all is well, it should take into account examples of other countries. Many countries who borrowed money under the assumption that they have relevant resources to pay back suffered, and are still suffering, the ever-increasing burden of foreign debt.
A Walk Down The Memory Lane
Back in 1968, the Western countries were willing to offer loans to Romania. In fact, Romania did accept some attractive loan packages from various countries. Soon, the country found itself under the debt of around $13 billion. The loan which was initially considered a gateway to economic development started hitting the country’s finances hard.
The then prime minister of Romania Ceausescu took serious and much-needed steps to repay the debt. Through a referendum, the prime minister was able to restrict Romania from taking further foreign loans.
During the 1980s, much of the country’s industrial and agricultural products were being exported in order to make enough money to repay the country’s debts. The nation, on the other hand was suffering. The food shortage, electricity and gas blackouts took a toll on the lives of the people. However, the sacrifice metamorphosed into victory and by 1989, the country had paid its loan back.
On the other hand, Sri Lanka still couldn’t figure out how to get out of the Hambantota debacle. The country took loan from China to invest in infrastructure development projects, but now the country is struggling to repay the loans.
Out of Sri Lanka’s $64.9 billion foreign debt, the country owes $8 billion to China. All the loans taken to develop its infrastructure have pushed the country into a pit of debt. The country is looking for an IMF bailout program while simultaneously offering the ownership of its airport to Chinese authorities. For this offer, China has only one thing to say that the country wants its money back. The debt crisis took place when the country couldn’t materialize its development projects.
Similar is the case of Venezuela, an oil rich country, which is now struggling to come out of the economic crisis. The inflation rate has catapulted to 400 percent and the volatile exchange rate has created more problems for the country.
The country took loan from China. As per the loan agreement, the country was supposed to pay the loan back in consideration. China opted for oil barrels against the loan. However, the sharp dip in oil reserves left the country with nothing but an overly burdened economy. At one point, the country had to import oil barrels to pay back the loan. This has further worsened Venezuela’s debt position.
Pakistan’s Debt Situation
The Pakistani government is trying hard to do something about its rising debt problem. Passing the debt limitation law, writing off loan, etc., are some of the measures adopted by the country to stop external debt from widening. The most important step that the country should take is to increase its exports. This can be done by strengthening industrial and agricultural sectors. If this is done, the country will be able to minimize its heavy reliance on foreign debt.
For Pakistan, however, dwindling exports have taken a toll. The export of fruit and vegetables has suffered a sharp decline, because the country has not taken adequate steps to meet the international standards. Many countries don’t import edible items from Pakistan out of the fear that these goods might contain pesticides.
Following the launch of CPEC, China’s exports to Pakistan has considerably increased, but Pakistan couldn’t reciprocate this action. Pakistan is financing one of the most expensive projects and it must take cautious steps to save itself from any major debt crisis.
The industrial sector of the country needs immediate attention of the higher authorities. Goods should be certified and checked at all levels to ensure that they meet the international standards.
In the same way, the country can make the most of its mass transit programs. The people should be encouraged to use the newly constructed motorways and highways. The revenue, in shape of toll taxes, generated from these projects can be saved for future loan repayments.
The tourism industry is also the untapped sector of the country. Pakistan’s rich culture and remnants of multiple civilizations preserved in the national museums can be used to boost tourism. This industry can become very profitable in a very short period of time.
The reliance on external financing sources can only be minimized through proper planning. Attention must be given on how the imported items, including machinery, etc., can be put into use to increase productivity.