Daily Times

An individual could face an economic crisis on a small scale when their income is less than their expenses. If this happens in the case of a government, everyone is concerned because the problem is much difficult to handle and contain. It is an undisputed fact that Pakistan is currently going through a debt crisis. Once, they were in such a strong economic position, that back in the 1960s, they gave Japan a loan of $4 million to develop its agricultural economy. But now their situation has deteriorated due to their reliance on international debt.

A debt crisis is a condition in which a country has heavy external debts and is unable to pay the principle of the debt. It is a situation where a state uses a large percentage of its foreign exchange in paying off their debts, and even goes to the extent of borrowing more loans, to meet the most urgent needs of their economy.

For a long time, the debt crisis in Pakistan has been a major challenge. It is because of this crisis that the country has failed to develop economically, leading a large population of citizens to poverty. Their loans have been growing due to various factors, like paying loans only in “hard currencies”, a drop in the value of exports, and the refinancing of the loans themselves. The case is different for developed nations, as they continue to acquire wealth in the form of repayments of loans and interests. The causes and consequences of the debt crisis originates partly in the international expansion of US Banking organisations, together with the rapid growth in world’s economies including the least developed countries. It is worth noting that the loans are also the main reason behind Pakistan’s growing debt crisis.

It is really interesting to know that CPEC is being developed with billions in Chinese loans and grants. Even though people are celebrating this initiative, they might instead like to think about how Pakistan will repay these loans when China is set to benefit more from CPEC

The debt crisis has negatively affected the economic development and national security in Pakistan, and led to political instability as well. According to the dependency theory, developed countries benefit at the expense of developing countries. A similar situation can be found in Pakistan. They provide the natural resources and cheap labour to wealthy nations, without which they cannot enjoy the living standards that they are accustomed to. Developed nations always maintain a state of dependence by using various means like media, politics, banking, education, culture, sports, and all spheres of human resource development. They also actively counter attempts by developing nations to control their influence, by means of economic sanctions and use of military forces. This phenomenon can be seen in Pakistan as well.

Usually the loans received by Pakistan have a relatively high rate of interest. It can make it hard for developing countries to repay them, but another factor that impedes a country’s ability to repay loans is corruption. And anytime a country tries to solve their debt crisis, they are forced to seek out more foreign assistance. This only adds to their debt crisis, and these economies soon find themselves trapped in a circle of debt, which can eventually result in their strategic financial institutions being taken over by the guarantors themselves.

Pakistan borrows loans from IMF, World Bank, Asian Development Bank and China etc. The root cause of this includes consistent decline in the prices of their raw materials in the international markets, widening trade deficits, problems resulting to external aid, exploitation of the resources by the creditors, and agricultural and textile export deficits. The result is poor provision of social amenities like good health facilities, and schools, intercommunity conflicts, ineffective governments, political instability, and many negative effects on the citizens. The debt crisis has taken Pakistan to the extent of just begging for international assistance in the form of more loans, grants and financial aids, and considering their rising population this will only have a negative effect on their potential for future economic growth.

It is really interesting to know that the China-Pakistan Economic Corridor (CPEC) is being developed with $46 billion of Chinese loans and grants. Even though people are celebrating this initiative, they might instead like to think about how Pakistan will repay these loans when China is set to benefit more from CPEC.

There other factors that need to be considered to reduce our debt crisis. It is important to reduce the debt stock, the total amount or volume of debt, through debt restructuring, cancellation or repudiation. There are different ways to get there. Convene a major conference of creditors and debtors that deals comprehensively with the debt burden, and take developmental criteria into account when deciding on the size of debt reduction and the revised terms of debt repayments. For instance, by limiting their volume as a share of GDP, or making them dependent on current account surpluses.

The second is to reduce the cost of debt service. Several experts argued that it is not the size of the debt stock that matters but the costs of it, which is primarily determined by the interest rate a debtor nation has to pay. Therefore, the aim is to get the interest rates down and/or to reschedule repayment to a point of time when the economic and financial situation of debtor has improved. The lenders could purchase government bonds of debt-distressed nations and convert them into zero-interest bonds with long or even infinite maturities. This all happens through effective foreign policy and international relations. Strong, independent and fair institutions in a country make a country’s economy strong.

The writer is a PhD scholar and author of various books on international relations, criminology and gender studies. He can be reached at fastian.mentor@gmail.com

Published in Daily Times, July 4^th 2018.