DEBT:

A duty or obligation to pay money, deliver goods, or render service under an express or implied agreement. One who owes, is a debtor or debit-or; one to whom it is owed, is deb-tee, creditor, or lender.
Use of debt in an organization's financial structure creates financial leverage that can multiply yield on investment provided returns generated by debt exceed its cost. Because the interest paid on debt can be written off as an expense, debt is normally the cheapest type of ling term financing.

FOREIGN DEBT: 

An outstanding loan that one country owes to an another country or institutions within that country. Foreign debt also includes due payments to international organizations such as the International Monetary Fund (IMF). Total foreign debt can be a combination of short term and long term liabilities.

FOREIGN AID:

The international transfer of capital, goods, or services from a country or international organization for the benefit of the recipient country or its population. Aid can be economic, military, or emergency humanitarian e.g., aid given following natural disasters. 
Foreign aid can involve a transfer of financial resources or commodities or technical advice and training. The resources can take form of grants or concessional credits e.g., export credits The most common type of foreign aid is official development assistance (ODA), which is assistance given to promote development and combat poverty. The primary source of ODA which for some counties represents only a small portions of their assistance is bilateral grants from one country to another, though some of the aid is in the form of loans, and sometimes the aid is channeled through international organizations and nongovernmental organizations (NGO's). For example, the International Monetary Fund (IMF), the world bank, and the United Nations Children's Fund (UNICEF) have provided significant amounts of aid to countries and NGO's involved in assistance activities.

FOREIGN AID IS COURSE:

Since the time of independence Pakistan has been facing macroeconomic exertions, such as vicious circle of poverty, less utilization of available natural resources, unfavorable political circumstances that influenced domestic economy and so on. To seize the deficiency, Pakistan has had to depend greatly on financial assistance made by distant countries. Pakistan has been seeking aid since 1947 from global lenders including International Monetary Fund (IMF), Asian Development Bank (ADB) and World Bank.
This financial aid poured mostly in the form of loans or debts with high interest rates. Focal of such assistance is the socioeconomic development of the country.
Financial assistance once taken as a blessing, appeared as to remove all the dearth of the economy. Reluctantly many of the sectors started nourishing at par. Pakistan commenced its way towards developing nation but 2005s earthquake ruined Pakistan leaving its awful economy further worsen.
Though foreign aid showered in the country but, in fact, it directly went to the bank accounts of few effluents and hence with the passage of time, it proved that foreign aid has become a curse instead of becoming blessing, not only perished the confidence of local people but corrupted more government officials.All the authorities here are now seeking more and more aid rather than to rely on their own available resources.
Pakistan has already borrowed too much foreign aid in the form of loans and is still borrowing that has reached the historic over $60 billion. Debt burden is continuously increasing so its interest rates that worth more than the debt itself. Now the economic position is so deteriorated that for the payment of interest, Pakistan tries to get more loans. Pakistan has become now an aid addict and does not make policies to develop their economy with their own domestic resources. Officials do not pay attention for the development of the technology. They just become entirely dependent on others. Major portion of aid particularly commodity aid is misappropriated by the concerned Government officials.
Moreover, when aid is in terms of commodity such as wheat etc, which many times is provided at a very nominal price, discourages local production of that commodity because of higher cost of production within the country. This situation discourages local agricultural production. If donor country has assisted in establishing imported substitution industry then raw material for the industry will have to be imported from loan given country otherwise industry will not continue its production because particular raw material is not available locally. This causes heavy foreign exchange burden on economy.
Pakistan is obtaining foreign aid for bridging gap between domestic savings and investment and also to improve balance of payments position but till now it has not been able to accomplish this task, rather both gaps are continuously increasing.
Sometimes aid giving countries interfere in the defense and foreign affairs of Pakistan. That's why it is said that there are always political strings attached to the bilateral loans. Thus this is to be reveal here that all aid is not for economic rationales but also political. Most of the politicians miss allocate the aid for its appropriate concern so to raise their pay, power and prestige. Thus aid is also promoting greed and selfishness among the leaders of the realm.
Pakistan was accessed as an independent nation but Pakistan is now fully dependent on the aid drug to eradicate all the absences. As soon as a new government takes office it is out to woe the US for aid, begs from the Saudis for a few crumbs and looks to countries like China for handouts. This must stop. To achieve self respect and start to improve the lives of the impoverished masses the country needs corrective surgery.
The starting point should be adopting a culture of austerity and simplicity. The President, Prime Minister, Army Chief and Chief Justice should be given homes and protocol of ordinary citizens. The vestiges of colonial days, the pomp of office must go. Leaders must present themselves as a role model of modesty rather to complex the masses by their luxurious stuff. One has only to look across the border that how people present themselves in public in simple clothes, sans jewels and accessories, where ministers don't drive in flashy imported vehicles if a role model is needed.
The next step is to generate resources by taxing all. The first step should be agriculture. There is no more favorable time than now. In the past 3 to 4 years produce price including cotton have witnesses a runaway increase and most farmers have had there incomes increase by over 400 percent in three years. Income tax is a failure in Pakistan however consumption tax can be promoted. All students going abroad for study should be required to get an NOC which would require their parents to explain the source of funds.
All property purchase, vehicle purchase and airline ticket purchase should require an NTN number. Put in place consumption taxes. For examples vehicles over 1000 cc should progressively be taxed.
Measures such as the above would document the economy and bring more of the black economy into the main stream.With a corrupt bureaucracy, political elite and military this may virtually impossible.
so a revolution is needed to unshackle Pakistan.

GROWTH AND INVESTMENT:

ECONOMIC GROWTH:

An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries.

INVESTMENT:

An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

 

I - INTRODUCTION

“A country is Poor because she is Poor” is an oft-quoted maxim, i.e. poverty is not only the cause but also the consequence of poverty. Consequently, the underdeveloped countries (UDC) like Pakistan are entrapped in a “Vicious Circle of Poverty”. Because of low incomes, the saving Ratios also remain low, resulting in low investment levels. At the same time, due to low income the taxable capacity remains lower, i.e. government earnings also remain low. In such situations, the UDCs have to face saving-investment deficit as well as the deficit in balance of payments (BOP). The Two-Gap Model suggests that developing countries have to rely on the foreign capital inflows (FCI) to fill these two gaps: the import-export gap and the saving-investment gap. 

IT is not denying the fact that a developing country has to rely on borrowings in order to achieve its overarching goals of economic stability and national development. Proper debt management is the prerequisite for the sustainable economic growth of a country. There must be equilibrium in exports and imports so as to minimize the need for borrowing and overcoming fiscal deficit.
Unfortunately, the ever increasing foreign debt is one of the major problems besetting Pakistan’s lingering economy.
Pakistan is the third largest debt-recipient country in the region. Its external debts have been reported to reach 33 per cent of the GDP as compared to India’s 15 per cent and China’s seven per cent. There are several factors, including domestic problems and international economic recession, behind this debt dynamics. The increasing debt-to-GDP ratio is mainly due to declining-tax-to-GDP ratio as out of 190 million only 1.8 million people pay tax. Rampant corruption is the key factor in this regard.
According to the Transparency International annual report, Pakistan is at 34th position among the most corrupt countries of the world.
Apart from this energy crisis, including the erratic power supply, crippling inflation, growing security spending and low productive capacity have led to fiscal deficit which, in turn, increases foreign debt.
Pakistan is not in a position to formulate an independent fiscal policy due to these external debts and its struggling economy is at the mercy of leading lenders like the IMF and World Bank.
In a nutshell, Pakistan’s economy is at a critical juncture and there is a dire need for taking a pragmatic approach regarding fiscal management and independent decision-making as it is the only sine qua non for economic development.

2. External Debt Policy of Pakistan in1990S and2000S:

This section of study is particularly reserved to analyze the foreign debt policy of Pakistan during 1990s and 2000s. With the desire to achieve higher standards of living by enhancing the growth rat

e of GDP and GNP, and to follow the famous Harrod-Domar Growth Model of long term economic growth, during 1950s, Pakistan started economic planning in which foreign borrowings had to play a vital role to achieve different targeted indicators. Thus the process of debt accumulation had been continued up to date.

$59.5 billion. Indeed the debt servicing expenditures of this heavy debt has always been a curse for the developing economy of Pakistan. Most part of the external debt has been borrowed from International Monetary Fund (I.M.F).

During 1990s and 2000s, there were two times when governments of Pakistan announced not to accept any interest bearing debt. But it remained very short-term policies of the concerned governments. The external debt and liabilities had always been rescheduled by donor agencies and countries on fresh terms and conditions. According to the Economic Survey 2010-11, total external debt has been reached the maximum position of the history of Pakistan, which is Pakistan entered into nine different agreements with the IMF during the period 1988-2000.

The major factors which contributed towards the motivation of borrowings from IMF included need to obtain financial resources for BOP problem, secure access of funds from other IFIs and bilateral donors, to get debt relief and rescheduling in the post 1998 period. During the period 1988-2000, the prolonged uses of fund resources in Pakistan can be characterized as less successful in achieving the desired objectives. One among other major reasons was that the governments used foreign resources to fix the external payment gaps but they did not adopt complementary policy reforms. These are the reasons that debt position of Pakistan worsened very rapidly. It is very important to trace time dimension of these two decades in relation to debt burden and debt servicing to GDP ratio with some other important indicators of external debt and liabilities.

The Figure: 1 below depicts debt accumulation process of Pakistan in the last two decades. 

It is mentioned with the help of external debt and liabilities percentage in relation to overall GDP of the economy for the attempted time period of the study. It is very clear that it had an increasing trend from 1989-90 to 1991-2000, then decreasing but, again increasing from the fiscal year 2006-07.Its current ratio is more than 30 percent of GDP which is very high and shows an alarming situation for our economy. If we look at the debt servicing to GDP ratio of the economy, its again very discouraging that we have to pay for debt servicing for more than our GDP growth rate. As it can be traced from the Figure: 2 that with the exception of the period 2003-04 to 2007-08, the growth rate of GDP had never been to greater than the debt servicing expenditures of our GDP. It seems a serious problem which we shall address empirically in the subsequent sections of this study.

The trends depicted in Figure: 3 show the relationship between unemployment rate in the economy (UNEMP) and external debt and liabilities to GDP ratio (EDLGDP). The two trends show a weak positive correlation between these two variables. UNEMP has been remained almost stable during the two decades. It is, no doubt, against the hopes of a common man and also for the policy making point of view. Since the theory says that there must be reduction in UNEMP with the foreign assistance in the country.

The Figure: 4 trace the relationship between actual figure of GDP in million rupees and total external debt of Pakistan in million rupees (EXTDBT). It graphically shows that the gap between GDP and EXTDBT has been increasing with every passing fiscal year. The widest gap had been observed during the fiscal year 2006-07. It had been shortened just for two fiscal years, now it is again widening, which, in fact an alarming situation for the economy. Although GDP has been increasing, the external debt also increasing with greater proportion.

 

3. IMPACTS OF FOREIGN AID:

Different types of studies were under taken in order to understand the impacts of foreign capital inflows (FCIs) on the economic development. And the different methods and variables were used to analyze the role of foreign aid in economic development. Some studies focused on the study of aid’s impacts on the domestic savings, investments and capital formation, while some other researcher paid much attention to study the role aid on the debt burden, GDP growth etc. Some other studies focused upon the impact of aid on the different sectors of the economy like the agricultural sector, energy and the industrial sectors, social sectors (like health and education etc.).

It is difficult to analyze the effect of foreign aid on all the sectors and variables, as described above, in a single paper. Therefore, I narrow down my analysis to only two variables that are, GDP growth and the Debt burden. Here I have tried to analyze the impacts of foreign aid on GDP and the overall Debt Burden. 

4 . Conclusion and Remedies for Future

This study has been an attempt to examine the external debt policy of Pakistan during 1990s and 2000s and to investigate its ultimate impacts on developing economy of Pakistan. It is an attempt to investigate the effects of foreign debt and liabilities and total debt servicing expenditures on the development of Pakistan. By applying the OLS technique for econometric analysis on the secondary data for the period 1989-90 to 2009-10, the study suggests that these are the actual expenditures on debt servicing which are mainly responsible for the worst situation of less productivity, increasing unemployment and less contributing manufacturing sector of the economy of Pakistan. Whereas the external debt and liabilities to GDP ratio is found positively related with the growth of manufacturing sector. Weak but statistically significant relationship has also been found between external debt and liabilities to GDP ratio and unemployment rate of the economy for the last two decades. Total domestic debt has been investigated to have negative relation with unemployment rate in theeconomy.

External debt and liabilities to GDP ratio has been found to have positive and statistically significant relationship with the overall GDP levels of the economy in the period of last twenty years. But when this variable has been replaced with the actual external debt in million rupees, along with some extra explanatory variables, it showed negative impact on overall GDP of the economy. This impact has been found statistically insignificant. On the basis of given theoretical and econometric analysis, the study strongly suggests the following future remedies to the policy makers:

1) To try to reduce the expenditures on debt servicing. It can be achieved with the better professional and skilled negotiation with the donor agencies and countries.

2) To efficiently allocate and to develop constraints to utilize the amount of external debt on more productive and development expenditures. So that it might be a source of increase in net investment in the country and, hence, to increase the exports of the economy and, further, to reduce the trade deficit and overall government deficit.

3) To reduce the population growth rate, since it has been found to have significant positive correlation with unemployment rate in the economy. This reduction in growth rate of population will not only cause to improve per capita income of Pakistan, but also be helpful to improve the living standard of the people.

4) To control the hyper inflation, and to make price stability sustainable with GDP growth rate of the economy.

5) The external debt must be allocated to increase the technical skill and professional capabilities of the people. So that they might be able to increase the manufacturing sector growth rate of the economy.

5. References

 

Sajawal M. Ghumman, Lahore, from newspaper __ published Jan 10, 2013.Pakistan: Impacts of foreign debt.

https://mpra.ub.uni-muenchen.de/1211/1/MPRA_paper_1211.pdf

http://www.researchgate.net/publication/263729522_Debt_Burden_of_Pakistan_Impact_and_Remedies_for_Future