PUBLIC DEBT

Introduction

Mohammad Aatir Khan

06-M
Public Debt

• What is Debt?

• Why we need Debt?

• Why we need Money?

Sources of Capital?
• Surplus Budgeting

• Profits from Public Enterprise

• Deficit Financing

• Loans from within the country

• Aids and grants from outside the country

What is Public Debt?
• Borrowing from within the country is called
domestic debt.
• Borrowing from outside the country is called
external debt.

• External debt and internal debt together are

called Public Debt.
Domestic Debt
• Also called Internal Debt consists of:

▫ Floating debt (short-term)

▫ Permanent debt (long-term)
▫ Unfunded debt (mostly National Saving
Schemes)
Domestic Debt (Rs. Billion)

Fiscal 2004- 2005- 2006-07 2007-08 2008- 2009-10

Year/Type 05 06 09
of debt
Permanent 526.179 514.879 562.540 616.766 685.939 779.182
Floating 778.163 940.233 1107.655 1632.370 1903.487 2299.737
Unfunded 873.24 881.706 940.007 1020.379 270.513 1411.690
8
Total 2177.59 2336.81 2610.202 3274.515 3859.939 4490.609
0 8
Debt as % of 33.5 30.7 30.1 32.0 30.3 30.6
GDP
Problems of Public Debt.
1. The volume of public debt increases as time goes on. It
threatens the country's ability to repay the loan.

2. The raising of loans both domestic and foreign are full

of uncertainties. Therefore proper planning for
development cannot be carried out.

3. The debt overhang depresses growth by increasing

investors uncertainty.
Problems of Public Debt..
4. The debt burden discourages efforts on part of the
government to carry out bold structural and economic
reforms for economic growth.

5. If there is unwise use of borrowed resources it raises

real cost of borrowing.

6. The debt servicing increases with passage of time. The

country therefore has no option but to borrow more to
repay the previous loans.
Suggestions for the retirement of debt:
• Money should be borrowed only for essential
developmental purposes and that too at a low rate of
interest.

• The Government should follow prudent fiscal and

monetary policies for reducing the fiscal deficit and
containing inflation within limits.

• Short-term loans should be taken at low rate of interest

to repay the expensive loans.
Suggestions for the retirement of debt:
• The country should accelerate the pace of foreign
exchange earnings for the repayment of loans.

• The burden of domestic loan can be reduced by

broadening the tax base in the country.

• The payments received from the sale of public

enterprises should be used for retiring the debts.

• The Government can tap the global capital market for

external borrowing at low rate.
 Foreign Economic Assistance
And Its Various Forms
Fatima Khawaja
Foreign Economic Assistance
• Definition :
“It is the flow of resources and technical
assistance from a developed country or
an international organization to stimulate
domestic efforts of a less developed
country i.e. for purchasing machinery,
equipment and building dams etc”
Foreign Economic Assistance
• It is also used to bridge the gap between balance
of payments.
• Example:
Developed
country Less
(America) developed
country
Funds (Pakistan)

International
organization
(IMF) Planes ,heavy
machinery etc
Sources Of Foreign Aid
• Two types of Foreign Aid:
▫ Bilateral
▫ Multi lateral
Bilateral Agreement
• Government of donor country which provide aid.
For example:
Developed
country
Less
(America)
developed
country
Aid Funds
(Pakistan)

For betterment
of education
system
Multi lateral Agreement
• The international Aid giving agencies such as
world bank ,IMF, IBRD etc provide the aid.
For example:
International
organization
(IMF) Less developed
country
(Pakistan)
Aid Funds

Flood Relief
program
Sources of Foreign Aid in
Pakistan
• Consortium
• Non-consortium
• Funds from Islamic countries
• Consortium :
– Association of countries for some definite purpose
of funding.
– It was renamed as Pakistan Development Forum.
– It is the single largest source which provides foreign
loans
– It includes 11 countries (Belgium, Canada, France
,Germany ,Italy ,Japan ,Netherlands, Norway,
Sweden, UK,USA)
• Non consortium:
– Individual level loans/funds from various countries
and fund giving organizations.
• Funds from Islamic countries:
– All Islamic countries are included in this category.
Types Of Economic Assistance
• Following are the types of economic assistance:
Types Of Economic
Assistance

Foreign Technical
Grants Assistance
Loans
Grants
• Helping Poor Nations on humanitarian
grounds in times of emergency i.e. floods, earth
quake etc
• Grants can be in form of money ,food or both to
mitigate their sufferings.
• It is a gesture of goodwill and provided as a
token of sympathy
• GRANTS DONOT HAVE REPAYMENT
OBLIGATIONS.
Foreign Loans
• These are provided in the form of:
– Foreign Exchange
– Machinery
– Technical Services
• The receiving country is to repay the loans along
with interest in installments to the donor
country or the aid giving institute.
• The loan as per agreement may be paid in
foreign exchange.
Types Of Loans
Soft loans/Hard loans
• Loans given at nominal rate of
interest ranging from 1 to 3
percent and repayable after
25 years ,it is called soft
loan.
• Loans given at rate of interest
ranging above 3 percent and
repayable with-in 25 years ,it
is called hard loan.
Tied loans/Untied loans
• Tied loans: Loans tied to
both source and utilization .
• It is generally received at
uncompetitive prices and
interest rate are usually
equivalent to commercial rates
• Untied loans: Loans not tied
to both source and utilization
is called
• It is generally received at
competitive prices and interest
rates.
Technical assistance
• The developed nations are also providing
technical experts in the erection ,installation and
working of heavy projects like steel mills ,power
stations etc to the less developed nations
• They also carryout economic surveys and offer
financial advisory services to the developing
country
Benefits & Costs of Foreign Economic Assistance

Hafiz Muhammad Kabeer Yaqoob 02-M

Benefits of foreign Economic Assistance
• Increasing the level of investment:
▫ Most of the developing countries are facing the
problem of low rate of savings and as a result there is
low level of investment.
▫ Foreign loans are required to supplement domestic
savings for bridging the resource gap between the
desired investment and the domestic savings.
• Building infrastructures:
▫ Foreign loans can helps the country in developing
infrastructural facilities which require huge
investment.
• Development of basic industries:
▫ Foreign loans can assist in building the basic industries
like iron, steel, petroleum, heavy engineering.
• Risky Projects:
▫ Due to shortage of capital and low expertise, the domestic
capital is usually shy of undertaking risky projects, like oil
and gas exploration, mineral resources etc.
▫ Foreign capital and necessary expertise can undertake
such risky projects and explore the natural resources for
economic development of the country.
• BOP Support:
▫ The foreign exchange gap is filled up with the inflow of
foreign capital from IMF.
• Greater employment opportunities:
▫ The financing of various projects provides greater
employment opportunities in the country.
• High quality products:
▫ The inflow of technical knowledge improves the quantity
and the quality of manufactured goods and makes them
available at lower prices to the domestic consumer.
• Increase production:
▫ Foreign capital increases the productive capacity of
various sectors of the economy.
• Increase wages:
▫ The real wages of the workers are increased with
the help of foreign assistance.
• Increase tax revenue:
▫ The profits earned on foreign investments are
taxed by the Govt. the revenue of the state is
increased.
Donor Country and the economic assistance
• Humanitarian Ground:
▫ If a country is faced with famine, drought,
epidemic diseases, earthquake etc.it is obligatory
for the developed nations to help that country
financially purely on humanitarian grounds.
▫ The rich countries are generously extending
economic assistance in the form of grants to the
poor nations of the world.
• Self interest reasons:
▫ Protect the developing country from the spread of
fear of communism.
▫ Surplus good are exported to the needy countries
on loan.
▫ Remove the economic disparities among the
nations of the world.
▫ Foreign aid is also given for increasing the camp
followers of the donor country.
The Cost of aid to recipient country
The burden of foreign debt can be judged from the
following facts:
• The burden of debt servicing is increasing as time
passes.
• The tied loans given to a developing country raise
the economic cost of the donor country if it is faced
with inflation.
• The domestic agriculture production may be
discouraged by the receipt of commodity aid from
the developed nations.
• An import substitution industry established by
foreign assistance may continue depending on the
import of essential raw material from the rich
countries.
• There may be political strings attached to the
bilateral loans.
• Debt overhang may also discourage efforts by the
Govt. to carry out basic fiscal reforms.
• The Piling of debt depresses growth by increasing
uncertainty among the foreign investors.
Foreign Debt Burden and Debt
Servicing Problems in Pakistan
Need for Foreign Economic Assistance
• Flow of foreign economic assistance started in
1950s.
• The reliance on foreign borrowing continued to
grow which has risen to $43.5 billion in 2009.
Factors contribute to rise in
External Debt
• Persistence of large current account deficit
(about 5% of GDP) for over one decade.
• Wasteful use of borrowed resources.
• Rising real cost of external borrowing.
• Stagnant exports.
• Declining flow of foreign exchange.
• Higher debt servicing payments.
Problems of receiving
Foreign Loans
Fatima Ali 13-M
Tied Aid
• Mostly the foreign aid is tied to both source and
utilization.
• It means that the receiving country have to make
all the purchases from the donor country and
can utilize that money only on projects approved
by the donor country.
• In the end it causes the receiving country to
purchase at uncompetitive prices and confine its
operations.
Change in Composition of Aid
• The Aid composition has changed drastically
over the years. As the proportion of grant in aid
and grant like assistance has been declining:

1955-60 2001-02 2005-06

• The share • It was • It was
of grant only 0.8% reduced
like of total to 1
assistance loans million
was 80% USD only
• Hard Term Loans:
▫ 80% of the foreign capital inflow is in the form of
Hard term loans which means it is repayable at
high rate of interest and within 25 years.
• Commitment of Aid:
▫ Commitments of foreign aid is also declining. The
donors are hesitant to grant loans.
• Fall in Disbursement of Aid:
▫ The disbursement of aid in total commitment is
also declining.
• Net Transfer:
▫ The growing debt has increased the liability of
debt service payments.
• Devaluations:
▫ The successive devaluations of currency has lead
to the increase in the burden of debt.
Debt Servicing of External Debt
• The Govt. of Pakistan has taken the following
steps to reduce the burden of foreign debt:
▫ Building up strong Foreign exchange reserves
▫ Prepayment of expensive debt
▫ Contracting new loans on concessional rates
▫ Reducing current deficit in the country
▫ Minimizing fluctuations in the foreign exchange
rate
▫ Writing off bilateral loans
• Due to better external management, the Govt. of
Pakistan has succeeded in lowering the
incidence of debt servicing. Net transfers as % of
total disbursements were 25% for the decade of
1990’s.
• For the last 7 year, net transfers were negative
for only 1 year 2003-04 due to prepayment to
Asian Development Bank.
Foreign Direct Investment
Private Public
foreign developmen
investment t assistance
Private Foreign Investment (PFI)
• The role of PFI is very controversial.
• So now we will discuss the main points in favor
of PFI and the arguments which are against it.
Points in favor of PFI
PFI is desired to fill the saving gap for achieving the target
growth

An inflow of foreign capital can reduce the foreign

exchange trade gap

LDC’s can mobilize the financial resources by taxing the

MNC’s

Assistance in management, entrepreneurial and

technological skills

PFI adds more value to the output of LDC’s

Arguments against PFI

They may inhibit the expansion of domestic firms by importing intermediate

goods rather than getting from local firms.

The repatriation (sending home) of profits, interest, royalties, management

fees by MNC’s can worsen the capital account rather than improving the BOP.

MNC’s get liberal tax concessions, excessive investment allowances, tariff

protections and gets much rebates. In the end they contribute very less to the
public revenue.
They hinder the growth of local entrepreneurs.

MNC’s establish the industries in urban areas and the imbalances between the
urban and rural areas increases. And the result is rural-urban migration.

By making products for rich and middle class they stimulates inappropriate
consumption patterns.

MNC’s uses the economic power to influence the Govt. policies.

MNC’s are mostly monopolistic.

Reconciling the Pros and Cons
Limits on
The amounts of profit maybe restricted
●

Profit to a reasonable rate of return.

repatriation

Local Country can insist to MNC’s to include

●

the local investors to increase the local

Partners influence.

Local Value MNC’s can be asked to manufacture local

●

value added spare parts to save foreign

added exchange.

Export MNC’s can be bound only to export a

●

requirements certain amount of company’s output.

Performance of Pakistan’s
Economy in the Year 2009-10
Haider Ali 27-M
• Pakistan’s economy remained one of the fastest
growing economies in the South Asia Region
during 2003-07.
• Afterwards the economy was led to crisis due to
the problems like:
▫ War on Terrorism
▫ Unprecedented hike in Oil and Commodity prices
▫ Overall Global Financial Crisis
State of the Economy in the light of Macro-
Economic variables
• Real GDP Growth:
▫ Declined to a very low level of 1.2% during 2009-
10 mainly due to massive decline in the large scale
manufacturing sector.
▫ The growth has picked up to 4.1% in 2009-10.
• Per Capita Income:
▫ Marginal increase from $1042 in 2007-08 to
$1046 in 2009-10.
Inflation
• The average inflation rate as measured by the
change in CPI was 13.3% in April, 2010 as
against 8.9% in October 2009.
• The rapid increase in inflation was due to:
▫ Rising food prices
▫ Weaker rupee/dollar exchange rate
▫ Withdrawal of subsidies on gas, electricity and
petroleum
▫ Custom duty on imports of various items
Poverty and Income Distribution
• The percentage of population living below the
poverty line (based on 2350 calories per adult
per day) was about 22.3% of people in 2005-
2006.

How can we
reduce Poverty?
How can we reduce Poverty?

Promoting Job Creation

Increasing Development Expenditures

Providing Education
Reducing Prices of Food items
Promoting Micro finance (MF) schemes for increasing
job opportunities on Self-employment basis
Inflow of Workers’ Remittances
• The Workers’ Remittances from abroad is the 3rd
largest source of foreign exchange.
• The inflow of Workers’ Remittances is gradually
increasing and has touched $7.3 billion for the
year 2009-2010.
Capital Market
• Capital markets in Pakistan had a great start in
the beginning of 2008 despite the adverse
impact of the Global Financial Crisis.
• KSE 100 index gained 11.6% by mid April.
• However the market declined and KSE 100
index fell by 62% on December 31, 2008 due to:
▫ Worsening macro-economic fundamentals
▫ Law and order situation
▫ Capital flight
• But hopefully in July-March 2009-2010 there
was recovery and the KSE 100 index was up to
10.7% from the flow in late 2008.
External Debt

June 2008
March 2009
Pakistan’s debt
was $46.3 2008-2009
Pakistan’s debt
Billion
was increased to The debt March 2010
$50.1 Billion increased from
28.1% to 30.2% of Pakistan’s debt
GDP showing the was reduced to
highest increase $43.47 Billion
in 1 year over the
decade. It was due
to decline in FDI
Exchange Rate

2008-2009

16.3% depreciation in October 2009

rupee. It was due to:
Loss of Foreign April 2009
The record
exchange reserves
Political touched record Recovered to March 2010
uncertainty low of around Rs.80.50/$
Speculation in the Rs.83.46/$ due to: The rate stood at
exchange market
Arrangements Rs. 84.68/$
with IMF
Reduction in
imports
Improved
external inflows
Exchange Reserves

Novemb May April

er 2008 2009 2010
Reached the
●
Raised to
● Raised
●

lowest level $11.6 billion further to

of $6.4 due to IMF $15
million inflow billion
Foreign Investment
• Due to Global financial crisis, Pakistan is facing
severe decline in its Private capital inflow.
• FDI during 2008-09 declined to 31.2%
compared to the corresponding period last year.
• Foreign investment experienced a further
decline of 44.7% during July-April 2009-10
compared with last year.
Fiscal Development

2007-08 Fiscal deficit was 7.6% to GDP

●

2008-09 Fiscal deficit declined to 5.2%

●

2009-10 Fiscal deficit further declined to 4.2%

●
Trade and Payments
Savings

2008-09

National Savings were Domestic Savings were

14.3% of GDP 11.2% of GDP
Domestic Debt

Total Domestic Debt was Rs.4491

Domestic Debt is 30.6% of GDP
billion by the end of March, 2010
Macro Economic Projected
Targets for the Year 2010-11
GDP growth rate target is 3.3% for 2010-11 against 4.1% last year.

Inflation rate is targeted at 9.5% against 20% last year.

Trade deficit is projected at $11.7 billion against $12.23 billion last year.

Export target is $19.96 billion against $19.92 billion last year.

Import target is 31.7 billion against $29.9 billion last year.

Remittances are projected at $9 billion
against $8.5 billion last year.
For “Public Order and Safety Affairs” Rs.51.3
billion has to be allocated.
Agriculture growth rate is 3.8% against 1.2%
last year.
Manufacturing sector growth is targeted at
5.6% against -3.27% last year.
Service sector is projected to grow by 4.7%
against 4.6% last year.