Aid effectiveness, DEBT CAPACITY AND DEBT MANAGEMENT IN THE ECONOMY OF PAKISTAN

Abstract

This thesis analyzes the role of foreign aid in the economy of Pakistan in terms of its effects on economic growth, income equality, povel1y and the debt burden. It also evaluates Pakistan's debt servicing and debt retirement capacities and its debt management practices. The thesis finds that foreign aid has not contributed favo rably to GDP growth and income equality, though it has been effective, in a limited way, in reduc ing the extent of poveliy. The ineffectiveness of aid can be attributed to indirect diversion of aid funds to non-productive acti vities and ineffi ciency in resource allocation especially in the public sector assoc iated with the easy ava il ability of foreign aid. However, the study argues that fo reign aid has been instrumenta l in sup porting the growth rate in consumption th at otherwise would not have been possible. Furthermore fo reign aid and external borrowin g made it easier to avoid hard policy choices such as heavy taxation of income and consumption. The thesis fi nds that Pakistan's long-run debt-serv icing capac ity is extremely low, primarily due to low savings and producti vity. It is further observed that with the current state of sav ings and producti vity, Pakistan has to choose between sacrific ing growth and prolonging the unsustainable position of continuously growing debt burden. The thesis concludes that the practice of re li ance on foreign aid is unsustainable unless effOlis are made, on continuous basis, to overcome the basic weaknesses in the economy. Pakistan must improve its saving rate by continuing and even fUliher refining the ongoing process of tax reforms, downsizing of the public sector and privatization of public sector enterprises. Pakistan needs to improve its overall productivity in the economy, especially in the public sector. The privatization process needs to be accelerated for the sake of minimizing the cost of losses in the public sector and improving productivity rather than revenue ge neration. Pakistan also needs to manage its debt in a better way. There is utmost need for enrichment of the inte ll ectual capac ity in the publ ic sector institutions responsible for debt management. These institutions also need to be reformed thoroughly and given suffic ient autonomy. Finally, the thesis concl ud es that Pakistan has to be se lective in choosing among the alte rnative aid and loan packages. External borrowing has to be target specific and the targets have to be specified in the light of a social we lfare function that assigns due we ight to soc ial as we ll as economic considerations such as growth enhancement, promotion of equ ity and soc ial justice and eradication of poverty. Exte rn al borrowing must be undertaken within the framework of economic plans rather than making th e planning exercise contingent on the availabil ity of external resources.