7/28/2019 Pakistan Must Avoid Debt Trap

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Pakistan Must Avoid Debt Trap

Pakistan is the only country outside Europe to have gone to the IMF for a bailout. The

Western Financial meltdown hit the United States and Europe hard, no country in Asia.

However, Pakistans Fragile economy and the inability of leadership to secure the

confidence of even its best friend have forced to seek a 7.6bn$ aid package. The IMF`sassistance opens doors to aid from the World Bank and donor countries. But Pakistan`s

official foreign exchange reserves may still not hold above the $8bn level (equivalent to

four months of imports) for long because the IMF will only disburse $4bn during this fiscal

year and the current account deficit continues to be under pressure.

Pakistan must achieve a minimum growth rate of seven per cent to reduce poverty which

has climbed sharply. The mantra of economic stabilization to reduce inflation will not be

enough to achieve this. The government must work hard to restore confidence in its

policies and competence. Credibility has emerged as a major issue in both domestic and

foreign affairs, be it the government`s relationship with the other political parties or its

dealings with old friends like China and Saudi Arabia. Mr Praful Patel, then a vice-president

at the World Bank, met Mr Zardari, Mr Gilani and the government`s finance managers on

March 26 and 27, 2008 and warned that Pakistan will need the international community`s

support over the coming months. Mr Patel added If action is not taken, the economy will

start to falter and apparently the Bank was not comfortable with the PPP government`s

economic plan.

The solution is an automatic price adjustment mechanism for oil prices so that price signals

are transmitted quickly and circular debts do not accumulate. The new pricing formula

should remove the subsidy for oil refineries and do away with formulas that favour the oil

marketing companies. Examining data from other Asian countries reveals a more gradual

increase in inflation cushioned by higher levels of subsidies even though most Asian

countries are also large oil importers. Reason their rich pay more tax and their

governments can afford more subsidies. The rich and the ruling elites in Pakistan would

rather borrow, beg or steal and mortgage Pakistan`s future than pay more taxes. Pakistan`s

consumers have been paying more than their fair share of taxes due to a convoluted oil

pricing mechanism while governments and oil companies have been earning super-normal

profits. The subsidies increased above the cost levels only after the regime of Pervez

Musharaf. Before this, taxes and duties on petroleum products were one of the topcontributors to total government revenues. Wrong economic policies that favour vested

interests together with the Pakistani establishment`s dependence on Washington as the

main source of power are responsible for the country`s fundamental economic and political

imbalances. Both issues must be addressed if the country is to avoid the debt trap and

make progress that benefits its people.