PRESENTATION ON
Debt, Growth and Poverty Reduction:
A Case of Pakistan
By
Dr. Ashfaque H. Khan
Principal & Dean
School of Social Sciences &
Humanities (S3H)
National University of Sciences &
Technology, Islamabad
At:
Centre for Policy Studies (CPS), CIIT
COMSATS, Islamabad
Oct 12, 2013
0
 Economic growth is the single most important factor influencing
poverty
 A stable macroeconomic environment is essential for a sustained
high economic growth
 Empirical evidence suggests that macroeconomics instability has
generally been associated with poor growth performance and the
associated rise in poverty
 The persistence of large fiscal and current account deficits and
the attendant rise in public and external debt have been the
major source of microeconomic instability in many developing
countries.
1
Summary
Persistence of
Large Fiscal and
CAD
Rise in Public
and External
Debt
Major Source
of Macro
Instability
Poor Growth
Performance
Rise in
Poverty
2
 Existing Empirical Evidence
 Rising public debt and economic growth exhibit negative
relationship
 Reinhart and Rogoff (2012) found weak relationship between
government debt and long term economic growth under 90%
of debt/GDP ratio. Negative relationship becomes stronger
beyond 90% of debt/GDP ratio.
 Balassone et al. (2011) found a negative and non-linear
relationship between public debt and growth, with growth
declining substantially when the debt to GDP ratio exceeds
100 percent.
3
 Summary
 Overwhelming empirical evidence suggests four things
- Relationship between public debt and economic growth
is negative
- Relationship is non-linear
- There exists bi-directional causality between these two
variables
- Higher public debt affects growth negatively through
investment
4
IS DEBT CREATION BAD FOR THE ECONOMY?
 Borrowing domestically or abroad is a normal part of
economic activity.
 As long as the borrowers can earn a higher
economic/social rate of return than the cost of invested
funds, creation of debt is not a burden.
 Debt-servicing problems arise when the debt carrying
capacity of the country does not increase commensurate
with the increase in its debt servicing liabilities.
(The debt carrying capacity is defined as the ability of a
country to service its external liabilities within an orderly
and stable macroeconomic framework)
(Continue…)
5
IS DEBT CREATION BAD FOR THE ECONOMY?
Short-term borrowing for longer-term projects can
lead to serious cash flow problems.
Countries most often run into difficulties because
the borrowed funds are directed toward wasteful or
low economic return projects.
6
Pakistan sustained a very large budget
deficit in the 1990s and During 2008-12
Overall fiscal deficit (% of GDP)
Source: Ministry of Finance
* Including earthquake related expenditure7
Current Account Deficit (% of GDP)
• Current Account Deficit remained high in the 1990s despite low economic growth.
• Current Account Deficit widened recently on account of strong economic activity
and rising oil and commodity prices. The same has improved in 2008-09 on account of
collapse in oil and commodity prices.
Source: SBP
8
TRENDS IN PUBLIC DEBT
(Rs. Billion)
99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09
a) Debt Payable
(Rs)
09-10 2010-112011-122012-13
1576
1728
1715
1852
1979
2152 2322
2601 3266
3852
4651
6014
7638
9521
27.5
27.8
29.9
30.6
31.2
32.1
33.9
36.4
40.7
46.4
50.0
54.6
53.2
47.9
Exc. Rate
(E.O.P)
52.5
63.4
60.1
57.7
57.9
59.7
60.2
60.4
68.3
81.4
85.5
86.0
94.5
99.1
b) Foreign Debt
(Rs)
1442
1761
1795
1766
1810
1913 2041
2201 2778
3776
4270
4694
5030
4747
c) Total Debt (a +
b)
3018
3489
3510
3618
3789
4065 4363
4802 6044
7629
8921
10709 12668 14268
3826
4163
4402
4823
5641
6500 7623
8673 1024 12724 14837 18063 20091 22909
3
513
553
624
721
806
900 1095
78.9
83.8
79.8
75.0
67.2
62.5
588
631
563
502
470
452
Debt payable ($)
GDP (mp)
Total Revenue
1298 1499
1851
2078
2261
2566
2969
57.2
55.4 59.0
60.0
68.1
59.3
63.0
62.3
398
370
412
429
474
494
481
Total Debt as %
of:
- GDP
- Revenue
•
403
Total stock of public debt in 60 years (1947-2007) stood at Rs. 4802 billion but
we added Rs. 9466 billion in just six years (2008-13)
Source: Ministry of Finance
9
TRENDS IN EXTERNAL DEBT AND LIABILITIES
External Debt and Foreign Exchange Liabilities (Billion $)
•We added $1.6 billion in external debt in 8 years (2000-07) but added $19.6 billion in just 4 years (2008-11)
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Source: Ministry of Finance
MACROECONOMIC CONSEQUENCES
OF UNSUSTAINABLE DEBT
11
WHY SHOULD WE WORRY ABOUT RISING DEBT
BURDEN
 Serious threat to development
 Major source of Macroeconomic instability
 Lower Economic Growth
 Rise in Unemployment
 Rise In Poverty
 Raises the Risks of a Fiscal Crises
 Keeps Borrowing Cost High
 Discourages Private Sector Investment
 Major source of discouragement for foreign investment
 Keeps pressure on exchange rate
 Major constraints for the government to undertake counter
cyclical policies to revive economic growth
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LOSS OF FINANCIAL SOVEREIGNITY
 Pakistan became the prolonged user of IMF resources.
 Economic Policy making circles around IMF/IFIs Programs.
 Influence of IMF and IFIs in policy making increase
substantially.
 We went to the IMF in November 2008; IMF Program
remained suspended since May 2010 and until the
completion of the program in September 2011.
 Pakistan Entered in a new program with the IMF in early
Sep 2013
13
Barring two years the real GDP grew at an
average rate of 3.8% p.a in the 1990s
Growth recovered during 2002-07 to an average of 6.8% p.a.
Source: Various Issues of Economic Survey
14
Significant Reduction in Unemployment
•13.5 million jobs created in seven
•Unemployment declined …
Labour Force
Survey
8.3
8.5
8.0
years
7.8
Employment
(in millions)
Number of
New
Employment
(in millions)
7.7
7.5
FY 97
35.16
-
7.0
FY 00
37.32
2.16
FY 02
39.64
2.32
FY 04
42.24
2.6
FY 06
47.37
5.13
FY 07
49.68
2.31
5.0
FY 08
50.75
1.07
4.5
FY 09
52.71
2.0
4.0
FY 10
54.05
1.34
FY11
54.68
0.63
6.5
6.2
6
6.0
5.5
5.3
5.5
5.6
5.2
1999-002001-022003-042005-062006-07 2007-082008-092009-102010-11
•We need to create 3.5- 4.0 million
•Source: Economic Survey 2006-07
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jobs per year in the next 10 years
for new entrants
•Source: Labour Force Survey, FBS
Percent of people living below the poverty line
reduced
Area
199899
200001
200405
200506
200708
Overall
30.6
34.5
23.9
22.3
17.2
Rural
34.7
39.3
28.1
27.0
20.0
Urban
20.9
22.7
14.9
13.1
10.0
Source: Center for Research on Poverty Reduction and Income Distribution (CRPRID)
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Percent of people living below the poverty line
reduced
39.3
40
35
34.7
Overall
Rural
Urban
34.5
30.6
30
28.1
25
20.9
22.7
27
23.9
22.3
20
20
14.9
15
17.2
13.1
10
10
5
0
1998-99
2000-01
2004-05
17
2005-06
2007-08
Progress is reflected in the ratings
momentum on Pakistan
B1
B2
Moody’s
B2
B2
B3
B3
B3
Caa1
Aug, 2009
Outlook: stable
S&P
B+
B
B-
B+
B
B-
Aug, 2009
CCC+
CCC
CCC-
B-
CCC
CC SD
Outlook: Negative
31
18
Ratings Scale
Moody’s Investors
Services
STANDARD
&POOR’S
( Long-Term )
( Long-Term )
Investment
grade
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-
Non
Investment
grade
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
BB+
BB
BBB+
B
BCCC+
CCC
CCC19
Pakistan’s Ratings
in 2007
Current Ratings
 What Needs to be Done?
– Newly Elected Government must bring a strong economic
team
– Political Leadership must provide full support to the team
– No Room for Business-as-usual Policy
– Extraordinary situation Demand Extraordinary Measures
– Financial Discipline is the key to success
– Strike a balance between stabilization and Growth
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 Undertake wide-ranging structural reforms
– Taxation side
– Expenditure side
– Accelerating Privatization
– Power Sector Reform
– Circular Debt Issues
– Correcting the Manufacturing defects of the NFC
– Strengthening of Infrastructure
– Strong Linkages with Private Sector
 Challenging Time Ahead but Surmountable
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THANK YOU
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