Pakistan Institute of Development Economics



Pakistan’s Debt Problem: Its Changing Nature and Growing Gravity (The Distinguishedl Lecture) PDR Vol. 37 No.4 Part I-1998

Author: Parvez Hasan

Pakistan has been facing a deep-seated economic and financial crisis and seemingly intractable governance issues for the last few years. Factors such as international sanctions and global economic slowdown, which have worsened Pakistan’s economic difficulties, were beyond Pakistan’s control. But by and large, the country’s economic and financial difficulties are the result of economic mismanagement in key areas over long periods. Bad governance, as reflected in widespread corruption and poor delivery of public services, and especially poor law and order have given birth to a crisis of confidence in the state. It is argued here that despite this scenario, a long and arduous process of building institutions, setting the policies right, and enforcing a rule-based governance stressing both merit and accountability can put Pakistan back on the road to shared prosperity. Resolving financial problems, accelerating demographic transition, exploiting tremendous agricultural potential, improving both availability and quality of education, increasing competitiveness and bringing about structural change in exports and industry, and reforming the government are crucial policy actions that can help shape a better future for the country and end the economic drift.

It is a great honour to be asked to give the first Mahbub ul Haq memorial lecture to The Pakistan Society of Development Economists. Mahbub’s sudden and untimely death in the summer of 1998 is still a source of great shock. His passing away has deprived Pakistan of one of its most illustrious sons and robbed the world community of one of the most effective spokesmen for just development. Mahbub’s path breaking contributions to the concept of human development will be long remembered and his influence on economic and social policies is being felt globally. For me Mahbub was a close personal friend for nearly half a century. It was also a source of great pleasure to work closely with him in Pakistan’s planning in the 1960s and at the World Bank in the 1970s and to see him operate with such boldness and conviction in dealing with issues of poverty. For all his internationalism, Mahbub’s first and lasting love was Pakistan. I know that he was frustrated and troubled that Pakistan’s economic and social performance had not lived up to the earlier promise and had fallen much short of the very considerable potential. In honouring Mahbub ul Haq’s memory, therefore, I will devote my lecture to conditions and policies which are needed for an economic turnaround in Pakistan. I believe better governance and more effective economic management can ensure not only higher growth than in the past but more just distribution of growth benefits, a broader human development and greater self reliance.


There can be little argument that Pakistan has been facing a deep seated economic and financial crisis and seemingly intractable governance issues for the last few years. The financial crisis manifested itself in a near default on external loans in 1996-97, freezing of resident foreign currency deposits in late May 1998, and a technical default on many external debt payment after August 1998, latter triggered by imposition of sanctions following India and Pakistan’s nuclear explosions. A new IMF agreement and agreement by the Paris and London clubs to reschedule substantial amount of debt payments due in 1998-99 and possibly in 1999-2000 has staved off danger of debt default but there is a consensus that these agreements have provided breathing room only. The macro-economic imbalances, both fiscal and external still remain rather large. The overhang of public debt is how huge. By mid 1999 the ratio of public debt to GDP was over 95 percent (the comparable figures for India is 55 percent) and any significant reduction of debt burden will require a combination of strong financial discipline and good economic policies stretched over several years. Meanwhile the financial constraint is aggravating the structural economic problems notably in industry and exports and is depressing investment in physical and human capital so badly needed to rectify Pakistan’s serious lag, in infrastructure and social development. In 1998-99 both public investment and total fixed capital formation as a percentage of GDP were at the lowest level in more than two decades: total investment was only 14.9 percent of GDP in 1998-99 compared to the average of 18.8 percent during 1990–98. It is hardly surprising that the per capita GNP growth which had already slowed to 1.1 percent annum during the first half of the 1990’s from over 3 percent per annum during 1960–90 has nearly stagnated during the last three years

The governance issue are highlighted by the crisis of confidence in the state which is resulting from poor delivery of public services especially law and order. This along with wide spread corruption is leading to a breakdown of the compact between the people and the state. This makes it difficult among other things to collect taxes. At the political level, the divisions in the country remain large notwithstanding the unprecedented political mandate given to Nawaz Sharif’s Muslim League in February 1997 and notwithstanding the large majority of the government in the Parliament. Indeed, the Government’s standing in the smaller provinces has suffered as it lost its coalition partners ANP and MQM . There is a sense that politics are being dominated by the Punjab and the Prime Minister’s inner circle.

From a geo-political point of view, the fact that Pakistan has gone from being the best performing country on the sub-continent in terms of growth rate of GNP per capita during 1960–85 to the worst in the 1990s is bound to have consequences for handling of foreign policy and defence issues. In per capita GNP terms, India now seems to be growing three to four times as fast as Pakistan. This is bound to upset the balance of power considered so vital in South Asia. Thus notwithstanding Pakistan’s acquisition of the nuclear capability, the strategic edge seems to belong to India.

Parvez Hasan