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This blog is for students, managers and those lay people who are interested to contribute to, comment on or simply share their workplace problems and are keen to learn about issues relating to public finance, corporate finance and macro-economic management affecting their lives.

Tuesday, September 7, 2010

Extravagance a la Pakistan Steel and a borrowed life.....

Pakistan Steel made a history in 2009 when it decided to sell its products at almost half the cost price. What was the motive for this generous subsidy is a public knowledge. If you just ignore the direct overhead expenses, even then the cost of raw material alone exceeded the selling price. More interesting thing is that production overheads increased when the sales were on the decline. The company was emboldened by the fact that the management of the previous year had made some cash savings of Rs. 10 billions which were used freely and on top of that, a short-term borrowing of Rs. 5.8 billions was obtained. It also used workers saving like pension funds to make both ends meet and be able to subsidize the sales.

Pakistan government seems to have learned a lesson or two from the Steel Mills. A rather alarming development was reported by almost all Pakistani newspapers on September 7, 2010 that the government, federal and provincial, is on the verge of financial collapse. So dire is the state of affairs that the government may not have money to pay salaries in a few months. Well, does it not sound like Pakistan Steel? Government of Pakistan is there to bail out Pakistan Steel, PIA, railways, WAPDA etc but who will bail out Pakistan Government?

This is a God-sent opportunity for IMF and other donors to make some quick bucks. The IMF has announced to provide $450 million to Pakistan under emergency assistance for the rehabilitation and reconstruction of flood-hit areas. The World Bank and the Asian Development Bank (ADB) have also offered $1 billion and $2 billion respectively, for the same purpose. Thus, the three International Financial Institutions (IFIs) together would provide almost $3.5 billion to Pakistan as loan in the shortest possible time. The international community has also pledged about a billion dollar assistance for the flood-affected areas. Some of the pledges would be in cash and some in kind. The pledge in the shape of cash would mostly be in terms of soft loan.

This situation was analyzed by Dr Ashfaq Hasan Khan, a member of Musharraf economic team in an op-ed which appeared in The News International on Wednesday. The paper says that the current finance minister seems to have entered a race with the former finance minister in terms of drowning the country under debt. The former finance minister remained at the helm of affairs for 16 months and signed an over $11 billion assistance package with the IMF, of which $8.7 billion has been disbursed. The current finance minister has had the privilege to borrow $3.5 billion in just four months of his stay. With this speed he will definitely outpace his predecessor in accumulating debt. What the writer failed to write was that the current finance minister was also a minister under Musharraf.

The debt figures given in the op-ed are frightening. Pakistan's external debt and liabilities (EDL) stood at $38.9 billion at the end of June 1999, which rose to $40.3 billion by end of June 2007 - an increase of only $1.4 billion in eight years. During the last three years (2007-10), the EDL surged from $40.3 billion to $55.6 billion - an increase of $15.3 billion as compared to $1.4 billion in the previous eight years, should be an eye-opener for the current economic team. The consequences of the surge in EDL are alarming for the economy. As a result of exorbitant increase in EDL, the external debt-servicing surged from a $2.87 billion in 2006-07 to $5.64 billion in 2009-10 - almost doubled in just three years. Debt-servicing was only 16.6 per cent of the total export earnings in 2006-07 but rose to almost 29 percent in 2009-10. In other words, almost 30 per cent of export proceeds were consumed for debt-servicing in 2009-10, thus reducing the country's capacity to import.

The op-ed says that economic activities in developing countries like
Pakistan are largely dependent on imported raw material, capital goods, energy etc. A decline in the country's capacity to import is bound to slow down the economic activity with the attendant rise in unemployment and poverty. No country in the world has ever come out of a difficult situation like us by living on borrowed resources. The only way to do that is a life of simplicity and austerity and not luxury otherwise we will be living a borrowed life.

1 comment:

  1. An eye opener statics of external debts of Pakistan has been reflected in this blog. I wish our Govt draw some lesson out of it before it is too late.