A Simulation Analysis of the Debt Problem in Pakistan

Eatzaz Ahmad, Ayaz Ahmed

Abstract


The current debt situation in Pakistan and the resulting
financial crisis require serious attempts to find a sustainable
indigenous solution. As such it is essential to search ways and means to
reduce dependence on external borrowing over medium to long run.1
External debt is usually created to sustain a growth rate of the
economy, which is otherwise not feasible with the given state of
domestic resources, technology, consumption propensity and economic
management practices. However, the success of economic growth financed
by external borrowing depends on two factors, namely the domestic saving
rate and productivity. A country with lower saving rate needs to borrow
more to finance a given rate of economic growth. In Pakistan the flow of
external loans is likely to have adversely affected the compulsion for
savings. For example, no serious attempts have been made to improve tax
collection or to control non-development government expenditure unless
forced by the donor agencies. The adverse effect of borrowing on savings
has recently been observed in [Ali et al. (1997)]. The evidence also
does not support the proposition that higher rate of economic growth
results in higher saving rate [see Ali et al. (1997)]. The saving rate
in the private sector of Pakistan has remained low because of low real
interest rates and the lack of legitimate and safe investment
opportunities. Furthermore the poor and middle-income classes have been
burdened with high inflation tax and no serious efforts have been made
to tax the rich. Saving rate in the government sector has been
deteriorating due to exponential growth in the size of this sector and
extraordinarily low productivity. Government has ventured in the
territories where it had no business in the first place.

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DOI: https://doi.org/10.30541/v37i4IIpp.355-376

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