An American politician Alexander Hamilton said: A national debt, if it is not excessive, will be to us a national blessing. External debt refers to the money borrowed by a country from foreign investors. Debtors can be sovereign nations, corporations or private individuals. The debt itself can take the form of money owed to private banks, external governments and global financial institutions including the World Bank or International Monetary Funds. Early phase of economic development, developing countries gather foreign debt as high existing account deficits, shortfall of domestic saving and capital stock. For this purpose, imports are necessary to boost up domestic resources.
External debt is applied as a tool to reduce the gap between domestic savings, investments, exports and imports. This kind of debt permits economic policy makers to spend and invest more by providing surplus sources to current total sources in an economy in a definite period. If appropriate implementation and achievement of financial sources from external debt provide positive contributions and decrease the level of poverty for the countries which have low economic growth. On the other hand, if the attained external debts are distributed uneconomically, cost of debt from external sources cause macro-economic management problems. In general, applied standard for an adequate level of external debt is that the net present value of external public debt should be less than 150% of its exports or 250% of its revenues.
The external debt is categorized into different types including External debt versus GDP, Dangerous debt and Tracking the debt. In 
external debt versus GDP, economists compare the external debt with Gross Domestic Product which means how many manufacture of goods and generate money to pay off their debt. Devaluation of currency is one of the main factor which can lead to wider economic downfall within a country. In dangerous debt, Government used foreign currency to meet up domestic expenses which create problematic situation for the country if external debt costs engulf the public sector. In tracking the debt, government tend to track the external debt of other states. Besides, various global bodies such as World Bank, IMF keep records and get involved in handling external debt, negotiating repayments and offering low interest loans to countries to pay back their debts.
In developing countries, an increase of external debt is regarded as common phenomenon of the fiscal sectors of most of the economies. A country with lesser saving rate requires to borrow more to finance the given rate of economic growth. Therefore, external debt is acquired to withstand the growth rate of the economy which would not achievable with the certain domestic resources. Pakistan is one of the developing countries and faces serious debt problems. According to World Bank report (2000-2001), Pakistan is among the Highly Indebted Countries; as Pakistan’s present and future debt situation is quite gloomy.
In 1947, at the time of independence, rate of domestic saving was too low to finance economic growth through productive investment. As a result, Pakistan decided for external borrowing to hasten the economy growth rate with the assessment that in future increased growth rate would raise the saving rate and generate plenty of exportable surplus to step down the debt. Till 1960, this growth strategy remained successful and perceived a high level of economic growth. Unfortunately, Pakistan suffered serious external debt problem due to various factors.
Firstly, oil price increased by Organization of Petroleum Exporting Countries in 1973/74 which led to decline in the external payments position of the oil importing developing countries and forced many of them including Pakistan to borrow heavily. Secondly, Pakistan suffered from these global events of exceptional nature which forced severe pressures on its Balance of Payments and debt servicing liabilities occurred. In addition, inappropriate implementation of macro-economic policies, political instability, corruption and poor law and order situation are the key internal factors for rapid growth of external debt in Pakistan. In 1970, the value of external debt was $ 3.4 billion which went to $ 9.93 billion in 1980 and it is doubled approximately $ 20.66 billion. In the last few years, external debt increased at an extraordinary rate and went to $ 54.60 billion in 2010. According to World Bank Report of 2014, the external debt of Pakistan reached to $ 65.5 billion.
From the policy prospective it is recommended that increased domestic saving and export earnings could also raise the estimated growth rate and reduce the dependence of the economy on external debt. It is very important to build conducive environment for investment and much focus of the policies should be based on the inflow of Foreign Direct Investment, whereas the inflow of debts should be lessened. There is severe need of deep monitoring and consistent debt management strategies to avoid the misutilization of external debt.
In order to reduce debt burden, Pakistan can use export marketing strategies and take appropriate steps to boost its export. To begin with, reduce inflation rate because if domestic inflation is higher compared to inflation in the counter trading partners, which leads to discourage exports. To increase its exports it also needs to rise its access to foreign market, predominantly to the European Union and USA for its textile exports. Then, Pakistan has to alter its imports from consumer goods to capital goods as capital goods are generally linked with enhanced productivity and higher revenues over the investment. To upsurge foreign investment inflows, Pakistan has to improve law and order situation and business condition. Also, external trade strategies should be supported by strategies intended at mobilizing domestic savings and external investment. Lastly, an in-depth assessment of policies and plans introduced by the World Bank and IMF which is unavoidable as some of the packages are badly disturbing the Pakistan’s economy.
R. Junaid Zahid is Communication Officer & Researcher at Sustainable Development Policy Institute (SDPI).He can be reached at junaid@sdpi.org
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