Breaking the Debt Trap: Myths and Reality

Is coming out of the debt trap easier said than done for Pakistan’s New Government?
Making Pakistan’s economy debt free remains one of the biggest aspirations of Prime Minster Imran Khan. Despite tall claims being made by PTI of neither seeking help from IMF nor begging any state for loans the new government still had to consider both the options. Khan whilst sitting in the opposition had criticized previous corrupt regimes for accumulating foreign debt. However after coming to power he found himself in the same situation and asked for foreign assistance to avert balance of payment crises. With the passage of time the Prime Minister would realize that once in power decision makers have certain pressures. Therefore instantly making the economy debt free is easier said than done. It is obviously true that some of the third world countries with the inclusion of Pakistan are in a debt trap. In order to understand why third world states are in a debt trap we need to understand the world system theory. The world system theory defines a three tiered structure of inequality (core, periphery and semi periphery). This structure of inequality is manifested in dimensions such as unequal distribution of wealth, asymmetrical economic independence and political inequality. Despite aspiring to eventually get out of the debt trap the present government had to consider IMF and the option of seeking help from friendly states. Earlier this year the United States was concerned about its tax payer dollar being paid to Chinese companies as a part of IMF bailout. However, no conclusion has practically been reached between IMF and Pakistan therefore now the government is solely depending on foreign assistance to avert its balance of payment crises. Pakistan has so far sought financial assistance from Saudi Arabia, UAE, China and Malaysia.Financial aid worth $ 6 billion relief has been issued from the Saudi’s. China has pledged to offer one a half billion dollar grant. Furthermore another one and a half billion dollars would be given to Pakistan as soft deposit to stabilize the rupee. Besides that the Chinese have also pledged to invest in the agriculture sector. Pakistan for balancing trade with China has requested the Chinese government to let its 300 items reach the Chinese markets free of duty. Concerning Imran Khan’s recent visit to China, economic experts have two opinions. The first opinion suggests that PM’s Chinese visit has been extremely successful. The second opinion of experts suggests that the recent trip to China has been pretty disappointing. Some experts are of the view that the benefits of CPEC would take longer to materialize while Pakistan needs an instant solution. Furthermore Skeptics are of the view that China is not offering unconditional financial support to Pakistan. However, the question is whether the new regime can actually break the debt trap or is it far from reality? The answer is that the new government still needs to improve its financial policies. Some experts suggest the new government should follow the example of Ecuador where Presidential commission was set up to audit country’s foreign debt. Resultantly the government suspended certain parts of the country’s accumulated foreign debt. The inquiry conducted by Ecuador’s CAIC Commission blamed country’s former presidents, finance ministers, presidents of central banks and so forth so on. Likewise Pakistan should also payoff the legitimate amount of its foreign debt by auditing the accumulated foreign debt. More over financial experts are of the view that the present government should consider imposing a ban on the import of luxury items to stop dollar from flowing out of Pakistan. Experts believe that imposing more taxes on imported good is not sufficient to improve the economy. The country at this point of time was in a dire need of foreign financial assistance to avert its balance of payment crises. However, accumulating more foreign debt without taking to task all those who had accumulated foreign debt is certainly not a wise decision. The government therefore must audit all the accumulated foreign debts and only payoff the legitimate debt in order to break this classic debt trap.


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