Debt crisis is indeed a burning current issue in the whole world. A true glimpse of this reality is provided by the ongoing violent protests against a series of fiscal austerity reforms in Greece. The worsening debt crisis of Greece is expected to trigger a contagion of sovereign debt crises in several other European countries.
It is interesting to note that the nature and the economic aftermath of the current debt crisis of Greece and 1998 debt crisis of Pakistan have remarkable similarities ─ For example, the debt-gross domestic product ratio of Pakistan as well as Greece exceeded 100% during their respective debt crises, national external debt has been acting as a drag on the national economies of Pakistan, and Greece, and now both Greece and Pakistan desperately need fiscal consolidation as well as economic growth for resolving their respective external debt crisis.
My doctoral thesis entitled “Economic Effects of External Debt amidst Debt Crisis of Pakistan” aims at offering an empirical explanation of several adverse effects of the 1998 external debt crisis of Pakistan.
While concentrating on Pakistan, my thesis can also provide some lessons for the recent debt crises in America, Europe, Africa and Asia. Above all, it tells a story of all of us as individuals, households, and nations who have been continuously spending beyond our own means by borrowing and thereby incurring individual, household and national budget deficits which have ultimately culminated into ever-growing mountains of the burden of debt which is really the sum of all past budget deficits of a nation.
The story of the debt crisis commenced when Keynes’ policy recommendation of resorting to deficit financing successfully brought the sagging economies of the West out of the great depression of the 1930s. Ironically, this policy of relentless deficit financing itself became a problem and a root cause of most of the external debt crisis since 1970s. Against this background, Pakistan’s public debt/GDP ratio debt was 102% in 1998-99 and external debt/GDP ratio was greater than 50%.
In this scenario, Pakistan experienced an external debt crisis which was triggered by the international economic sanctions imposed against Pakistan in the aftermath of her nuclear tests in 1998. While being at the brink of sovereign debt default, Pakistan was forced by the circumstances to receive additional external loans from International Monetary Fund (IMF) subject to the conditions of implementing the tough austerity measures along with the imposition of a general sales tax of 15%. As a result of the implementation of the conditionalities imposed by the IMF,, Pakistan experienced an additional multiple economic crisis in the form of spiralling double digit inflation which reduced aggregate demand, investment, employment, economic growth and increased poverty in Pakistan. It is against this background that the economy of Pakistan has been crippled by a mountain of external debt which is now equal to US$59.5 billion.
The real dilemma of Pakistan is that in spite of implementing the toughest austerity reforms imposed by the International Monetary Fund., Pakistan’s external debt crisis as well as the multiple economic crises have been worsening throughout the decade of 2000s amidst a worsening recession.
The contemporary debt crisis of Pakistan has become a big hindrance to the growth of economy because fluctuations in external debt have been causing fluctuations in the growth rate of economy. This empirical analysis and the examination of the long-term dynamic macroeconomic effects of the on-going external debt crisis of Pakistan on both sectoral growth rates and sectoral shares of the Gross Domestic Product during the 1990s and the 2000s constitute the subject matter of this thesis.
It is pertinent to note that economists have proposed several alternative solutions to a sovereign debt crisis in the forms of the imposition of a Tobin tax on financial transactions for financing national budget deficits and institutionalization of budget surplus ─ via the enforcement of macroeconomic structural reforms such as privatization, significant cuts in public expenditures, substantial increases in taxes ─ in the national economies of the countries experiencing debt crises. These proposed painful potential solutions of the contemporary national sovereign debt crises are not only controversial amongst the proponents of various politico-economic ideologies but also unpopular among the masses of the countries crippled by the sovereign debt crisis.
However, a logical lesson of the story of debt crisis of Pakistan is to encourage all individuals, households, and governments to live and spend within their means in order to preclude the possibilities of budget deficits and the corresponding painful debt crises.