Pakistan’s external debt and liabilities stood at 63.96 billion US dollars at the end of 2014

Pakistan’s external debt and liabilities stood at 63.96 billion US dollars at the end of 2014. For a population of approximately 200 million, this means that every Pakistani owes about 320 US dollars to foreigners alone — the total amount of money each of us owes is more than 1,000 US dollars. Dr Hafiz Pasha, a former finance minister, says the government of Prime Minister Nawaz Sharif has signed loan agreements of 52 billion US dollars, to be received in the next five to 10 years. These new loans will only add to our individual and collective debt burden.

According to the World Bank, there are three components of foreign aid, which is generally known as Overseas Development Assistance (ODA): loans made on concessional terms by multilateral institutions such as the International Monetary Fund, the World Bank and the Asian Development Bank; grants made by the official agencies of the 29 rich countries which are members of an international donor consortium called Development Assistance Committee (DAC); and grants made by non-DAC countries. The problem is that substantial part of foreign aid, indeed, consists of loans. Only a part of it is grants – handouts we don’t need to return – and that part has been shrinking of late.

Pakistan has received somewhere between one per cent and two per cent of ODA disbursed to all the recipient countries between 2001 and 2013. In relative terms, this figure may look small but not so in absolute terms. According to a Congressional Research Service report, prepared for the American legislature, Pakistan has received approximately 104 billion US dollars in foreign aid over a 53-year period, from 1960 to 2013. Close to 40 per cent of this money – 31 billion US dollars – was received just in 10 years between 2001 and 2013.

This article looks at some important aspects of foreign aid in Pakistan.

Pakistan is an aid-dependent country.

Yes, to a large extent.

To measure a country’s reliance on foreign aid, it is important to know how much ODA contributes to its Gross National Income (GNI) every year — the higher the contribution, the higher the dependency. Pakistan’s ODA to GNI percentage has been varying widely since 2001. In the years immediately following 9/11, it was higher than the average for all the recipient countries. That changed after 2003 when it declined to 1.25 per cent — lower than the average figure that stood at 1.43 per cent then. After 2009, the percentage increased again due to 7.5 billion US dollars that Pakistan received from the United States in 2010-2014 under the Kerry-Lugar-Bergman Act.

What these fluctuations do not show is that Pakistan’s dependence on foreign money has always been huge. One measure of this dependence is that the money required to retire or to service foreign liabilities stands at a staggering six per cent of the country’s Gross Domestic Product (GDP). To put things in perspective, education expenditure is less than two per cent of the GDP and health gets less than one per cent of the total national output.

The increase in debt servicing is mainly caused by shift in external financing from bilateral grants and concessional loans (77 per cent of the total ODA in the 1960s) to multilateral and non-concessional loans. By the late 1990s, the grant part had declined drastically to 9.6 per cent and continued to drop subsequently. Data by the Economics Affairs Division in Islamabad suggests that only seven per cent of all foreign economic assistance given to Pakistan in 2014 was in the form of grants. The rest was bilateral or multilateral loans — 94 per cent of them in the last year coming from just one country, China. These loans have improved Pakistan’s fiscal position today but, at the same time, these have increased foreign liabilities and also the amount of money required for paying them back in the future.

Aid money is meant for specific sectors.

Yes, the donors have preferences.

Four sectors in Pakistan have received the highest amount of foreign aid, especially in recent years: education, health, government and social sector infrastructure. The education sector has been consistently ranked as number one recipient of foreign aid since 2007. Health and governance have continued to exchange the rest of the four spots among them over the same years. Aid to health and education sectors, however, plummeted in 2003 and only returned to the 2002 level in 2007. Another spike in aid money spent on these sectors was seen in 2010 onwards primarily due to the Kerry-Lugar Assistance Act.

Foreign assistance for the energy sector shows a similarly up-and-down pattern. It was a relatively high priority sector for the donors till 2004 but then it did not receive much attention during the rest of the last decade. Only with the start of the current decade did donors pour in money for it again — the ADB, for instance, has reaffirmed its commitment to fund the construction of Bhasha Dam as well as the Turkemanistan-Afghanistan-Pakistan-India (TAPI) gas pipeline. The US has, similarly, spent millions of dollars in the restoration and maintenance of the power sector, including a thermal power plant in Jamshoro.

While some of the fluctuations in aid may have political and diplomatic reasons, they certainly do not reflect the relative weakness or strength of the aid-receiving sectors. Agriculture, for instance, contributes about 21 per cent to Pakistan’s GDP but it has never been among the top five priority sectors for foreign aid allocation.

The education sector has been consistently ranked as the number one recipient of foreign aid since 2007 | Illustration courtesy dawn.com

Aid is linked to the donors’ geopolitical interests.

Not always.

It will be a sweeping generalisation to state that all aid is driven by the donors' geopolitical interests. A look at the aid given to Pakistan since 2001, indeed, suggests that there has been no consistent pattern in the amount and focus of foreign assistance. During the similar or even same political and strategic situations, the donors have responded differently to the country’s calls for aid. For instance, Pakistan did not receive much American aid between 2007 and 2010 even when the two countries were still fighting jointly against terrorism.

One of the major global determinants in how much aid a country should get has been the international community’s commitment to undertake development projects in health and education sectors. Most of the aid flowing towards these two sectors is channelised under two major initiatives — Education for All and the Millennium Development Goals (MDGs). Even when sometimes aid flows to individual countries change due to certain strategic and political factors – such as the post-9/11 war against terrorism leading to a bigger influx of foreign aid into Pakistan – international political developments have a minor role to play in directing which way foreign aid money should move and by how much.

Foreign aid has increased economic growth and improved social indicators.

We do not really know.

International experience and literature are inconclusive in this regard. Some experts suggest aid has a positive effect on economic growth if certain other conditions – such as the presence of sound commercial, fiscal and monetary policies – hold. Others argue that economic activity does not increase by the same rate as the foreign aid injected into the economy. In some ways, foreign aid, in fact, proves harmful for economic growth as it helps recipient governments refrain from generating revenue from internal sources, by inducing domestic savings and raising taxes for instance.

The situation in Pakistan is also unclear at best. While some studies find that aid has not been helpful in mobilising domestic economic resources, others point out that stringent terms and conditions attached to concessional multilateral loans have mostly proved harmful for economic activity. The huge foreign exchange requirements to payback foreign loans also put severe pressure on fiscal resources — a major part of the new foreign loans goes into retiring the old ones, leaving little money for investment in economic and social uplift. The most recent United Nations Human Development Index says about 60 per cent of Pakistanis live on less than two dollars a day; 5.5 million Pakistani children are out of school; and Pakistan has the highest number of illiterate adults after China and India. These statistics clearly show that aid has not improved social and economic indicators — not, at least, in a significant way.

William Easterly, an American economist, calls this phenomenon “growth without development.” In his paper, The Political Economy of Growth Without Development, he writes: “Pakistan has had respectable per capita growth over 1950-1999, intensive involvement by donors and international agencies (58 billion dollars in foreign aid), and has a well-educated and high-achieving elite and diaspora. Yet, Pakistan systematically underperforms on most social and political indicators – education, health, sanitation, fertility, gender equality, corruption, political instability and violence, and democracy – for its level of income.”

One reason for this is obvious: a huge amount of aid has not been utilised effectively. “It is estimated that only one-third of external assistance appears in the budgetary record and forms part of the Public Sector Development Programme (PSDP),” reveals Dr Vaqar Ahmed who works for the Islamabad-based think tank, Sustainable Development Policy Institute (SDPI). In a paper, Foreign Aid in South Asia, he points at massive leakages in aid utilisation and argues that these leakages are mostly caused by a lack of coordination among government departments. Coordination, he says, becomes even more difficult in sectors which receive aid for small projects from a large number of donors.

A USAID (United States Agency for International Development) fact sheet on the US assistance to Pakistan goes even further and finds problems in aid utilisation in almost every sector. “Challenges to implementation of the civilian assistance program in Pakistan remain in every sector.” One of the culprits the report blames for this state of affairs is the lack of capacity within local institutions to disburse and spend foreign aid in an effective and efficient manner. “Limited local technical capacity has affected the implementation of many assistance efforts.”

Senators Richard Lugar (Left) and John Kerry (right), who, along with Congressman Howard Berman, were the sponsors of the Enhanced Partnership with Pakistan Act of 2009

Pakistan can get out of the aid trap.

Yes, that is possible.

The best way out of an aid cycle is to mobilise domestic resources. This can be done mainly by initiating comprehensive tax reforms. Tax-to-GDP ratio in Pakistan is amongst the lowest in the world — in 2014 it stood at 10.1 per cent. Efforts should be made to increase the tax net rather than imposing more taxes on those who are already paying. Those who have less should pay less. Those who are not paying taxes at all should be incentivised to pay.

Devising innovative financing mechanisms is another option for mobilising local resources to generate fiscal space for the development of social sectors. Bright Future Program in Florida is an illustrative example. In 1986, Florida authorised a lottery to use its proceeds for financing public-sector education. Since its inception, the lottery has provided 28 billion dollars to the state’s schools and students through scholarships, books, technology and even buildings. The money that the lottery injects into the education system is six per cent of Florida’s annual education sector budget.

Another example is the one implemented by a multi-country anti-disease programme, UNITAid, in France, Cameroon, Chile, Congo, Madagascar, Mali, Mauritius, Niger and the Republic of Korea. Under this scheme, everyone buying economy class air tickets in these countries has to pay one US dollar extra and everyone travelling business class pays 40 US dollars extra. The money thus collected then goes into a fund meant for fighting diseases such as Aids and malaria. These levies account for half of the UNITAid’s total financial resources as of now.

Perhaps similar programmes can be replicated in Pakistan by tapping into the enormous potential of private philanthropy. Small steps matter and may help alleviate the country’s reliance on foreign aid which, in any case, hasn’t helped the local economy in any significant way.