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Debt, Growth and Poverty Reduction: A Case of Pakistan

Debt, Growth and Poverty Reduction: A Case of Pakistan. Economic growth is the single most important factor influencing poverty a 10 percent increase in a country’s average income will reduce the poverty rate by between 20 and 30 per cent.1

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Debt, Growth and Poverty Reduction: A Case of Pakistan

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  1. Debt, Growth and Poverty Reduction: A Case of Pakistan

  2. Economic growth is the single most important factor influencing poverty • a 10 percent increase in a country’s average income will reduce the poverty rate by between 20 and 30 per cent.1 • A stable macroeconomic environment is essential for a sustained high economic growth • Empirical evidence suggests that macroeconomics instability has generally been associated with poor growth performance and the associated rise in poverty • The persistence of large fiscal and current account deficits and the attendant rise in public and external debt have been the major source of microeconomic instability in many developing countries.

  3. Summary

  4. Existing Empirical Evidence • Rising public debt and economic growth exhibit negative relationship • Reinhart and Rogoff (2012) found weak relationship between government debt and long term economic growth under 90% of debt/GDP ratio. Negative relationship becomes stronger beyond 90% of debt/GDP ratio. • Balassone et al. (2011) found a negative and non-linear relationship between public debt and growth, with growth declining substantially when the debt to GDP ratio exceeds 100 percent.

  5. Summary • Overwhelming empirical evidence suggests four things • Relationship between public debt and economic growth is negative • Relationship is non-linear • There exists bi-directional causality between these two variables • Higher public debt affects growth negatively through investment

  6. IS DEBT CREATION BAD FOR THE ECONOMY? • Borrowing domestically or abroad is a normal part of economic activity. • As long as the borrowers can earn a higher economic/social rate of return than the cost of invested funds, creation of debt is not a burden. • Debt-servicing problems arise when the debt carrying capacity of the country does not increase commensurate with the increase in its debt servicing liabilities. (The debt carrying capacity is defined as the ability of a country to service its external liabilities within an orderly and stable macroeconomic framework) (Continue…)

  7. IS DEBT CREATION BAD FOR THE ECONOMY? • Short-term borrowing for longer-term projects can lead to serious cash flow problems. • Countries most often run into difficulties because the borrowed funds are directed toward wasteful or low economic return projects.

  8. Pakistan sustained a very large budget deficit in the 1990s and During 2008-12 Overall fiscal deficit (% of GDP) Source: Ministry of Finance * Including earthquake related expenditure

  9. Current Account Deficit (% of GDP) • Current Account Deficit remained high in the 1990s despite low economic growth. • Current Account Deficit widened recently on account of strong economic activity and rising oil and commodity prices. The same has improved in 2008-09 on account of collapse in oil and commodity prices. Source: SBP

  10. TRENDS IN PUBLIC DEBT (Rs. Billion) • Total stock of public debt in 60 years (1947-2007) stood at Rs. 4802 billion but we added Rs. 9466 billion in just six years (2008-13) Source: Ministry of Finance

  11. TRENDS IN EXTERNAL DEBT AND LIABILITIES External Debt and Foreign Exchange Liabilities (Billion $) • We added $1.6 billion in external debt in 8 years (2000-07) but added $19.6 billion in just 4 years (2008-11) Source: Ministry of Finance

  12. MACROECONOMIC CONSEQUENCES OF UNSUSTAINABLE DEBT

  13. WHY SHOULD WE WORRY ABOUT RISING DEBT BURDEN • Serious threat to development • Major source of Macroeconomic instability • Lower Economic Growth • Rise in Unemployment • Rise In Poverty • Raises the Risks of a Fiscal Crises • Keeps Borrowing Cost High • Discourages Private Sector Investment • Major source of discouragement for foreign investment • Keeps pressure on exchange rate • Major constraints for the government to undertake counter cyclical policies to revive economic growth

  14. LOSS OF FINANCIAL SOVEREIGNITY • Pakistan became the prolonged user of IMF resources. • Economic Policy making circles around IMF/IFIs Programs. • Influence of IMF and IFIs in policy making increase substantially. • We went to the IMF in November 2008; IMF Program remained suspended since May 2010 and until the completion of the program in September 2011. • Pakistan Entered in a new program with the IMF in early Sep 2013

  15. Barring two years the real GDP grew at an average rate of 3.8% p.a in the 1990s Growth recovered during 2002-07 to an average of 6.8% p.a. Source: Various Issues of Economic Survey

  16. Significant Reduction in Unemployment • Unemployment declined … • 13.5 million jobs created in seven years • We need to create 3.5- 4.0 million jobs per year in the next 10 years for new entrants • Source: Economic Survey 2006-07 • Source: Labour Force Survey, FBS

  17. Percent of people living below the poverty line reduced Source: Center for Research on Poverty Reduction and Income Distribution (CRPRID)

  18. Poverty; trends, causes and solutions

  19. Percent of people living below the poverty line reduced

  20. Progress is reflected in the ratings momentum on Pakistan Moody’s B1 B2 B2 B2 B3 B3 B3 Caa1 Aug, 2009 Outlook: stable B+ B+ B B Aug, 2009 S&P B- B- B- CCC+ CCC CCC- CCC SD CC Outlook: Negative 31

  21. Ratings Scale STANDARD &POOR’S Moody’s Investors Services ( Long-Term ) ( Long-Term ) Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 AAA prime AA+ AA high grade AA- A+ under medium grade A A- BBB+ BBB BBB- Investment grade Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca BB+ BB BB- B+ B B- CCC+ CCC CCC- Non Investment grade Pakistan’s Ratings in 2007 (H.speculative Current Ratings

  22. What Needs to be Done? • Newly Elected Government must bring a strong economic team • Political Leadership must provide full support to the team • No Room for Business-as-usual Policy • Extraordinary situation Demand Extraordinary Measures • Financial Discipline is the key to success • Strike a balance between stabilization and Growth

  23. Undertake wide-ranging structural reforms • Taxation side • Expenditure side • Accelerating Privatization • Power Sector Reform • Circular Debt Issues • Correcting the Manufacturing defects of the NFC • Strengthening of Infrastructure • Strong Linkages with Private Sector • Challenging Time Ahead but Surmountable

  24. THANK YOU

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