The foreign economic assistance since early 1950s has largely supplemented the scarce domestic resources and made positive contribution towards sustaining a higher economic growth and developing the country's infrastructural base. However, the increasing reliance on foreign borrowing and its hardening of terms had serious implications for Pakistan's debt service obligations. Consequently, the disbursed and outstanding external debt (medium & long term) by end June, 2000 is estimated to have risen to $ 25.5 billion or 39.4 percent of GDP and about 306 percent of export earnings. Similarly the annual external debt service payments have risen substantially over time and squeezed the net inflow of foreign resources. However, due to rescheduling of debt, the service payments during 1999-2000 are expected to decline by 8.5 percent to $ 1400 million, that is, 2.2 percent of GDP. Likewise declining trend also persists in the commitments and disbursements of loans which are likely to aggregate at $ 1659 million and $ 1966 million respectively during the current fiscal year, 1999-2000.

Commitments and Disbursements
The commitments and disbursements in the 1990s exhibited a declining trend and, on yearly basis, averaged at $ 2309 million and $ 2422 million respectively. The commitments declined by 35.6 percent from $ 2576 million in 1990-91 to $1659 million, in 1999-2000. While decline in disbursements in this decade was 8.8 percent — falling from $ 2156 million in 1990-91 to $ 1966 million in 1999-2000. Disbursements as percentage of commitments have shown a divergent trend, fluctuating widely in the decade of the 1990s. The ratio was as low as 83.7 percent in 1990-91 and peaked at 133.0 percent during 1997-98. The details are given in Table 10.1.

* Estimates
Source: Economic Affairs Division

The annual commitments and disbursements since 1990-91 to 1999-2000 are also documented in Fig-1.

The commitments of foreign aid continued to rise every year due to higher availability of aid and reached $ 3,439 million in 1989-90. A declining trend was witnessed thereafter, as commitments sharply reduced to $ 1,897 million in 1992-93, reflecting a net fall of $ 1,542 million or 44.8 percent over 1989-90, mainly due to poor aid environment. However, commitments rose again to $ 3,025 million in 1994-95 but this revival could not prolong as the commitments fell sharply to $ 2,681 million in the following year (1995-96) and further to $ 1,759 million in 1996-97. However, these were up at $ 2,106 million during 1997-98 and $ 2,119 million during 1998-99. The commitments for 1999-2000 are estimated to decline by 21.7 percent to $ 1,659 million due to the economic sanctions. In total commitments, the share of consortium sources (excluding relief assistance for Afghan refugees), non-Consortium and Islamic countries, during 1999-2000 is expected to be 59.9 percent, 29.1 percent and 10.9 percent respectively. The share of relief assistance for Afghan refugees is expected to be only 0.1 percent during 1999-2000. The commitments by use and type of aid since 1995-96 are given in Table 10.2.

E: Estimates Source: Economic Affairs Division

The disbursement of aid as a proportion of total commitments with some fluctuations has declined over time primarily due to changed international environment. The gross disbursements fell from 104 percent of total commitments in the Third Plan period (1965-70) to 60 percent in the Sixth Plan period (1983-88). It rose to 87 percent during Seventh Plan period (1988-93) and further to 105 percent in Eighth Plan period (1993-98). This ratio went up to 112 percent during 1998-99 and is expected to further rise up to 118 percent during 1999-2000 due mainly to lower commitments. An amount of $ 1,966 million is expected to be disbursed during 1999-2000 which would be less by 17.5 percent over the level of $ 2,384 million in 1998-99. The position of disbursements since 1995-96 by type and use of aid is summarized in Table 10.3.

E: Estimates Source: Economic Affairs Division

Debt Service Payments and Net Transfers
The increased liability of debt service payments has squeezed the inflow of net foreign resources. The net transfers of aid in the decade of the 1990s averaged at $ 593 million per annum. It peaked at $ 853 million in 1991-92 but turned negative by $ 34 million in 1996-97 due to decline in disbursements and relatively more growth in debt service payments. However, it improved to $ 852 million during 1998-99 due to lower debt
servicing resulting from debt rescheduling and are estimated to decline further to $ 564 million in 1999-2000. The annual details since 1990-91 are given in Table 10.4.

* Excluding relief assistance for Afghan refugees
** Excluding interest on short-term borrowings and IMF charges.
E. Estimates.
Source: Economic Affairs Division.

It is an irony that at a time when Pakistan is facing serious balance of payments difficulties it has emerged as net exporter of capital to the International Financial Institutions (the preferred creditors) with the expected amount of $ 533.8 million during the current fiscal year [See Table 10.5].

Source: External Finance Wing, Finance Division

The net transfer of foreign aid as percent of gross disbursement in the decade of the 1990s has continuously been declining till 1996-97 due to steep rise in debt service payments. The net transfer of foreign aid was 36 percent of the disbursements in 1990-91 but turned into negative by 1996-97. It improved to 16 percent during 1997-98 due to greater inflow of loans and food aid. The net transfers, however, further increased to 36 percent in 1998-99 due to lower debt service payments as a result of debt rescheduling but are projected to decline further to 29 percent in 1999-2000. The aid flows instead of being utilized to build up the production capacity of economy are being largely used up in debt servicing. The ratios of annual transfers since 1990-91 are shown in Fig-2.

Sources of Aid
The major sources of foreign economic assistance to Pakistan have been the Consortium, non-Consortium and Islamic countries. Among these, the Aid-to-Pakistan Consortium formulated in 1960 now renamed as 'Pakistan Development Forum' (including assistance from Consortium sources under outside Consortium arrangements) remains the largest source of economic assistance to Pakistan by providing 84 percent of the total commitments. Of this, 46 percent was on bilateral and 38 percent on multilateral basis. The members of non-Consortium provided 8 percent while Islamic countries contributed 5 percent to total foreign economic assistance. The share of relief assistance for Afghan Refugees was 3 percent. The share of Consortium sources (excluding aid under outside Consortium arrangements and relief assistance) in total commitments is likely to increase from 53.2 percent in 1998-99 to 59.9 percent in 1999-2000. Source-wise commitments and disbursements for 1998-99 and 1999-2000 are summarized in Table 10.6.

* Excluding short-term credits of one and less than one year maturity
E: Estimates
Source: Economic Affairs Division

Project Vs Non-Project Aid
The element of project aid in the total disbursement has been increasing over the years. The project aid in the decade of the 1990s averaged at $ 1746 million per annum. It was as high as $ 2151 million during 1995-96 and as low as $ 1265 million in 1999-2000. The non-project aid in this period, on yearly basis, averaged at $ 676 million. It attained peak at $ 1249 million in the year 1997-98 and remained at low level of $ 412 million during 1996-97 due to lesser disbursement of aid and constraints in counter part financing. The details are given in Table 10.7.

* Estimates
Source: Economic Affairs Division

The share of project aid in the decade of 1990s averaged annually at 72 percent and fluctuated between 55-84 percent. The share of non-project aid during this decade fluctuated widely (16-45 percent) and averaged at 28 percent per annum. The share of project aid during 1998-99 was 65.5 percent which is expected to go down to 64.3 percent in 1999-2000 due to difficulties in counter part financing and lesser disbursement of aid. The share of non-project aid on the other hand is likely to increase from 34.5 percent in 1998-99 to 35.7 percent during 1999-2000 due mainly to higher disbursement of non-food aid. The trend is reflected in Fig-3.

Terms of Loans and Credits
Overtime, the terms of foreign loans and credits have significantly become harder. The terms and conditions of the loans and credits were soft during the 1960s and 1970s, as compared to the terms in the 1950s. During the 1980s and the first nine years of the 1990s (1990-99), these terms have been made somewhat more harder. The rate of interest which averaged at about 4.6 percent during the 1950s declined to 3.3 percent during the 1960s and the 1970s, but increased to 4.8 percent and 4.4 percent during the 1980s and the first nine years of the 1990s respectively. The payment period of the loans/credits during the 1950s was 21 years with a grace period of 2 years which improved to 30 years with a grace period of 7 years during the 1960s, but reduced to around 25 years with a grace period of 6 years during the 1970s. Repayment period, however, improved to 28 years including a grace period of 7 years in the 1980s but declined to 22 years including a grace period of 6 years during the first nine years of the 1990s. The terms of loans and credits became harder as not only the grant element has become quite insignificant but the aid also became donors driven i.e. on the pre-specified donors terms and conditions. Furthermore, the commercial loans were available only on higher interest rates. By and large, the hardening of terms reflected by higher average interest rates and lower average maturity periods of the loans have adversely affected Pakistan's external debt servicing.

Composition of Aid
The composition of aid over the years has considerably changed from grants and grant like assistance to hard term loans. The share of grant and grant like foreign assistance in total commitments was 80 percent during the First Five Year Plan (1955-60) but dropped to 46 percent during the Second Plan (1960-65) and continued to decline thereafter, averaging 31 percent during the Third Plan (1965-70) and 10 percent during the Fourth Plan (1970-75). However, due to the relief assistance for Afghan refugees, its share increased to about 22 percent during the Fifth Plan (1978-83) and remained almost the same during the Sixth Plan (1983-88). Thereafter, the share of grants and grant like assistance continued to exhibit a declining trend and averaged at 16 percent during Seventh Plan (1988-93) and 9 percent during Eighth Plan (1993-98). It however, increased to 15 percent in 1998-99 but is likely to decrease again to 11 percent during 1999-2000.

Stock of External Debt
Pakistan's accumulated disbursed and outstanding external debt (medium & long-term) is presently close to $ 25.5 billion. The debt during 1990-91 was $ 15,471 million and reached $ 22,633 million by the end of 1998-99, implying a net increase of $ 7,162 million or by 46.3 percent. It is estimated that debt would rise to $ 25,493 million by the end of current fiscal year, making further addition of $ 2,860 million or 12.6 percent. External debt has grown at an average rate of 5.5 percent per annum during the decade of 1990s.

Further analysis reveals that external debt has grown at an average annual rate of 8.0 percent during 1990-91 to 1994-95 but it slowed down to an average rate of almost about 3.0 percent per annum during 1995-96 to 1999-2000. The slower rate of growth of medium and long-term outstanding debt during the second half of the 1990s suggests that Pakistan's reliance on short-term debt has gone up.

The external debt to GDP ratio has exhibited a fluctuating trend during the 1990s. It was 34 percent in 1990-91 but escalated to 39 percent in 1993-94 and then declined thereafter. This ratio, however, took upward trend during 1998-99 and 1999-2000 (39%) due to rescheduling of debt service payments and addition of capitalized interest in debt stock as a result of rescheduling agreements with donors. As percentage of export earnings, external debt has remained in the range of 251 to 306 percent during the 1990s which is sufficiently higher than the sustainable debt limit of 225-250 percent.

Pakistan's debt servicing liability has also shown a rising trend in the 1990s - rising from $ 1,316 million in 1990-91 to $ 2,353 million in 1997-98, thereby registering an average increase of 8.5 percent per annum. Annual accumulation of external debt, higher cost and lower maturity period of loans are mainly responsible for steady increase in debt servicing liability. However, due to the debt relief from the "Paris Club" and "Non-Paris Club" donors/ countries, debt servicing during 1998-99 has dropped to $ 1,530 million which is less by 35 percent over 1997-98 and is estimated to decline further to $ 1,400 million or by 8.5 percent during 1999-2000.

Debt servicing as percentage of foreign exchange earnings has increased from 13.7 percent in 1990-91 to 17.6 percent in 1997-98. This ratio however, has dropped to 13.6 percent during 1998-99 and is estimated to be 10.8 percent during 1999-2000. As percent of GDP it has increased from 2.9 percent in 1990-91 to 3.8 percent in 1997-98 but it declined to 2.6 percent during 1998-99. As percentage of export earnings, the debt servicing has also increased from 21.5 percent in 1990-91 to 27.3 percent in 1997-98 which is higher than the sustainable limits of 20-25 percent. It, however, declined to 19.7 percent in 1998-99 due to debt relief as a result of rescheduling and is further estimated to decline to 16.8 percent during 1999-2000. The annual details of stock of debt since 1990-91 are given in Table 10.8.

* Regular debt (payable in foreign exchange only). Medium and long term.
** Excluding interest on short-term borrowings and IMF charges.
FEE: Foreign Exchange Earnings.
E: Estimates
Source : E.A.D

The significant decline in debt service payments due to rescheduling of external debt is also portrayed in Fig-4.

Rescheduling of Debt
The squeez on foreign exchange reserves caused by the drying up of assistance from the International Financial Institutions (IFIs) as a result of the economic sanctions and the resultant fall in private transfers/capital, created large financing gap in the balance of payments. This gap was to be bridged by the resumption of flows from the IFIs and debt rescheduling under the aegis of the Paris Club and its commercial creditors including the Euro bond holders. Accordingly, once the agreement to reactivate the stalled IMF programme was reached, the government approached the Paris Club secretariat for rescheduling its bilateral debts. An agreement was reached with Paris Club creditors in January, 1999 to reschedule its debt amounting to about $ 3 billion, payable during the consolidation period from 1-1-1999 to 31-12-2000 including arrears as of December 31, 1998 for the loans contracted upto September 30, 1997 having maturity for more than one year. The country wise status of debt rescheduling as on 1st May, 2000 under Paris Club bilateral agreements (signed/initiated) are documented in Table 10.9.

Source: Economic Affairs Division

Of the non-Paris Club creditors, agreement on State Credits (ODA) with Peoples Republic of China has been concluded in February, 2000. Negotiations with other creditors outside Paris Club are in progress. The expected amount of debt rescheduling from these creditors is estimated as $ 300 million.

In addition, commercial debt amounting to $ 927 million has also been rescheduled. The government has also successfully rescheduled its Euro bonds maturing between December, 1999 - February, 2002 through a voluntary exchange offer with a single rescheduled bond of extended maturity. The offer received upto 98 percent acceptance against the outstanding amount of $ 608 million. With the completion of Euro bond and commercial debt rescheduling, Pakistan's credit rating in international bond market has improved from 'D' to 'B' minus on December 8, 1999 by the Standard & Poor's international credit rating agency.