AID EFFECTIVENESS, DEBT CAPACITY AND DEBT MANAGEMENT IN THE ECONOMY OF PAKISTAN

This thesis analyzes the role of foreign aid in the economy of Pakistan in terms of its effects on economic growth, income equality, poverty and the debt burden. It also evaluates Pakistan's debt servicing and debt retirement capacities and its debt management practices. The thesis finds that foreign aid has not contributed favorably to GDP growth and income equality, though it has been effective, in a limited way, in reducing the extent of poverty. The ineffectiveness of aid can be attributed to indirect diversion of aid funds to non-productive activities and inefficiency in resource allocation especially in the public sector associated with the easy availability of foreign aid. However, the study argues that foreign aid has been instrumental in supporting the growth rate in consumption that otherwise would not have been possible. Furthermore foreign aid and external borrowing made it easier to avoid hard policy choices such as heavy taxation of income and consumption.\ud \ud The thesis finds that Pakistan's long-run debt-servicing capacity is extremely low, primarily due to low savings and productivity. It is further observed that with the current state of savings and productivity, Pakistan has to choose between sacrificing growth and prolonging the unsustainable position of continuously growing debt burden.\ud \ud The thesis concludes that the practice of reliance on foreign aid is unsustainable unless efforts are made, on continuous basis, to overcome the basic weaknesses in the economy. Pakistan must improve its saving rate by continuing and even further refining the ongoing process or tax reforms, down sizing of the public sector and privatization of public sector enterprises. Pakistan needs to improve its overall productivity in the economy, especially in the public sector. The privatization process needs to be accelerated for the sake of minimizing the cost of losses in the public sector and improving productivity rather than revenue generation. Pakistan also needs to manage its debt in a better way. There is utmost need for enrichment of the intellectual capacity in the public sector institutions responsible for debt management. These institutions also need to be reformed thoroughly and given sufficient autonomy.\ud \ud Finally, the thesis concludes that Pakistan has to be selective in choosing among the alternative aid and loan packages. External borrowing has to be target specific and the targets have to be specified in the light of a social welfare function that assigns due weight to social as well as economic considerations such as growth enhancement, promotion of equity and social justice and eradication of poverty. External borrowing must be undertaken within the framework of economic plans rather than making the planning exercise contingent on the availability of external resources