DEBT Pakistan’s debt burden, both internal and external, mounted steadily over the years In 1998, the two burdens taken together amounted to nearly 90 percent of the gross domestic product (GDP) The large burden of debt is the consequence of a very low domestic savings rate In 1998, Pakistan’s tax to GDP ratio was slightly more than 13 percent, whereas the public-sector expenditure was close to 195 percent The difference between the two-the budgetary deficit-was traditionally financed by both domestic and external borrowing This resulted in a progressive increase in the debt burden Pakistan also had a large balance-of-payments deficit-the difference between total external earnings and expenditure In the absence of large capital flows such as foreign aid and workers remittances, which Pakistan used to finance the external deficit in the past, the country had to resort to heavy commercial borrowing This had added to the debt burden

Servicing of debt became the largest claim on the budget before the military assumed power in October 1999 In the 1997-1998 fiscal year, debt servicing consumed 40 percent of government revenues Servicing of external debt in the same year took up 38 percent of export earningsThe government, headed by President Pervez Musharraf, decided to address the problem posed by the burden of debt by appointing a committee of professionals Headed by Pervez Hasan, who had served at the World Bank for almost 30 years, the committee proposed a program of action that was adopted by the government However, after the terrorist attacks of 11 September 2001, several Western governments decided to provide debt relief to Pakistan through the mechanism of the Paris Club-an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor nations The United States wrote off $1 billion of outstanding debt owed to it by Pakistan With regard to domestic debt, a significant lowering of interest rates reduced the cost of service In financial year 2004-2005, the country’s debt outstanding amounted to US$58 billion, equivalent to 64 percent of GDP

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