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FOREIGN AID

FOREIGN AID Pakistan has a relatively low rate of domestic savings, estimated at 176 percent in 2003-2004 Consequently, in order to sustain a high rate of growth, it needs to obtain foreign capital to have an adequate level of investment For a growth rate ranging between 6 to 8 percent a year of gross domestic product, it must be able to invest between 25 to 30 percent of its GDP The gap between domestic savings rate and gross domestic investment is of the order of 10 percent a year This has to be met from external flows Pakistan has, in the past, used four types of external flows in order to augment domestic savings The most important and cheapest form of inflow is foreign aid, which is provided either as a grant, or as loans at very low rates of interest The second type of flow is borrowing by the government from international capital markets at prevailing interest rates The third takes the form of remittances sent by Pakistanis working and living abroad



The fourth type of flow is foreign direct investment (FDI) Ever since the country became independent, Pakistan has relied more heavily on foreign aid and workers’ remittances than on the other two types of capital inflowsForeign aid is provided by both multilateral development institutions and bilateral donors While the flow from the former source has been fairly steady, the second type of assistance depends on the country’s relationship with major donors such as the United States, Japan, Saudi Arabia, and smaller countries of the Gulf zone For a number of years, Pakistan did not receive official assistance that was positive on a net basis The aid coming in was much smaller than the payments Pakistan had to make in order to service the debt it owed to foreign donors In the five year period between 1994 and 1999, there was a positive flow of about US$2 million a year This, however, turned to a negative flow of over US$1 billion as a result of the sharp reduction in new money provided to the country because of the sanctions imposed on it following Pakistan’s decision to test nuclear bombs These sanctions remained in place for a couple of years In the year 2000-2001, there was another negative flow of almost US$1 billion The situation changed following the terrorist attack of 11 September on the United States; Pakistan began to receive large amounts of assistance from the United States

As a result, in 2000-2001, Pakistan had a positive flow of US$340 million It turned negative again in the following three years, averaging at US$750 million as Pakistan began to restructure its outstanding debt by paying off the more expensive debts using the new easy money that had become available As Pakistan embarks upon a more ambitious program aimed at accelerating the rate of economic growth, it will have to increase domestic savings and reduce its reliance on borrowings, including relatively low-cost official development assistance

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