A Simulation Analysis of the Debt Problem in Pakistan

Abstract

The current debt situation in Pakistan and the resulting financial crisis require serious attempts to find a sustainable indigenous solution. As such it is essential to search ways and means to reduce dependence on external borrowing over medium to long run.1 External debt is usually created to sustain a growth rate of the economy, which is otherwise not feasible with the given state of domestic resources, technology, consumption propensity and economic management practices. However, the success of economic growth financed by external borrowing depends on two factors, namely the domestic saving rate and productivity. A country with lower saving rate needs to borrow more to finance a given rate of economic growth. In Pakistan the flow of external loans is likely to have adversely affected the compulsion for savings. For example, no serious attempts have been made to improve tax collection or to control non-development government expenditure unless forced by the donor agencies.