Rising debt burden

ACCORDING to a Debt Policy Statement, the total public debt increased from less than three trillion rupees in 1999 to over Rs4.4 trillion in 2006. While the total debt has increased in absolute terms, the debt-to-GDP ratio has declined. During 2000-2006, the debt grew at 6.15 per cent per annum against the nominal GDP growth of 12.4 per cent, rising to 6.7 per cent against the real GDP growth of 6.6 per cent in 2006. But, simultaneously, debt-to-GDP ratio has declined sharply over the year to 56 per cent. The success of the official debt strategy has been substantially contributed by a one-time huge debt relief and rescheduling by the Paris Club and replacement of expensive domestic and foreign loans by cheaper credit facilitated by the recent record low interest rates. Apart from an average GDP growth of seven per cent per annum for the past few years, the size of the economy has also enlarged by the updating of national accounts.

As GDP growth is not export-oriented but driven by domestic demand, the impact of the rising debt stock needs to be seen, more appropriately, against the background of the widening fiscal and current account deficits. In 2006, the domestic debt servicing cost was Rs191.4 billion. Nearly $3.1 billion was repaid to foreign lenders against aid of $2.26 billion and $800 million raised from international financial markets. The outstanding foreign debt as on June 30, 2006, was $37.26 billion. Over one year, the fiscal deficit rose from 3.5 per cent to 4.2 per cent and the current account deficit went up from 1.4 per cent to 3.9 per cent. The trend is continuing as export earnings from merchandise are expected to plummet to four per cent this year and the overall balance of payments is worsening. Foreign debt is expected go up much faster as upgrading and expansion of the national transport corridor picks up pace and the construction of mega dams is undertaken. Besides, there are risks in raising loans at the floating interest rates. New foreign loans amounting to over three billion dollars were contracted in 2006. About a quarter of the debt stock by end June 2006 was at floating interest rates which can raise the cost of debt servicing when interest rates rise or the exchange rate depreciates. A devaluation of one rupee against the dollar would raise the debt servicing cost by Rs36 billion. The impact of devaluation on the debt servicing cost of foreign loans can be assessed from the exchange rate of the rupee falling from Rs51.6 in 1999 to Rs60.5 in the first quarter of 2007. The bulk of the loans are coming from multilateral lending agencies for which it is vital that major shareholders are on board - which is not always the case.

The government, however, is placing more reliance on domestic debts which has raised its share to 53.2 per cent of the total public debt, reducing dependence on external borrowings. Domestic debts are rising much faster at 7.5 per cent against the overall public debt increase of 6.7 per cent. These debts are immune from foreign exchange risks but debt servicing rises when interest rates increase. But the government needs to reduce its inflationary borrowings. More important, the government needs to ensure that public debt policy does not lead to a debt trap as in the past.

A flippant idea

THE statement made by the federal shipping minister Babar Khan Ghauri the other day, hinting at a postponement of general elections by a year, seems inscrutable. If the purpose was to create a stir in political circles and thereby to gauge public response to the idea of postponement, he must be congratulated for having achieved it. Ironically, the minister’s own party, the Muttahida Qaumi Movement, has termed it his own opinion and not that of the party, but he seems to have found ready acceptance for his ‘feeler’ with the Chaudhries of Punjab. Looking for every opportunity to flatter the leader at the top, Chaudhries Shujaat Hussain and Pervaiz Elahi have added to the idea of election postponement by citing reasons for the unexpected move: a worsening law and order situation, a US attack on Iran and possible imposition of emergency in the country. The ruling PML leaders went on to say that the Constitution allowed deferring a general election by a year, and that they had been the first ones to float the idea.

Regardless of whoever may be the original proponent of the grand plan, it is ill-conceived and ill-advised. It comes at a time when the current assemblies, howsoever weak their democratic credentials, will be the first ones to complete their five-year tenure in the country’s chequered political history. Giving the legislatures an additional year in office will not win the current rulers any more plus points that they may have in the preceding five. The military high command, the real arbiters of power behind the scenes, will be playing into the hands of self-serving politicians by considering such a move. Postponing elections will discredit the current political system altogether, which was tailor-made to serve the exigencies of the powers behind the system. It is time General Pervez Musharraf and the military seriously considered an honourable way out of the political arena, instead of getting entrenched deeper into the quicksand of flattery that surrounds it. Howsoever imperfect, the current political process must take its own course and reform itself over a period of time, without any more meddling from above, in order to mature into a sustainable democratic system.

Whither PIA?

IT IS disturbing to watch the decline of what was once considered a world class airline. It is made worse by an impending ban by the EU on a majority of PIA’s fleet from March 8 because the airline has not met international safety standards. How could an airline be so callous as not to comply with safety standards, thereby putting passengers’ lives at risk? The ban is not a bolt from the blue as the EU has been threatening the action for some time, but it seems that nothing was done — at least that is how it appears as PIA has been oddly silent on the issue. It first said that it had not received any written word on the ban and then that the EU restrictions placed on it were “discriminatory”. If that is its defence, it is appalling, especially since it had ample time to rectify the faults and deficiencies. It did nothing to put its own house in order. Britain’s decision to implement the ban from next Friday speaks volumes about PIA’s negligent attitude. This is a cause for serious concern given that its monthly losses are said to be one billion rupees a month. The airline is heavily overstaffed and those that matter, like engineers, ground staff, pilots and crew, complain of being overworked and underpaid. As for its administrative aspect, here too PIA’s performance has been consistently poor, with passenger complaints of flight cancellations, delays and inconveniences mounting by the day.

PIA management seems dismissive of these obvious problems. This ostrich-like approach will get it nowhere. Neither will the government’s hands-off approach, for the losses resulting from the EU ban will be huge. The government must step in and ensure that PIA puts its house in order — or risk losing customers who now have options other than of flying PIA.

Half a century of the EU

THE European Union marks its 50th birthday on March 25, with a special summit in Berlin. Leaders from the 27-nation bloc will use the celebrations to issue a special declaration outlining their common values and aspirations.

There will be much self-congratulation in the recognition that the last half-century has seen the EU spectacularly exceeding the goals set by its six founding nations in the aftermath of the Second World War.

The presidents and premiers will also have to admit, however, that the opening years of the 21st century have been especially unkind to Europe. Today’s EU is in the midst of an unprecedented crisis of confidence, racked by doubts and uncertainties about the future. Much of the anxiety is due to last year’s rejection of a new constitution by French and Dutch voters. Europeans are also worried about the impact of globalisation on their jobs and uneasy about further EU enlargement, especially plans to bring in mainly Muslim Turkey into the bloc.

It’s been a long and impressive 50 years, however. The now 27-member EU with 490 million people was created as the European Economic Community (EEC) under the Treaty of Rome by Belgium, France, Italy, Luxembourg, the Netherlands and West Germany on March 25, 1957.

Built on the ruins of the Second World War the EU was established largely to prevent another war between Germany and France by forging strong economic bonds between the two nations. France and Germany fought three wars between 1870 and 1945. "The European unification idea came from the realisation that Europe's nation-states would -- if left on their own -- never break out of the vicious circle of war and destruction," said German Chancellor Angela Merkel in a recent speech.

Starting with the 1951 European Coal and Steel Community (ECSC), post-War leaders in western Europe created an array of joint institutions designed to draw their countries into an ever closer economic and political union. As a result of these ties, the idea of war between Berlin and Paris has become unthinkable.

Battles between the two countries in today's Europe are limited to economic issues, including a current contest on which country gets to build parts of the new Airbus A350 jet.

The two EU heavyweights are widely recognised as the "motors" behind the bloc's rapid development over the last half-century. According to conventional wisdom in Brussels and other EU capitals, political and economic progress in the bloc is conditional on the “special relationship” between Paris and Berlin.

Over the years, with Germany and France in the vanguard, the EU has broken down national trade barriers to create a single market and agreed to the free cross-border movement of EU citizens who are generally allowed to work and live in any country in the bloc. Another landmark agreement was the creation of the euro single currency in 2002. So far 13 EU states have replaced their old national currencies with the euro.

The EU at the moment lacks similar visionary projects, however. Upcoming presidential elections in France, pitting Socialist icon Segolene Royal against the conservative politician Nicolas Sarkozy, mean that any major new ideas for revitalising the EU are on ice. Also, the rejection of the bloc's constitution by voters in France and the Netherlands in 2005 has pitched the entire European project into crisis. So far nobody has come up with any concrete ideas on how to get France and the Netherlands back on board.

German Chancellor Angela Merkel had vowed to use Germany's EU presidency -- which lasts through June -- to make a big push for the old constitution text. But recognising that little can be achieved until Paris and The Hague decide what they want, the German leader is now only talking about setting a constitution timetable.

Further EU enlargement is also causing discord. While the six pioneering EU nations retain important policymaking clout, successive enlargements have also seen the entry of other influential nations -- including Britain in 1973, Spain in 1986 and Poland in 2004.

"Enlargement is one of the EU’s most powerful policy tools," says a senior EU diplomat. In the 1980s, the prospect of joining Europe helped spur democracy in Greece, Spain and Portugal. In the late 1990s, it was the pull of the EU that helped transform central and eastern Europe into modern, well-functioning democracies.

The EU's big bang expansion in May 2004 to include eight former communist nations as well as Malta and Cyprus was the bloc's fifth and most ambitious enlargement to date. Continuing the process, Bulgaria and Romania were welcomed into the club on January 1, 2007. Their entry symbolised a further "reunification of our European family," said an enthusiastic European Commission President Jose Manuel Barroso.

EU policymakers insist they are still committed to using the bloc's "soft power" ability to bring peace, stability and prosperity to countries in its immediate neighbourhood. But EU leaders, voicing increasing wariness of further expansion, now insist that the future pace of enlargement will be dictated by the ability of present members to "absorb and integrate" the mainly poorer states knocking at EU gates.

Membership negotiations are under way with Croatia and -- at least partially -- with Turkey. Macedonia has been recognised as eligible for entry although actual accession discussions have yet to begin. EU enlargement chief Olli Rehn also remains adamant that the club has not closed its doors to western Balkan nations which he says have a "clear European perspective".

However, the going is getting tougher even for new members. Several "old" EU nations have maintained restrictions on the free movement of citizens from central and eastern European countries which joined the bloc in 2004. Also Romania and Bulgaria are subject to stringent "accompanying measures" -- the toughest ever imposed by the EU on acceding nations -- which could include trade and aid sanctions if they do not fight corruption and organised crime.

With many in Brussels and other EU capitals talking openly of "enlargement fatigue", Barroso is among those insisting that the bloc must decide on the future of the failed constitution before any further expansion. Officials in Brussels argue that the EU needs a new treaty to ensure efficient and effective decision-making in an enlarged Europe. There is also concern at the budgetary costs of further expansion.

Most significantly, however, EU hopefuls are being told they must wait patiently in the wings while the bloc's leaders try to ease public fears about increased east-west immigration flows. Much-publicised French public concerns about a flood of cheap "Polish plumbers" who would steal French jobs are believed to have convinced some voters to reject the EU constitution.

Fears about the entry of mainly Muslim Turkey are also believed to have contributed to the cold-shouldering of the treaty by French and Dutch nationals. "We know we cannot take in every state that wants to join," German Chancellor Merkel said after the EU leaders’ meeting in Brussels on December 14-15 last year adopted a go-slow stance on further expansion.

Backing Merkel's stance are the leaders of Luxembourg, Belgium and The Netherlands. France is also wary about swift, further enlargement. Although Britain, Sweden and most of the central and eastern European states want expansion to continue, leaders at the summit agreed that new countries will only be admitted if existing EU states are satisfied they can deal with financial, social and institutional burdens the applicants pose.

This will impact not only on Turkey and Croatia, which are negotiating EU entry, but also disappoint western Balkan states -- Serbia, Montenegro, Bosnia-Herzegovina, Albania and Kosovo – which are clamouring to enter the bloc. The new approach also effectively puts a lid on EU entry aspirations harboured by Ukraine and Georgia.

There is some good news, however, with EU nations slowly but surely flexing their muscles on the global stage. True, EU governments have been -- and often remain -- at loggerheads over how best to deal with global flashpoints. Disagreements over the pros and cons of the US-led Iraq war -- which was backed by Britain, Spain and Italy but opposed by France and Germany -- provided the worst example of EU infighting over foreign policy. However, while the discord clearly tarnished Europe's international image, it has spurred EU efforts to try and forge a united front on global affairs.

One result was the adoption of adopt a first-ever EU "security strategy" in 2003, underlining Europe's commitment to strong international institutions and the use of "soft power" instruments of trade and aid to prevent crisis. "Trade and development policies can be powerful tools for reform," the strategy underlined, adding: "A world seen as offering justice and opportunity for everyone will be more secure."

However, the soft approach -- compared to the US policy of giving priority to military action -- was tempered by the recognition that more active policies were needed to tackle "new dynamic threats" including terrorism and the proliferation of weapons of mass destruction. When diplomacy failed, the strategy said the EU would be ready to envisage "early, rapid and when necessary, robust intervention."

Since then 16 civilian and military missions have been deployed across the world - including in Bosnia, Darfur, the Palestinian territories and Iraq -- often in partnership with the UN, the 26-nation Nato military alliance and the African Union.

EU officials point out that the EU's role as world security actor is "unique" because it combines military and civilian operations when tackling crises. In addition to a lead role in seeking to defuse the nuclear crisis with Iran, the EU last year sent troops to supervise national elections in Congo and to monitor a ceasefire between Israel and Hezbollah fighters in Lebanon. EU forces are also deployed in the Balkans. EU foreign and security policy chief Javier Solana recently predicted an increase in international demand for EU peace missions, including in Afghanistan and Kosovo.