There are four major sources of capital availability to a country: (1), capital may be raised through surplus budgeting; (2) the profits earned from the public enterprises may be utilized for financing the projects; (3) the government may borrow for supplementing domestic saving and investment and (4) the government may receive economic assistance or loans from other countries/institutions to increase the rate of capital formation in the country.

In most of the developing countries, the first three sources of raising capital are not adequate to accelerate the rate of development to the desired extent. The less developed countries, therefore, have to depend upon the last source i.e., the foreign economic assistance for breaking out from the vicious circle of low purchasing power and saving capacity.

External debt burden could badly affect a developing country's economic and political sovereignty. If the foreign debt is not repaid, the country may either defaults or has to borrow more to repay the debt.

In case of default, the world confidence will shake on the economic condition of the country. Resultantly, the country would be unable to import necessities such as food, oil, machinery and equipment and necessary raw material for the production of goods, both for domestic and foreign markets.

This would further aggravate the situation in the form of inflation, collapse of growth and investment, high inequality, unemployment and poverty. Fresh borrowing means moving towards the centre of the whirlpool of debt where economic and political independence becomes a dream.

The debt situation which had become serious over the years, further aggravated after the country's nuclear test in 1998 and subsequent military coup in 1999. Before September, 11, 2001 the economy of Pakistan was in serious web debt as committed outflow of foreign exchange exceeded inflow by $4.56 billion. Pakistan could only get rescheduled $3.96 billion out of $4.56 billion on short term basis under strict conditions.

The main purpose of this article is to review the past progress and circumstances under which Pakistan was caught in the web of heavy debt. And this not only pushes the country back into the row of developing countries but also affect the country's sovereignty.

The debt indicators are usually presented in terms of stock and flow measures. The total debt stock and its share of GDP are important indicators of the debt burden.

Table 1 reveals that Pakistan's debt stock more than doubled from $11.4 billion to $22.35 billion in the decade of the 1980s. In terms of its share of GDP, the debt stock increased from roughly 40 to 56 per cent. In the 1990s, the debt stock increased from $ 24 billion to $35.72 billion and its share in GDP increased from 53.15 to 57.62 per cent during 1991 to 1998.

The Table also shows that debt stock decreased from $33.5 billion to $33.35 billion during the Mushrraf regime (1999 to 2003). Its share to GDP decreased from 54.90 to 48.0 per cent in the same period.

The rate of growth of debt stock was lower in the 1990s as compared to the previous decade. However, the growth rate in the last four years entered into negative figure i.e.; -1.87 per cent. (See Table 2).

The defining character of external debt is that it has to be repaid in foreign exchange. Indicators of inflows and outflows of foreign exchange are, therefore, most critical in terms of tracking the onset and persistence of an external debt crisis.

In the pure case, if net foreign exchange earnings are less than debt servicing requirements then debt servicing becomes unsustainable. In the case of Pakistan, net foreign exchange earnings have always been less than the debt servicing liabilities, if both interest and amortization liabilities are taken into account.

Table 3 shows that debt servicing to foreign exchange earnings ratio (only exports and remittances were taken as foreign exchange earnings) remained increasing during 1985 to 1998.

The average annual growth of foreign exchange earnings remained 5.7 per cent while debt servicing growth rate stood at 11 per cent annually. Subsequently it continued to decline because of the Paris Club rescheduling, surplus in current account coupled with a continued build-up in foreign exchange reserves and increase in foreign exchange earnings.

Table 4 reveals that in the year 1970, the debt servicing was $259 million and Pakistan was getting net $312 million as foreign assistance. The net transfer as percentage of disbursement was 54.6 per cent.

It went on decreasing in subsequent years and the picture was horrifying in the year 2000 wherein gross disbursement of foreign loan was $1836 million. The debt servicing was $4154 million and the net transfer as percentage of gross disbursement was -126.3 per cent.

The main reason was decrease in foreign debt disbursement which was about 69 per cent as compared to previous year, which, as per usual practice, was to be used for debt servicing. The other reason was low level of real GDP growth rate and that was 2.4 per cent.

However, in subsequent years Pakistan's debt servicing position improved due to continuous build-up in foreign exchange reserves which helped Pakistan to retire its expensive foreign debt.

During the last seven years of 1980s, the average real GDP growth rate remained 6.3 per cent while the average overall fiscal deficit was 8.1 per cent and this high figure was due to increase in current expenditure.

The decade of 1990s witnessed serious macroeconomic imbalances in Pakistan, caused primarily by the persistence of large fiscal deficit. During the period the fiscal deficit averaged 7.1 per cent of GDP despite cuts in development spending by almost 3.5 per cent of GDP, causing public debt to reach unsustainable level by the end of the 1990s.

The growing burden of debt servicing over the years not only made fiscal adjustment more difficult, but crowded out private investment on the one hand and forced public sector investment to decline on the other. Consequently, the overall investment declined by 3.0 per cent of GDP during the decade. The declining investment caused growth to decelerate.

The burgeoning revenue deficit is another indication of fiscal imbalances. The development expenditure also showed declining trend during the decade of 1990s. While it remained consistence during 1980s as shown in Table 5.

Factors responsible: There are number of factors responsible for the build-up of the debt problem. The central problems are large and persistent fiscal and current account deficits as well as imprudent use of borrowed funds.

The latter includes "wasteful government spending, resort to borrowing for non-development expenditures and poor implementation of foreign aided projects." It also mentions weakening debt carrying capacity - in terms of "stagnation and or decline in government revenues and exports - and rising real cost of government borrowing."

A sharp deceleration in remittance incomes and increasing interest and amortization liabilities of debt are also important reasons for increased external debt.

Pakistan is no longer on the threshold of an external debt crisis due to better economic policies. Pakistan witnessed a current account surplus over the last three years in row, increase in exports, large increase inflow of remittances (though one of the major reason was the incidence of 9/11), the receipt of considerable grant assistance (though it was also due to help against terrorism) and inflow of foreign direct investment.

However, a number of issues pertaining to the country's external debt burden still need to be addressed. Sustainable debt servicing requires more than the reduction of the net present value of debt.

It requires high and sustainable growth in GDP and foreign exchange earnings. The country is yet to embark on a path to achieve these twin goals. It will also require that appropriate fiscal discipline is maintained so that new borrowing is not squandered in unproductive expenditures - including borrowing for current expenditure and defence.

The government has chalked out a debt management strategy to be followed till 2010 to reduce public debt, including its external component. No need to mention that if the government is to commit itself to a strategy of debt reduction it should be one which not only keeps external debt within sustainable limits but also does not compromise on other important goals of economic performance - growth, welfare and poverty reduction.