Case Study Analysis

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The external debt burden of the country was reduced through different mechanisms like conversion of loan into Aid (grant), debt write-off and debt to development swaps.

A brief description of measures taken by the government to reduce foreign debt is as under:

Loans written off: Under such type of conversion outstanding loan is completely converted into grant. In such loans, all obligations of debt servicing were waived off. During 2001-04, the sources claimed that the total foreign debt worth $1.561 billion had been written-off by Denmark, Netherlands, USA and UK.

Denmark had written-off foreign loan worth $18.44 million on December 17 2002, Netherlands written-off foreign loan to Pakistan $14.43 million on November 28 2002, USA written-off two loans worth $495.238 million and $1 billion on July 16 2004 and November 5 2001, respectively. The United Kingdom also written-off $33.33 million foreign loan to grant on November 5 2001, the sources claimed. Total volume of written foreign loans to grant was $1.561 billion.

Debt to development swap: It is defined as the cancellation of external debt in exchange for the debtor government’s commitment to mobilisze domestic resources (local currency or another asset) for an agreed purpose i.e. development programme.

Pakistan got debt rescheduling under Paris club arrangement in November 2001. Under the rescheduling agreement there was provision for debt to development swap on voluntary basis. Five donors countries, including Belgium, Canada, Germany, Italy and Norway have been entered into debt swap agreements with Pakistan under this arrangement.

The sources claimed that Pakistan and Belgium have signed a Memorandum of Understanding (MOU) on debt for development swap up to Euro 30 million to finance Pakistan Earthquake Fund (PEF) rehabilitation and reconstruction efforts and priority would be given to social infrastructure in the earthquake areas.

Pakistan and Canada have signed a MoU on April 2006 regarding Pakistan- Canada debt Swap amounting to Canadian $449 million. According to the MoU, the Government of Canada would write off its entire outstanding Official Development Assistance (ODA) loans of Canadian $449 million against additional expenditure in education sector, particularly teachers training, to be made by the federal and provincial teachers training, institutes over the next five years, the sources maintained.

The sources claimed that a number of debt swap agreements were agreed upon between Pakistan and Germany, which include Debt for Education Swap–I Punjab amounting to Euro 25.564 million; Debt for Education Swap II in NWFP signed on December 2005 and debt amounting to Euro 25.564 million was cancelled under the condition; Debt for Development Housing Infrastructure in which an amount of Euro 30 million of Pakistani debt was cancelled.

In the post 9/11 scenario the Government of Italy offered cancellation of $85 million debt that Pakistan owed to Italy, against part expenditure incurred on Afghan refugees related project since October 2001. Pakistan and Italy signed another agreement on debt-for-development Swap on November 2006. The debt subject to swap operations under this agreement was of approx. $100 million.

Debt Swap Agreement amounting to $20 million concluded between Pakistan and Norway on November 2006. The sole purpose of this debt conversion was to support social infrastructure and services within the fields of health and education in the earthquake affected areas of NWFP, with focus on reconstruction and rehabilitation of school buildings for the primary level education after the 2005 earthquake disaster in Pakistan.

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Indebtedness represents one of the greatest problems facing Pakistan in recent times and presently the country is facing mountains of debt and huge budget deficits that hinder its abilities to create jobs for the unemployed and help the poor, causing poverty to spread, allocations to...
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