Lecture 07

Foreign Debt Burden

This was started in early 1950s and
continued to increase. This is illustrated in
table 1.
Year

US ( Billion)

01

2007

40

02

2008

46

03

2009

52

04

2010

57

05

2011

62

Sources: Annual Report 2010-11 SBP Karachi

01

Factors
Continue increase deficit in current
account (About 5% by GDP)
Rising real cost of external loan
Stagnant exports
Declining flow of foreign exchange
Higher Debt Servicing Payments

Measures to Reduce Burden of Foreign Debt

Building up strong Foreign Exchange

reserves
Prepayment of Expensive Debt
Contracting New Loans on Concessional
Rates
Reducing Current Deficit in the Country
Maintaining Fluctuations in the Foreign
Exchange Rate by Adopting Rational
Monetary & Fiscal Policy.
3

WHY Donors Give Aid

Political Motivations

US started Foreign Aid from the

Last 1940s under the Marshall
Plan.
Purpose
Reconstructing the war torn
economies to check spread of
communism.
It was shifted from Europe to
Third world in the Mid 1950s.
Purpose
Emphasis shifted toward
(a)Political
(b)
Economic
(c) Military support.
Consideration for
Geographically strategic .
Example: Afghan War

Economic Motivations

Foreign Exchange
Constraints (Loans &
Grants)
Reason
(a)Shortage of Domestic
Savings
(b)Creation of Foreign
Investment
(c)Shortage of Foreign
Exchange
(d)Finance needed for
important Capital Goods.

Foreign Direct-Investment
What is FDI?

FDI means an individual, a group of

individuals , an incorporated entity or a
public or private Company investing its
money in other country. Increasing FDI is
usually used as one of the indicator of
growing economy as Pakistan had
received more than five billion dollars in
2007
Example. Multinational Corporation (MNC)

Table 02 (FDI From July to October 2014

Millions Dollars
July-2014

August-2014

September-2014

October-2014

Inflo
w

Outflo
w

Net
FDI

Inflo
w

Outflo
w

Net
FDI

Inflo
w

Outflo
w

Net
FDI

Infl
ow

Out
flow

Net
FDI

113.
6

95.2

19.4

92.
0

33.9

58.1

108.
8

31.9

76.9

938
.8

690
.0

258
.8

Sources: SBP. Net Inflow of Foreign Public &

Private Investment

Indicators of FDI in Pakistan

Market Size

Skill Level

Political Stability

World Bank Report

(a)The adult
(a)It is a pre
(a)Pakistans
population (15requisite for
Economy is the 23rd
59) is
attracting foreign
largest in the
considered as
investors.
world in terms of
the wealth of
(b)World bank
GDP growth
nation in terms
survey 2014,
(b)Large number
of human
Pakistan is
consumer base
resources
considered as a
(c)Pakistan is the
(b)Attraction for
semi stable
26th largest
investor
country
economy in the
(Cheap Labor) (c)Negative impact
world in terms of
(c)Better
on FDI country is
purchasing power
infrastructure
shown in table 2
parity. These
as compared
factors attract
to other
foreign investors in
developing
the
country.
Note:
For further study countries
refer book.The Pakistan
(d)Availability
Economy
(Khawaja
Amjad Saeedof(From Pag
labor force
7
122-138
57.24 Million