The Impact of Foreign Capital Inflow on Savings and Investment: The Case of Pakistan

Abstract

The paper examines the role of foreign capital in the context of savings and investment for Pakistan for the period of 1963-64 - 1984-85. The question of the impact of foreign capital inflows on domestic resources has assumed primary importance in view of the increasing debt burden and declining concessionality of foreign loans. The data analysis! , based on the classification of loans according to rates of interest and terms to maturity, reveals that the terms and conditions of foreign loans have become more stringent over time, i.e. higher interest rates and lower maturity periods. The worsening terms and conditions of external loans have resulted in increasing reverse flow obligations. Debt servicing as a ratio of export earnings and foreign capital inflow has rapidly increased over time. During 1960-61 - 1970-71, debt-servicing obligations could be met from 14.85 percent of foreign assistance or 10.29 percent of our commodity export earnings, whereas during 1980-81 - 1984-85 foreign debt servicing could be financed from 29.63 percent of export earnings or 64.79 percent of foreign assistance. The heavy debt-servicing burden and unfavorable outlook for external finance has made it absolutely essential that foreign capital funds should generate internally the capacity to repay these loans. This could be facilitated if foreign capital inflows augment domestic capital formation efforts.