International researchers identified that the foreign aid is a significant source of income in developing states and carries potential to play a main role in enhancing economic growth.
The traditional literature on economic growth emphasizes the optimistic role of foreign aid in the process of economic development. It influences the process of growth through reducing the saving-investment gap, growing productivity and transferring the modern technology. However, few economists recorded the advantages of foreign capital inflows are of temporary nature.
It is also identified that the impact of foreign aid on economic development has always been a controversial issue.
During 1950s, 1960s and 1970s rich countries utilized foreign aid to fill the gaps in resources, encouraging local/domestic investment and industrial development under the belief that foreign aid could assist developing states to accelerate the takeoff into self-sustained growth through generating new local investment.
Various famous economists assert that foreign capital inflow is necessary and sufficient situation for economic growth in developing states. They claim that there exist an optimistic correlation between foreign aid and economic growth because it complements local resources and also supplements local savings to bridge saving-investment gap and offers extra financial resources which assists to attain the short-term growth targets.
Studies related to the foreign aid also concluded that foreign aid assists to close the foreign exchange gap, offer excess to modern technology and managerial skills and allow easier excess to world markets. It is also said that every state, mainly the developing states like Pakistan, need foreign aid in one or other form for its development and boosting pace of economic growth and undertaking projects, programmes and strategies for the welfare and well-being of its people. No doubt, external resources or foreign aid chiefly comprise project loans and grants, programme loans and other loans and grants. Project loans and grants are attained from friendly countries and specialized international financial institutions i.e. WB, ADB, Asian Infrastructure Development Bank and the Islamic Development Bank among various others. Sources recorded that project loans and grants so secured are basically utilized for procurement of project equipment, supplies and services, etc.
Programme loans are offered for budgetary support and these are connected and tied with achievement specific targets and goals of any developing state like Pakistan. Such programme loans not only assist in stabilizing foreign exchange reserves but also in generating a rupee counterpart to meet the country’s development needs.
Other loans chiefly comprise loans secured from the Islamic Development Bank and generated by sovereign Bonds, Sukuk bonds etc, which are attained from non-traditional sources through Pakistan usually for balance of payments also budgetary support.
Pakistan like many other developing states; has heavily relied on foreign borrowings to finance its economic development. Pakistan has received a substantial amount of foreign aid since its Independence in 1947 but little improvement has been observed in its socio-economic development as this policy increased its dependency on external resources.
Furthermore economists also identified that foreign aid can be and usually is in the form of money, goods or technical assistance and can be between two or various states bilaterally or multilaterally, as the case may be, between countries and financial institutions. Any assistance for projects does not simply assist in financing import of capital goods and related services but also meets part of expenditures in the form of local currency. This foreign aid in the form of project, programme and technical aid accompanied through commodity imports also assist in generating counterpart local currency funds that in turn are used for financing the country’s development expenditures.
Sources recorded that Pakistan’s 27 development partners, that is, lending states, agencies and other sources of funds generation include Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB), China, Commercial Banks, EIB, Sukuk Bond, European Union, France, Germany, GAVI , International Bank for Reconstruction and Development (IBRD-World Bank), International Development Association (IDA), International Monetary Fund (IMF), Islamic Development Bank (IDB), International Fund for Agriculture Development (IFAD), Japan, Korea, Kuwait, Multiple Donors Trust Fund (MDTF), Oman, OFID, Organization of Oil Exporting Countries (OPEC), Saudi Arabia, Turkish Exim Bank, United Kingdom (UK) and the USA.
Actually Pakistan doesn’t have enough funds on their own for offering public goods and services such as education, transportation systems or clean water and waste disposal facilities for the people at large. Although such goods are essentially needed and required for development, on the other hand their economic rate of return is also so uncertain that private investors are unwilling to provide funds on a large scale. Statistics showed that for financial year 2021-22, Pakistan’s total external loans and grants have been estimated at Rs 2747,691.647 million, including all foreign assistance loans and grants for PSDP of the Federal Government and outside PSDP. Total external resources for FY2021 were budgeted at Rs 222,2919.000 million and revised figures were slightly higher and placed at Rs 2286,858.519 million.
Needless to say, the foreign assistance is secured for development projects of federal and provincial governments and also for autonomous institutions including WAPDA, Pakistan Electric Power Company (PEPCO) and the National Highway Authority (NHA).