Disadvantages of Foreign Aid
Foreign economic assistance and Foreign Aid result in the following disadvantages.
1. Increase in Foreign Aid’s Debt Servicing
Pakistan has already borrowed too much foreign loans and is still borrowing. Now in order to pay interest Pakistan is. Thus debt burden is continuously increasing.
2. Increase in Production Cost
In results in the increase in the cost of project because of interest, heavy remuneration and other fringe benefits, which are given to foreign experts.
3. Habit of Dependence on Foreign Loan and Misuse of Aid
Aid receiving countries including Pakistan do not exert and do not make policies to develop their economy with their own domestic resources. They do not pay attention for development of technology. They just become entirely dependent on others. Major portion of aid particularly commodity aid is misappropriated by the concerned Government officials.
4. Exploitation by Donor Countries
Sometimes loan giving countries interfere in the defense and foreign affairs of Pakistan. That’s why it is said that there are always political strings attached to the bilateral loans.
5. Commodity Aid Discourages Domestic Agriculture Output
When aid is in terms of commodity such as wheat etc, which many times is provided at a very nominal price, discourages local production of that commodity because of higher cost of production within the country. This situation discourages local agricultural production.
6. Dependence of Imported Raw Material from Donor Country
If donor country has assisted in establishing imported substitution industry then raw material for the industry will have to be imported from loan given country otherwise industry will not continue its production because particular raw material is not available locally. This causes heavy foreign exchange burden on economy.
7. Project Tied Loans for Less Priority Projects
Sometimes a donor country may give project tied loans for those projects which for the time being may not be on the priority list of borrower and may not be very much feasible. In this way donor can burden the economy of borrower country because principal amount as well as interest has to be paid while project is not needed and is not worth while.
8. Savings Investment and Balance of Payments Gaps
Pakistan is obtaining foreign aid for bridging gap between domestic savings and investment and also to improve balance of payments position but till now it has not been able to accomplish this task, rather both gaps are continuously increasing.
9. Proportion of Tied Aid and Severity of Hard Terms Increased
As the time passes by, it is becoming difficult for Pakistan to obtain foreign aid. The donor countries have increased terms of aid by raising rate of interest and the repayment period has reduced. Too much sureties and guarantees are not demanded from Pakistan by donor countries.