The debt mountain

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A new government report has revealed that Pakistan took out $15.32 billion in new foreign loans in the fiscal year 2020-21, shattering the previous record of $10.45 billion set a year earlier. The report also shows that the incumbent government has almost doubled Pakistan’s external debt in just three years, adding $35.1 billion to take the total figure to an astonishing $85.6 billion. The report by the Ministry of Economic Affairs says that new debt was added “to mitigate the pressure on the current account deficit, strengthen foreign exchange reserves, enhance external debt servicing capacity and provide requisite financing to water sector development”.

Also concerning is the breakdown of where the money was spent. Apart from the 35% share that went to power projects, it is learnt that 23% went to rural development and social welfare, 18% to “governance”, and about 5% to education. These are all areas where the government had either cut funding early in its tenure or failed to fund at acceptable levels. The fact that we now need foreign aid to fill those gaps reflects the quick-fix mentality that has dominated our financial planning. Poor prioritisation has put the country in a position where the government now needs to borrow to finance even the most essential of services.

The heavy borrowing to shore up the current account deficit has already begun drying up. It is highly likely that we will see another year of record borrowing to reduce the stress on the current account caused by the massive import bill. Couple that with the free fall of the rupee, and the cost of the existing and new debt will continue to shoot up. To illustrate, in September, the finance ministry said that Rs2.9 trillion of the increase in total public debt was due to the devaluation of the rupee. The local currency has fallen about 8% — or by Rs13 to a dollar — since that announcement. This volatility makes it even harder to maintain the overall debt at sustainable levels.

It is also notable that neither exports nor the overall economy are growing at anywhere near the rates needed to reduce or even manage the colossal debt burden. Instead, failed policies on both fronts have led to the debt increasing at a record pace while revenue growth lags miles behind. For those that try to downplay the debt problem, we only need to point out that Japan, despite being a developed economy, has struggled to grow for the last 30-plus years largely because financing its high debt — currently about 237% of GDP — is its second-biggest budget line.

With Pakistan on track to reach a public debt-to-GDP ratio of 100% very soon, we must warn that almost all countries with such high debt burdens are either on the verge of economic collapse, or in the ‘better’ cases of wealthier countries, barely growing. Only Singapore is an outlier because it intentionally converts budget surpluses to debt to encourage stability in financial markets and growth in pension funds. Sadly for us, stability is swiftly fading into a dream.

By the way, shouldn’t we lend a serious ear to what Mr Shabbar Zaidi, former FBR chairman, said about the current state of Pakistan’s economy during a recent speech at a university function? Even though he says his words “the country is, at the moment, bankrupt and not a going concern” were cherry-picked, they have triggered a great amount of concern.

Published in The Express Tribune, December 19th, 2021.

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