The mountain of debt
A new government report has found that Pakistan took out $ 15.32 billion in new foreign loans in fiscal year 2020-2021, breaking the previous record of $ 10.45 billion set a year earlier. The report also shows that the current government nearly doubled Pakistan’s external debt in just three years, adding $ 35.1 billion to bring the total to $ 85.6 billion. The report from the Ministry of Economic Affairs indicates that new debt has been added “to alleviate pressure on the current account deficit, strengthen foreign exchange reserves, improve the capacity to service external debt and provide the financing necessary for development. of the water sector ”.
It is also of concern where the money has been spent. In addition to the 35% share that went to electricity projects, we learn that 23% went to rural development and social protection, 18% to “governance” and around 5% to education. These are all areas where the government either cut funding early in its mandate or failed to fund to acceptable levels. The fact that we now need foreign aid to fill these gaps reflects the silver bullet mentality that has dominated our financial planning. Poor prioritization has put the country in a position where the government must now borrow to finance even the most essential services.
The heavy borrowing to cover the current account deficit has already started to dry up. It is highly likely that we will see another record year of borrowing to reduce the pressure on the current account caused by the massive import bill. Add to that the free fall of the rupee, and the cost of existing and new debt will continue to rise. By way of illustration, in September, the Ministry of Finance declared that Rs 2,900 billion of the increase in total public debt was due to the devaluation of the rupee. The local currency has fallen about 8% – or Rs 13 to the dollar – since the announcement. This volatility makes it even more difficult to maintain overall debt at sustainable levels.
It is also noteworthy that neither exports nor the economy as a whole are growing at a rate close to the rates needed to reduce or even manage the colossal debt burden. Instead, the failure of policies on both fronts has resulted in debt rising at an all-time high while income growth lags. For those trying to downplay the debt problem, we need only point out that Japan, despite being a developed economy, has struggled to grow over the past 30 years, largely because it has financed its high debt – currently around 237% of GDP – is its second budget line.
With Pakistan on track to achieve a public debt-to-GDP ratio of 100% in the near future, we must warn that almost all countries with such a high debt burden are either on the brink of economic collapse or in the “Best” case of the richest countries, barely growing. Only Singapore is an outlier as it intentionally converts budget surpluses into debt to encourage financial market stability and pension fund growth. Unfortunately for us, stability quickly becomes a dream.
By the way, shouldn’t we give a serious ear to what Mr. Shabbar Zaidi, former president of the FBR, said about the current state of the Pakistani economy during a recent speech at a university reception? Even though he said his words “the country is, at the moment, bankrupt and is not in business” were handpicked, they have caused a great deal of concern.
Posted in The Express Tribune, December 19e, 2021.
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