Debt repayment problem….Miftah Ismail
PAKISTAN owes the world about $100 billion and has to repay $21bn to foreign lenders during the current fiscal year. And during the next three years, it will have to return similar or larger amounts each year totalling about $70bn.
So what happens four years from now? Will we have repaid about $90bn to our creditors and owe only $10bn? Unfortunately, no. We have no resources to repay our lenders. We will just have to try to borrow from one creditor to pay off another.
Hence four years from now, we will have to repay the world more than $21bn we have to pay this year, and a little more each year after that. Therefore, Pakistan will continue to slide more and more into debt, unless we try a novel idea: export more and run a current account surplus. Then and only then will we be able to pay back the world without borrowing from someone. But until then we are in a tight spot.
To understand how we got to this predicament, lets back up a bit. When Pakistan became part of the war against Al Qaeda and their Afghan Taliban protectors, much of our external debt owed to the West was written off. So we were left with considerably reduced debt repayments and our foreign exchange requirements shrank.
Four years from now, we will have to repay the world more than $21bn we have to pay this year.
Our primary need for foreign exchange after 2002 was to finance our current account deficit, which is the excess of imports over exports and remittances. As we accumulated CADs every year, our debt increased every year.
Remember, because we dont run current account surpluses, and hence never earn net foreign exchange, we only borrow foreign exchange from one source to repay another and our debt is never repaid and only grows.
After Gen Musharrafs government in 2007-08 ran Pakistans highest CAD, the incoming PPP government had to reduce this deficit by slowing the economy down. But once the economy slowed, our foreign exchange borrowing requirements came down and the economy more or less stabilised.
Because Pakistans economy wasnt doing well and we werent in an IMF programme, the world wasnt willing to lend to us and our foreign exchange borrowing didnt go up much. However, after five years of drift we were in the midst of a debilitating power shortage by 2013.
Enter the PML-N, and two things happened. One, we entered into an IMF agreement and, two, an agreement was reached with China on CPEC. Now we could get investments and borrow from China for power plants and other infrastructure and borrow from international bond markets to pay for our CADs. The CPEC borrowing, however, was the right thing to do as we really needed power, road and gas infrastructure.
The problem, however, was that as we doubled our power producing capacity in those years, we didnt double our industrial production or exports during those five or the ensuing four years.
So today, whereas our debt-servicing requirements for those power plants and gas and road infrastructure has increased, our ability to pay hasnt. This doesnt mean it was wrong to set up power plants. It means we didnt utilise the power from these plants well. Rather than set up factories, we built more malls and shaadi halls.
It should be pointed out that since most power and gas came online near the very end of the PML-Ns tenure, it couldnt really have industrialised. However, even within those five years, as a result of a fixed exchange rate, Pakistans export-to-GDP took its sharpest downward turn in our history. Therefore, the money borrowed from commercial banks and Eurobonds was spent on financing CADs.
From 2018 onwards, the PTI tried to reduce the CAD but never appreciated the connection between the current account and fiscal deficits. During its four years, tax-to-GDP fell significantly and we ran the largest budget deficits in our history. PTI added 78 per cent of all debt incurred in the previous 71 years and thus ensured we would run not just large fiscal but also large current account deficits.
It is important to understand how budget deficits cause CADs. When our government runs a deficit, it has to borrow to finance it. This money can only either come from the surplus of local private savings over investment or from abroad. But since there is no surplus of local savings, money to finance our fiscal deficit comes from abroad in the shape of imports financed on credit giving rise to the CAD.
Another thing the policymakers must understand is that now its not enough to reduce the CAD to get out of problems. With large debt repayments, we will either need to borrow more (thus requiring a healthy economy) or earn foreign exchange through exports.
How do we get out of this predicament? The answer remains simple but very difficult: we cut the fiscal deficit to below the growth rate, export more to bring the current account into balance, privatise to pay off debt and improve economic efficiency, and bring in considerably more foreign investment to improve our competitiveness.
Privatisation requires courage and consensus that our leadership has lacked, foreign investment requires, above all, peace and security that our civilian and military leaderships have failed to provide for over two decades, exporting more requires a shift from the import substitution model and an understanding of economic reasoning that, unfortunately, most of our policymakers have lacked over the years.
Finally, cutting deficits will mean reducing all current expenditures to below the inflation rate, taxing the untaxed, such as retail and wholesale trade, a fixed tax on agricultural land, a reduction in federal money given to provinces, etc. These are all hard steps but necessary for growth.
But look at the hardship our no-growth economy is causing. Only one out of 36 people on this earth is a Pakistani but one out of 10 uneducated children is a Pakistani. Our children are twice as likely as the world average to be stunted and three times as likely to be wasted.
The hard part should not be to make difficult reform decisions. It should be to realise that tonight millions of kids in Pakistan will go to sleep hungry.
The writer is a former finance minister.
Courtesy Dawn, January 14th, 2023