National Debt: Facts From Fiction? | Dr Kamal Monnoo

Last week at a CPEC road network’s inaugural ceremony in Baluchistan, the finance minister in his address was visibly angry at the (economic) pseudo intellectuals of Pakistan who according to him insist on misrepresenting the facts on Pakistan’s national debt. According to him, not only has Pakistan’s total debt come down in his tenure, but is also far better structured than it has been at any time during recent years. Well, if this is indeed the case, then probably the finance minister knows what the others don’t and perhaps more transparency by the ministry of finance on the real debt numbers would greatly help in clarifying this concern! Anyway, from what one knows – the ministry can of course clarify in-corrections, if any – if the present rate of borrowing does not slow down the external debt is all set to reach a whopping $90 billion in the next 4 years. Meaning, the country will need an amount of up to $20 billion merely to service its annual debt obligations. Any student of economics knows that though reasonable levels of external debt help finance productive investment and spur GDP growth, beyond a certain threshold the exercise can suddenly become counterproductive and even retard sustainable growth. In their famous paper on sovereign debt, Carmen Reinhart and Kenneth Rogoff (Harvard professors), argue that unproductive high borrowings invariably lead to sovereign debt defaults, counting as many as 250 in 200 years; more than 1 nation a year. God knows how this applies on the situation brewing in Pakistan where a first glance at fancy projects like Metro, Orange Line, endless strips of low-commercial motorways, highways, flyovers, etc raises serious questions on their self-sustainability!

To be precise, as of September 2015, Pakistan’s external debt stood at $66.5 billion. Just in 9 years, June 2006 to June 2015, Pakistan’s external debt increased by 75%; courtesy political dispensation? External debt is primarily comprised of public debt (government debt, debt from international finance institutions such as the IMF, and foreign exchange liabilities), borrowings on public sector enterprises, banks, private sector debt, and debt liabilities to direct investors. Of our total external debt, nearly 84% is public debt, which is primarily long term in nature, acquired from various multilateral lending organizations. This high percentage in itself signals a failure on the part of our foreign policy, since it shows that friends from the developed countries in recent years have shied away from directly helping Pakistan, in-turn leaving us to the mercy of the lender of the last resort, IMF – Grant element today of our debt stands reduced to 37% from 66% in 2011. However, even more dangerously, as per the World Bank’s assessment-2014, nearly 55% of our external debt is dollar denominated. Meaning, if the Pak rupee crashes against the dollar, the effect on our debt can be colossal. And this limitation today is most visibly manifesting itself in Pakistani exports, which are falling rapidly, as the government remains constrained in its option to use the policy tool of devaluation to stoke competitiveness.

While one moaned the excessive borrowing spree of the PPP led government, debt piling over the last two and half years has been no less scary. Violating all norms (including constitutional) of permissible level of debt in an economy, Pakistan seems headed towards a debt trap. From poorly negotiated terms with the IMF that decelerate economic activity and negate employment creation in home markets, the story is endless: crowding out the of the private sector (more than 85% loan portfolios of the commercial banks in the last 3 years are directed towards the government); compromising the very concept of sovereign debt – cost of governmental borrowing, which in-turn can have far reaching implications not only on the structure of debt but also on the sheer long-term ability of future governments to reduce the debt ratio; the interest rate conundrum and compromising on the option of using national savings at a given time to reduce national debt; raising expensive debt to retire cheaper borrowings; and last but not least, the whole business of questionable dollar denominated bond issues in the international markets. Pakistan’s total external liabilities at commercial rates today stand at about 36% of our total debt, our principal and interest payment alone tend to be as much as 20% of our total export earnings and the total debt today is as high as nearly two and a half times of our total annual export receipts. And by the way our exports are falling, so these percentages are likely to be higher in the months to come.

The situation is especially dangerous because economic fundamentals are consistently flouted by a government completely clueless on the real equilibrium of debt in our economy. The framework for debt sustainability analysis (also used by the IMF and the World Bank) has three broad policy objectives: a) to assess the current debt situation, meaning, debt’s maturity structure, who holds the debt and whether it has fixed or floating rates, b) identify vulnerabilities in advance, and c) work out alternative debt stabilizing paths. To silent his critics, it will help the finance minister to direct his ministry to act more transparently and share their workings on how we fare on the above mentioned 3 broad contours of debt assessment, and possibly also on the implications on debt, if any, for the CPEC investments of up to $46 billion going forward. Coming back to the paper of Carmen Reinhart and Kenneth Rogoff, they opine that at the end of the day the sustainability of any sovereign debt is determined by its perception and transparency: “The level of sustainable debt in an economy can have multiple equilibriums and these equilibria of debt are determined by the varying levels of confidence that policy makers are able to generate in dispensing sound and transparent economic management.”


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