ISLAMABAD: Pakistan is another Sri Lanka in the making if it is not stopped by taking actions the defaulting island nation failed to, a report by Institute for Policy Reforms (IPR) warned on Tuesday. With foreign debt growing by 200 percent in the last six years and exports increasing by just 3 percent, what could NOT go wrong?
“External debt and current account deficit are not just the biggest economic issues, they are a national emergency. Solving them is critical for economic revival and security. If not done, there is every chance the economy may default or face a Sri Lanka-type situation,” said the authors of the report titled What to do about Pakistan’s Mountain of Debt’. The following are the findings of the report that cuts deeper.
The Ukraine war, with the ensuing supply problems and inflation, compounds an already intractable situation further. The pressure of continuous borrowing for consumption and debt servicing without developing the means to repay the loans makes the external account fragile.
There is also a trend of worsening sustainability ratios as well as a preference for shorter tenure and higher cost debt. Total foreign debt was less than $60 billion in 2015. In six years, it more than doubled to over $130 billion in December 2021, and the borrowing continues. However, in those six years, exports of goods and services barely increased from $30.5 billion to $31.5 billion in FY21.
Foreign debt grew by over 200 percent in that period and exports by merely 3 percent. During the same period, debt servicing, principal plus interest, jumped about 250 percent. All sustainability indicators worsened.
Regarding debt tenor and cost, between 2010 and 2021, the share of low-cost mostly long-term Paris Club debt fell from 25 percent to 8.8 percent, while the share of multilateral loans fell from 42.7 percent to 27.6 percent. As against this, the share of high-cost bonds/sukuks went up from 2.7 percent to 6.4 percent, commercial loans from zero to 8.4 percent, and other bilateral loans from 3 percent to 16 percent.
Behind the repeated crises is a breakdown in policymaking. For example, Pakistan has a constant trade deficit. It is because of falling investment and production, but there is no effort to increase them. When we invest and produce less, we must import more, financed with foreign loans. When the economy grows by 2-3 percent Pakistan’s exports and remittances are enough to meet most imports. But when the economy grows by about 5 percent or when energy prices suddenly shoot up, we need more loans. That causes payment of interest and principal to rise and thus the crisis.
A plan to avoid future current account crises should lie at the centre of any substantial engagement with the IMF and other partners. Not merely piling debt on debt.
The IMF's main goal is to help a troubled economy to tide over an emergency. This is done in the hope that the country would make the reforms to avoid a future crisis. As our over 20 visits to the IMF testify, Pakistan does not make the reforms. The depth of reforms that Pakistan needs can only be set right by strong and committed leadership engaged with the people of Pakistan and working for growth and development.
The economy takes years to recover from each crisis. And we pay huge sums to external creditors and suppliers of goods. The ensuing devaluation, high interest rate, and cuts in public spending impoverishes the citizens and depresses economic activity. It is now a regular occurrence.
The sum of the economy’s infrastructure, human resource, and institutional assets are good for the economy to grow by up to 3 percent. Clearly, a growth rate of 2 to 3 percent is not an acceptable one.
All this has skewed GoP’s (government of Pakistan) expenditure. In FY21, 38 percent of federal expenditure paid off just the interest on domestic and foreign debt. It was 78 percent of federal revenue receipt. Most other expenditure was met from borrowings. Public investment on infrastructure and human capital has been cut drastically to meet debt payments. In addition to payment of interest, subsidies take up a lot of funds. IPPs is an example as are loss making PSEs.
What should Pakistan do? Policymakers must get serious. IPR recommends that each year, the GoP must set targets for fiscal and current account deficits and cut its coat accordingly. GoP may also earmark a part of the $ 30 billion remittances for repayment of external debt, by limiting imports.
In addition to indirect taxes, GoP must increase direct taxes and reduce exemptions. And we may have to go for debt relief from international creditors. To convince lenders we want to avoid future crises, we must go with a sound plan for economic growth and correction of elite privilege.
Until exports can grow substantially from production of more goods, the government must make an item-wise study of what export could increase quickly, possibly with incentives. Similarly, it must do away with all non-essential goods imports and make an item wise review to find domestic substitutes for them and bring some items quickly into production with incentives.
In addition to a Saudi facility for deferred payment for oil, we may request the same of Qatar. Restrict portfolio investment and end the volatility and transfer of resources that it causes. And gradually we must start accessing external debt to only finance projects that create GDP growth and exports. If over 70 percent of new debt is consumed, the crisis will never go away.
Getting out of the crisis would not be quick and easy. It is a gradual process aided also by some medium-term measures such as making the power sector more sustainable and reliable. We may also restructure domestic debt. And we must reorient public investment to help with export growth as well as ensure more credit for the private sector, the IPR report concluded. —