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February 8, 2017



Questions about debt

Pakistan’s ever-rising debt is perhaps the most discussed topic as far as economics is concerned. The finance minister’s recent article – published in mainstream publications – on this subject has still left many aspects unanswered. The respected finance minister starts with pointing out the difference between the gross debt and the net debt in order to demonstrate that Pakistan’s debt is not a serious issue.

First of all, it would have been better if he had explained what this distinction means and why it is important. This is so because majority of the readers are not financial experts, accountants or economists who could make sense of what the finance minister was trying to imply. He also did not give any breakup of the net public debt. For example, what is the percentage of the debt the government owes to itself and that of the assets in the total net debt? We can only guess. It is also important to present this distinction since the implications differ from country to country.

For the reader, let me decipher in simple English what the finance minister was trying to imply and also point out why he is wrong. The distinction between net and gross public debt represents an accounting identity, but its implications can go far beyond that. I will use a simple example. In gross public debt, we do not subtract the value of a government asset (say a building) from total debt, but we do that while compiling net debt. The logic (and basis) of this kind of accounting is that if push comes to shove (meaning that the government is in dire need of paying off debt), it can sell its buildings to pay back the loan. Similar logic goes for publicly held entities (like Pakistan Steel Mills) and other such assets.

One can immediately imagine the problems in this case. Who will, for example, buy Pakistan’s publicly-held entities that bleed the national exchequer of more than Rs600 billion a year? Please also note that these loss-inflicting entities carry heavy debts, guaranteed by the federal government. But yet, strangely, the federal government does not count these in its debt obligations (try figuring out this anomaly). Since 2013, all of the government’s efforts to get rid of these entities have borne little or no fruit. This explains my assertion that the implications of gross and net debt differ from country to country.

In Pakistan’s case, thus, it’s clearly not enough to just calculate a filtered public debt figure (net debt) and say that we shouldn’t worry. In fact, a dispassionate and unbiased analysis would suggest that we should worry more than ever. For the sake of argument, even if we assume that Pakistan’s government has such high demand assets that investors would rush to buy them when offered for sale, I cannot see that paying even half of the accumulated net debt of Rs18 trillion. So, I am a bit confused what makes the finance minister so confident when quoting net debt figures.

And mind you, when it comes to creating loss-making assets, there are not many who can beat Pakistani policymakers. Take this government’s pet project, the Metro Line in Lahore and Islamabad/Rawalpindi. Both are running in losses. Yet, in compiling net figures, this loss effect appears nowhere and their estimated value is subtracted from gross debt to make the figures more respectable. I am not sure how many readers would now be comfortable with the net debt figure. I certainly am not.

Let’s move to the next point – the advantage (stated by the finance minister) of accumulating domestic debt rather than an external one. The advantage comes in the form of easy ‘rollover’ (issuing new debt to cover the old one). That may be so, but the minister fails to mention the downsides of the policy. It comes in the form of ‘crowding out’ the private sector; meaning that the private sector finds it difficult to take loans. Since the government’s borrowings present lesser risk, banks prefer to lend to the government rather than to the private sector. This is a travesty since the private sector is the one that makes more judicious use of money and is the real driver of growth in Pakistan. This has been going on for the last decade or so.

By spoon-feeding the financial institutions like banks with T-bills, the government in fact does the country a huge disfavour since many proposed, productive investments by the private sector never materialise. In its place, there are government-led investments which usually turn out to be failures in the long run, thereby inflicting monetary cost upon the exchequer and the taxpayer. Moreover, excessive domestic borrowings serve to raise the interest rates, raising the cost of capital and of doing business.

In his article, the finance minister claims the external debt figure is $57.7 billion, and not $73 billion as claimed by other commentators. This difference, he argues, arises because the private sector debt is also counted as government debt. While it may not exactly be $73 billion, it’s also not $57.7 billion. That’s because the government does not count the liabilities of the PSE’s as its liability. As I have argued above, this is strange given that the debt of PSE is guaranteed by the federal government. That is probably why the State Bank, in its first quarter report for this fiscal year, stated that the total external liabilities were $62.4 billion. In the same report, the State Bank raised concern over the government resorting to expensive, short-term debt. This goes against the finance minister’s assertion of resorting to long-term debt with lengthy pay-off periods.

Finally, it’s not just the debt that is a bit disconcerting (Pakistan is not the only one that takes on debt), but also the way that it has been done. The $250 million from Credit Suisse and the recent revelation of a ‘gift’ in the form of Chinese loan worth $1 billion raises many questions. If it was a ‘gift’, then why did we need to pay it back (gifts are not supposed to be returned)? Also, the $250 million loan was taken without recourse to competitive bidding which needs explanation.

As for ‘credit rating agencies’, we need to be cautious. In late 2007, the fall of two investment houses set off the global recession from which the global economy has yet to recover properly. What was noticeable about the fall of Lehman Brothers and Bear Stearns was that their ‘credit rating’ was healthy and none of the credit rating agencies had cast any doubt about their financial health. There are many such cases. As far as I am concerned, people should always take their ratings with a pinch of salt.

In conclusion, taking on debt is nothing new and nothing extraordinary. But there are genuine concerns in Pakistan regarding the debt situation and its implications. We must appreciate the finance minister’s column where he tried to put the doubts to rest.

However, there are still many vexing issues surrounding Pakistan’s total debt, its compilation and the method of accumulating it. I do not doubt the capability of the respected finance minister and his team in handling the complexities surrounding Pakistan’s economic issues, but he and his team must go beyond numbers and figure out the implications of Pakistan’s surging debt.

The writer is a freelance contributor.

Email: [email protected]

Twitter @ShahidMohmand79