Development debt: a win-win bet for future growth

Comment

LAHORE: The new government shouldn’t be shy of borrowing for infrastructure and human resource development as previous regime had done despite drawing criticism from all sides.

The debt was taken to finance bankable development projects which after completion would have created adequate resources for debt repayment.

These development projects would also spur growth. Prudent planners understand that much needed infrastructure project and repairs cannot be postponed just as a highly indebted family would not postpone fixing leaks on the roof until the debt is paid off. Just as the leaks would damage the fixtures of the house and reduce it value drastically delaying infrastructure projects would have a similar impact on the economy.

Borrowing as such is not a sin; responsible businesses borrow frequently to invest in projects that are deemed commercially viable by financers, so should the government provided it comes up with bankable projects having potential to pay back the loan.

Addressing unemployment or creating new employment needs infrastructural upgrade, be it roads, communications, water channels, or human resource. If it is postponed till creation of own resources as a part of austerity the economic situation would further deteriorate. Generating own resources is essential but this also could only be achieved by investing in institutions, technology and human resource. Politicians would however have to understand the distinction between consumption and investment. Borrowing to run day to day affairs of the government is wasteful consumption while debt taken to invest in projects whose future benefits outweigh repayment costs is prudent investment.

Pakistan has been facing social unrest for the past 25 years because successive governments borrowed excessively for consumption and reduced the development investments. The public sector development expenditure started to rise in the era of previous regime that took the courage to finance almost all development on borrowed money. It had no choice because the revenues generated by the federation hardly covered the general expenditure, defence and debt servicing.

Up till now governments in Pakistan are shy of investing in mega infrastructure projects because they do not provide short-term economic stimulus. The mega projects launched by one government would mature after the tenure of that government is over. The politicians want to see the benefits of investment before they go back to the electorate again. Basha Dam for instance is a long-term project.

It was inaugurated by Musharraf, Yousuf Raza Gilani, and Nawaz Shariff only for political point scoring. None of them allocated enough resources to start the actual project in last 15 years. Investments in such infrastructure projects promise high returns in long run besides creating employment opportunities throughout the completion of the project. As a result of this negligence Pakistan is one of the most water starved country in the world. The new government should look beyond short-term electoral gains and plan mega projects of national importance.

When the investment is prudent its future returns exceed its cost including mark-up cost of borrowing. There are unlimited infrastructure projects in Pakistan that qualify under this criterion.

None of the elected members of National Assembly would oppose repair of crumbling roads and bridges that are the lifeline of economy. It has now been established that the cost of repair and new projects increases constantly in line with the delay.

The power projects have the capability to repay debt but because power produced by them is purchased by the governments. Projects like Mangla Dam, Tarbela Dam and Ghazi Brotha Hydro Power projects are revenue generators for the state after paying debt from their production.

Nelam Jehlum Hydro Power Project on the other hand was provided timely funds with the result that its cost quadrupled.

Though the cost of power production from this project is relatively high; still it has the capacity to service its loan and earn a lot of money for the state. Thus accelerated infrastructure investment is in our national interest as our economy is still in the doldrums.

Public debt has reached an unbearable limit in Pakistan because most of the loans taken during past one decade were for consumption purposes.

Still it would be unwise to postpone much needed infrastructure projects just because the government is running on a huge deficit.

The deficit is going to stay for a while and if the government can take loans for consumption why can’t it seek financial assistance for infrastructure projects.