Politics of debt

While it is no doubt a serious matter that Pakistan’s total debt went up from Rs6,000 billion in 2008 to Rs30,000 billion in 2019, it would appear that the inquiry commission being formed to look into the matter is being asked to answer the wrong set of questions. It was clear from Prime Minister Imran Khan’s midnight speech after the budget that the answer he wants is to know whose pockets the money went into. This is not the wisest question to ask about state-sector borrowing. This is also not to say that there is no corruption when the state spends money, but that the connection between state borrowing and corruption is not a straightforward one. The answer to why Pakistan’s total debt has grown so high lies in asking questions about policy, not law-enforcement. There is certainly a need to understand what went wrong.

To most observers, the answer has been fairly straightforward. State spending has increased much higher than the increase in revenue collected. For those who have watched budget after budget in the last decade, the same story has been repeated. Taking on debt is the standard mechanism for governments to spend money – not just in Pakistan, but around the world. There are three additional explanations for why debt increased after 2008. One, government debt across the world increased after the 2008 financial crisis. Two, especially after signing the CPEC agreement, the government of Pakistan pursued a fairly expansive development policy, which pushed state-sector spending higher each year. Three, if debt was stable in the decade of the Musharraf rule, it was because foreign aid flowed in due to Pakistan’s role in the US war on terror. This meant the borrowing could be kept in check as the government and imported technocrats set about creating the consumption-driven economy that is at the heart of the current economic crisis. The increase in debt is a problem of policy – which is connected to the fiscal and current account deficits. How state finance works need not be studied by a commission. Instead, what needs to be asked is why we are still following the same imported policy paradigm that brought us here in the first place.