Wednesday October 27, 2021

Overwhelmingly indebted

September 22, 2021
Overwhelmingly indebted

LAHORE: The economy is growing amid increasing inflation, depreciating rupee, ballooning current account deficit and declining foreign direct investment. The growth is subject to massive injection of borrowed money.

We are living dangerously and exploring all avenues to generate money. Besides the officially acknowledged debt, the money is also being raised both in foreign and domestic currency through sovereign bonds.

A sovereign bond is a debt security issued by a national government to raise money for financing government programmes, paying down old debt, paying interest on current debt, and any other government spending needs. Sovereign bonds can be denominated in a foreign currency or the government’s domestic currency.

Sovereign bonds are a way governments’ raise money in addition to tax revenue. It is a sort of long-term debt, but the entire bond amount has to be returned back in one go on its maturity.

Media reports indicate that besides issuing rupee denominated bonds, the present government is making efforts to raise $5 billion through Sukkuk (Islamic bond) this fiscal.

The first Sukkuk, if successful, will in fact be consumed in paying back the investors over $1 billion for the bond maturing this year. We are pledging our airports and motorways to raise these Sukkuks.

Even if this money is arranged, it would not resolve the financial problems that we are facing today. We have raised over $2 billion on high interest from overseas Pakistanis in the Roshan Digital Accounts.

The bonds are also high interest debts (for cash starved poor countries like Pakistan) that are usually payable in five years. Our policy rates practically determine the interest these bonds and accounts would attract.

If the policy rates are further increased as indicated by the State Bank governor in his monetary policy briefing, the interests on bonds and Roshan Digital Accounts would also increase.

We must realise that we are not on a sustainable growth path and reversal of growth can be expected anytime soon. The boom-and-bust growth cycles have been the hallmark of the last eighteen years, which saw four parties ruling Pakistan.

In 2003, when the PML-Q government took power, the economy was in good shape and it performed excellently till early 2007. After that the government lost its grip on the economy due to public appeasement policies before the election.

The resultant stress on general voters threw the government out of power in 2008. The PPP government that assumed power when the economy was on downslide took two years to stem the rot.

The economy started inching up in its last three years, but the scars of bad governance that still existed booted the government out of power. But one should give credit to that regime for things did gradually start improving as its tenure progressed.

The next government formed by PML-N had an easy ride till 2016. Its best accomplishment was to keep the prices of essential items in check that matter most for the poor. The disqualification of its elected Prime Minister was a setback for the party, but the growth inertia created in the first three years kept the economy growing.

This was the reason that in the 2018 elections there was a split mandate. The PTI assumed power through a coalition of numerous parties and independents. It certainly weakened it because of the adjustments the ruling party had to make with the coalition partners. The PTI government saw a sharp decline in GDP growth in its first two years.

Rupee slumped very sharply and the interest rates were taken to 13.25 percent. It did reduce and at one time took the current account deficit to positive. The exports declined sharply in the first two years. In the third year, growth returned with a bang almost touching 4 percent, which was remarkable in comparison to the growth of 1.9 percent in its first year and minus 0.4 percent in the second.

The interest rates were reduced to 7 percent. The rupee also made a remarkable recovery to trade at Rs152 against the dollar compared with its highest of over 168.50. The hopes of economic consolidation increased, but suddenly the rupee started slipping and is again trading at its highest level.

Inflation is again rising and so are the imports. Exports are also rising, but at a slower pace compared to imports. All this while, the current account deficit is getting out of control. With the election less than two years away no one is sure how the economy will shape up before the election. This government could not control the prices of essential items, which could impact its popularity when the public goes to vote.