Decades of subjugation

Shall we ever be able to get out of the debt trap?

Nearing 73 years of independence, our elites want to celebrate liberation from the colonial rule after pushing the country into a debt quagmire. This paradox depicts what Zulfikar Ali Bhutto highlighted in his book, The Myth of Independence.

What makes the situation more painful is the fact that every time a new loan is obtained, those in power express great satisfaction as if an extraordinary goal has been achieved.

The clearance of last tranche of the current arrangement with the International Monetary Fund (IMF) on December 26, was celebrated like August 14.

The dangers of a rising debt to GDP ratio were highlighted in 2016, in our article Trapped and enslaved, (The News on Sunday, Political Economy, June 5). In 2020, the situation is actually worse.

A common characteristic of the six budgets presented by the Pakistan Muslim League (Nawaz) government was the burgeoning debt. In compliance with the IMF prescription under a $6.4 billion bailout package, the PML-N accumulated unprecedented external debt.

In December 2019, the coalition government led by Pakistan Tahreek-i-Insaf (PTI), which had said prior to coming to power that they would never ask for IMF loans, got $6 billion from the IMF and claimed that this was a great “achievement”—even though the conditions imposed by the Fund were the most stringent in the history of IMF bailouts since 1958.

In the fiscal year 2019-20 alone, the PTI government secured over $13 billion in foreign loans, the second highest in history.We are now borrowing mainly to repay the maturing external debt. According to a report, quoting data compiled by the Ministry of Economic Affairs, during the previous fiscal year, Pakistan’s gross receipts in loans amounted to $13.2 billion. This includes bilateral as well as multilateral lenders as well as commercial creditors.

We received $29.2 billion in foreign loans in the last two years, including $26.2 billion borrowed by the PTI government since taking power in 2018. Out of this, $19.2 billion was taken to repay the maturing external debt. The rest was added to the “external public and publicly guaranteed debt”.

For the current fiscal year, the cost of external debt-servicing is estimated at Rs 315 billion, even after securing about Rs 50 billion temporary relief from the G20 group’s temporary relief on debt servicing. In fiscal year 2018-19, Pakistan had borrowed $16 billion, including balance of payments support from the Gulf countries, and returned $9.1 billion worth of loans. In fiscal year 2019-20, the gross foreign loans stood at $13.2 billion and repayments amounted to slightly above $10 billion.

Bilateral creditors disbursed $629 million in the last fiscal year against the budgetary target of $480 million. China gave us $488 million in bilateral loans against earlier estimate of $402 million. Multilateral creditors disbursed $5.54 billion in loans in the previous fiscal year. The Asian Development Bank provided $2.8 billion, exceeding the annual target of $1.7 billion. However, out of the $2.8 billion, its budgetary support loans amounted to $2.3 billion.

The IMF disbursed $2.84 billion loans, including $1.4 billion in emergency financing in response to Covid-19. The Islamic Development Bank disbursed $869 million under the oil credit facility against the estimate of $1.1 billion. The World Bank released $1.32 billion against the annual estimate of close to $1.2 billion. The Asian Infrastructure Investment Bank (AIIB) provided $508 million.

Pakistan’s agreements with the IMF (1958-2019)

Since 1958, Pakistan has signed 16 programmes with the IMF. On December 8, 1958, the military government signed a one-year Standby Arrangement (SBA), which it terminated in nine months. The second SBA was signed on March 16, 1965 and concluded on March 15, 1966. Yet another one-year SBA ended on May 17, 1973. The fourth SBA, signed on August 11, 1973, ended on August 10, 1974. The fifth one was signed on November 11, 1974 and concluded on November 10, 1975. The sixth was signed on March 9, 1977—it was terminated exactly one year later. On November 24, 1980, an Extended Fund Facility (EFF) was concluded which lasted for three years—ending on November 23, 1983.

Five years later, two simultaneous programmes, a Structural Adjustment Facility (SAF) and an SBA were signed on December 28, 1988. Both continued beyond the agreed timeframe and ended in 1990 and 1992, respectively. The ninth programme, again a one-year SBA, was signed on September 16, 1993, but was terminated prematurely on February 22, 1994. The 10th programme comprised two separate facilities—the SAF and the EFF—signed on February 22, 1994 for a period of three years. However, both the facilities were terminated much before maturity—on December 13, 1995. The 11th SBA was signed on December 13, 1995. It ended on September 30, 1997. The 12th programme was of two separate facilities, the Poverty Reduction Growth Facility (PRGF) and an EFF. Both were signed on October 20, 1997 and continued till October 19, 2000.

Under the 13th programme, another SBA was signed on November 29, 2000 and continued until September 30, 2001. The 14th Extended Credit Facility/PRGF was signed on June 12, 2001 and terminated on May 12, 2004. A three-year SBA was signed on November 24, 2008 but was prematurely terminated on September 12, 2010 after Pakistan could not initiate tax and energy reforms. The PML-N government signed an agreement in September 2013 and successfully completed it on August 4, 2016. Under the PTI government, the IMF Executive Board approved the 39-month-$6-billion EFF on July 3, 2019.

Like the previous PML-N government, the PTI administration has relied on short-term foreign commercial loans. Against the budgetary estimate of $2 billion, it borrowed $3.4 billion in foreign commercial loans. Two Chinese financial institutions — China Development Bank ($1.7 billion) and Bank of China ($500 million) — provided about two-thirds of these loans.

Dubai Bank extended $564 million, Ajman Bank $300 million, Citibank $148 million, Standard Chartered $27 million and Suisse Bank AG $205 million. The government plans to seek $15 billion in gross foreign loans during 2020-21 for debt servicing and building foreign currency reserves. Out of the estimated external borrowing of $15 billion, nearly $10 billion will be used to return the maturing loans, excluding interest payments.

The burgeoning fiscal deficit and ever-increasing debt burden are related to lack of will to undertake fundamental structural reforms, enforce fiscal discipline, increase tax collection, ensure rule of law and good governance and stop the monstrous losses of Public Sector Enterprises (PESs).

Managing high fiscal deficit coupled with a massive debt burden is the toughest challenge faced by the governments. The obvious and undisputed solution is a substantial increase in resources and a drastic reduction in spending. This is easier said than done. For many decades, our fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of the Federal Board of Revenue, leading to ever-increasing fiscal deficit and debt-servicing.

For retirement of debts, concerted efforts are required based on informed decisions. Resource mobilisation through export-led growth should be the top priority. For this we need infrastructure and trained human capital, growth of small and medium-sized firms in the industrial and agricultural sectors for producing value-added exportable surplus.

For the revival and growth of industry, large corporations with equity stakes for the poor should be established through public-private partnerships. This would set the stage for a structural change that could help achieve inclusive growth for the people which is presently confined to the elites, leaving the country in a debt trap.

The writers, lawyers and authors, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS)

Decades of subjugation