Debt: A flawed focus!

2018-01-02T23:14:44+05:00 Dr Kamal Monnoo

There is a lot of noise on how Pakistan’s debt has ballooned in recent years and economic head winds are facing Pak economy whence a significant portion of this debt reaches maturity. The experts in the meanwhile have been quick to blame the democratic governments of Zardari and Nawaz Sharif on their irresponsible and reckless borrowing sprees – all sorts of doomsday scenarios are afoot. While there is no denying the fact that Pakistan’s debt has risen meteorically in recent years and given the current state of the economy it is looking increasingly un-sustainable, the thing is that by simply looking at the debt numbers we may be focusing on the wrong element - It is its utilisation and not merely its quantum that we should essentially be worried about. Borrowing or debt in itself is not such a bad things as long as it is put to good use. Growth, as we know, has been the prime mantra of global economics since the 80s and to grow one needs capital. This growth recipe continues to rule the roost and only recently “The World Economic Situation and Prospects 2018”, was launched with much fanfare in New York by the United Nations. The aim is to grow World’s gross product by its highest ever in 2018, and who if one may ask would be the main driver: Of course, China, which is expected to contribute about one-third of this forecasted global growth; surpassing the combined contributions of the US, the Eurozone, and Japan. But then even China itself has its own debt issues. On the face of it the mega trade surpluses and its huge reserves make it a very healthy economy, but underneath lie piles of toxic domestic debt that the Chinese government has been generously doling out to its corporations to spur growth. When it comes to debt, the United States (US), Eurozone, Brazil and Japan are no exceptions – guess there is no cheap ticket to modern day development!

So how could Pakistan have been an exception? With its economy not producing any annual operational or trade surplus, naturally in order to grow it had to borrow. The trouble however is that in the process scant little attention was paid to the quality of debt being amassed and then subsequently how it was spent: skewed priorities, corruption, leakages and in-inefficiencies, conflict of interest, you name it and it happened courtesy the peculiar brand of Pakistani democracy that functions on the back of populist slogans, leaderships’ egos and naked nepotism. Well, easy to criticise, because a skeptic would rightly raise a question that if there is no way out but to borrow and if democracy is indeed the best system, then what is the way forward? Answer: Fix basically five things,

1) Quality of Debt: Foremost, Government in its borrowing binge has been acquiring (both foreign and domestic) expensive debt at more or less commercial rates. Also, the rationale on need-based borrowing has been missing. For example, while it has repeatedly claimed that it is increasing its credit only to the extent of the budget deficit requirements, the reality is quite different. The increase in federal government’s debt from July-September 2016, adds up to Rs858 billion, whereas, the budget deficit in the same period was only Rs450 billion - about half. This needs to be fixed through a slow but necessary process of debt substitution, meaning, debt replacement on rates more akin to applicable on sovereign borrowings.

2) Skewed spending priorities: In general, refers to preferring fancy projects while neglecting to spend on social sectors like health, education, housing, poverty reduction, safety nets and social welfare. Synopsis: * Bad History: Our debt (historic) has little to show for in social development and sustainable big-ticket projects. For example, NPV (net present value) of our debt spending comes out to be much lower than that of European Debt-spend. Even for intangible assets our deficit/spending does not match results, e.g. support over the years to sectors like health, housing, utilities, education, and social benefits does not add up with results, * No winning public sector corporations to show for. * Real poverty level still stuck at around 30%.* An extremely narrow and small industrial base. * Top-heavy public administration system that despite being inefficient has become further entrenched over time.

3) Finance ministry’s flawed approach to quick revenue generation: A complete lack of long-term economic vision on part of Mr. Dar and his obsession with quick revenue generation over the last four and half years (advertently or inadvertently) has in essence meant: preference to imports over domestic manufacturing, thereby aiding premature de-industrialisation and hampering job creation; squeesing private sector’s credit & its liquidity, especially of exporters; and a general imbalance in taxation and oversight policies that has resulted in promoting the undocumented sector and rendered Pakistan as an uncompetitive destination to do business. A taxation reform framework needs to be quickly introduced that promotes documentation, checks corruption & smuggling and broadens the tax base.

4) Avoid over-reliance on devaluation to manage trade deficit: We have already devalued the Pak Rupee by about 5% and given our circumstances, while one can somewhat argue the case of mild devaluation (5 to 7%, though gradual) in order to help manufacturing competitiveness at least in the short-term, anything in excess of 7% will instead be counterproductive. There exists no credible study or a real time example to prove that currency devaluation does indeed (sustainably) boosts exports – Asian tigers, China, Bangladesh and India, all have managed a surge in their exports during a stable currency period and not through any abrupt devaluation measures. In fact on the contrary, a WTO study (2008) points to a correlation between value addition and a stable currency environment. Amongst many other types of fallout, devaluation is invariably followed by a wave of inflationary pressures - especially in a current-account-deficit economy like Pakistan – and given that Pakistani exports in general are quite low on value addition, one needs to be careful in computing the trade-off between gains in exports with other likely fall-outs. And as for devaluation as a primary tool to discourage imports in Pakistan, there are two main concerns: First, Pakistan’s imports are largely on back of a consumption boom largely filled by the vacuum left by home manufacturing, so it is actually domestic manufacturing that needs lifting and Second, modern day management science has developed many other preferable tools than devaluation to curb imports, so why not exhaust them first.

5) Institutionalise borrowing and its usage: Any borrowing or debt undertaken for investment, e.g. CPEC (China Pakistan Economic Corridor) not only raises the fundamental question on its need or rationale, but also about the terms on which it is negotiated. Key here is to constitute an autonomous but competent apex board (including that over CPEC) comprising of credible members with sound management backgrounds. Raising debt or initiatives like CPEC may no longer be just our economic requirements, but perhaps also now our defense, foreign policy and geographic compulsions, which if not managed professionally can instead backfire.

It is time that our political diaspora understands that undermining each other or making untenable promises will only worsen matters. The route to fix economic issues is through policy measures aimed at finding solutions to Pakistan’s management deficiencies: From poorly run state owned enterprises to inefficient utilities’ producers to dismal bureaucratic functioning to faltering institutions like SECP, FBR, Customs, and others, all are victim to inept management and seeking a divorce from the state!


The writer is an entrepreneur and economic analyst.

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