“Understanding the issues in public sector economics is central to democratic societies and success of the public policies is dependent on how effectively governments can meet their objectives” - Joseph E. Stiglitz

This article is an attempt to shed light on the debt crises facing Pakistan by comparing it with countries in Europe already facing similar crises; crises that have yet to be resolved even by the best economists and central bankers in the world.

Accumulation of debt has flourished at a staggering rate during the last three year, since PML-N took charge. There has been extensive debate surrounding the issue and how it could lead to the downfall of our country’s fortunes, if mishandled.

Amid declining national income and failure to implement economic, political and institutional reforms, the unprecedented hike in public debt can lead to disastrous results in the future. Over the years, countries guilty of ill-handling their public finance have been severely penalized by the IMF with harsh austerity measures. These measures mostly resulted in self-defeating reforms causing output to tumble and raising the deficit and debt ratios to unsustainable levels, as in the case of Greece, Ireland, Italy and Portugal.

With the last payment of $102 million, Pakistan has quit the IMF, which echoed the message that Pakistan is ready to stand on her own feet, while also having four months of import payments in her pocket. But is that really so?

IMF’s final review report pointed that:

“Pakistan’s economy has made significant progress towards macroeconomic stability and laid the foundation for higher and most inclusive growth”.

With such a huge appraisal from the IMF staff, our government must be really proud. The Master is praising big time.

This is indeed a cherishing moment for a nation mired by extreme havoc and recurring mayhem for the last decade or so.

Another great news came courtesy a report published by BMI Research, declaring that Pakistan is among the “10 emerging markets of the future” and that these countries are expected to contribute $4.3 trillion into global GDP by 2025. Within a short span, this is certainly another encouraging signal for a country riddled by ill-timed protests, acute energy shortages, and a costly struggle against terrorism.

Pakistan’s government has come under tremendous pressure after apparent substantive criticism from opposition parties over the continuous over reliance on external and domestic debt to finance mega projects. This led to some titillating questions regarding the soaring public debt of the country. 

Firstly, how far has the country come from the threshold level set by the rule books? Secondly, how does it look compared with the other remaining emerging markets of the world? Thirdly, and most importantly, is it anywhere near the dangerously positioned European strugglers who stood on a financial time bomb since 2010?

Finally, how does the IMF expect to deal with any acrimonious situation arising in Pakistan in comparison to the recent cases witnessed elsewhere, particularly in Europe?

An in depth analysis of Pakistan’s public debt position since 1994 reveals that during most of the democratic periods, debt continued to stay well beyond the limitations imposed by law. Rather interestingly, during Musharaf’s period, it continuously declined below the threshold level after increasing in his early years.

Accusation of debt fuelled growth through extraordinary construction activity seems true when compared with other emerging markets, since Pakistan has only bettered compared with the struggling Egypt, which stands at 40% youth unemployment, and stuttering along a budget deficit of 12%.

Running such a dangerous level of public debt in countries like Pakistan is certainly questionable as geopolitical issues and violence can result in an abrupt end to direct investment in the country, potentially halting the progress, as capital flight could harm the already fragile economy.

The magnitude of Pakistan’s public debt in comparison with some high profile strugglers reflects a rosy picture on current situation because Pakistan’s debt is considerably lower compared to Greece, Ireland, Italy and Portugal.

But does this give Pakistan a clean-chit to continue acquiring more debt?

Not really, because according to IMF’s forecast, Pakistan is supposed to follow a strict fiscal policy to deleverage and decline its external debt below the threshold level.

But, the key question remains, can Pakistan manage to comply with the IMF plan?

Mr. Ishaq Dar will say yes to this question, but, the plight of countries which undergo such programs tell a different story.

In Greece for example, following IMF’s austerity measures to control public debt, the economy suffered greatly with unemployment rising to 27% and youth unemployment recorded at 60%, suicide rate doubled and 25% of the output was wiped out of the system in 2013.

What were the fundamental challenges faced by debt ridden ailing countries?

Top of the bill is lack of competitiveness, weak exports and industrial production. The situation has not changed much in these countries; they still have huge government deficits, high unemployment, declining direct investments (other than Portugal) and declining industrial production.

The only difference is that European Central Bank (ECB) has opted to grant them assurance with Merkel and co. declaring to “do whatever it takes” effectively meaning, no default risk for the strugglers.

We must know Greece, Ireland, Italy and Portugal still have a public debt of 178.4%. 955.2%. 132.5% and 128.8% of GDP.  Despite massive and insurmountable debt overhead, and lower real growth, there have been no immediate restructuring programs for these countries. It appears that these countries are bestowed with special concessions and are not objected to flouting of public debt rules.

Under current circumstances, what is the way forward for Pakistan? Should Pakistan continue to spend heavily in infrastructure projects? With no special concession available for Pakistan unlike EU’s specially treated strugglers,  with extremely weak competitiveness, weak exports, over reliance on indirect taxes, stagnancy in generating direct taxes, and soaring youth unemployment, coming out of IMF program is nothing but a far cry.

Could CPEC prove to be a savior? Only time will tell. When countries start accumulating debt, money is used to spur growth. With no such signs apparent in Pakistani economy, it may prove extraordinarily dangerous for the country to service this mammoth debt in the future.

After the completion of IMF’s final program in the country, there was plenty of talk of liberating the country from the IMF & the government had been quite vocal about breaking the beggars bowl.

However, some recent indicators have indicated that it’s getting tough for the government to get going. So, economists have started questioning how long it is possible for Pakistan to sustain without taking another loan package. The positive rhetoric about shunning the IMF for good already seems a thing of the past as many renowned economists have already pointed towards the weaknesses in the system and inherent flaws in Pakistani economy which could prove disastrous in the future, if the government continues its spending spree.

Experienced democratic champions had promised in pre-polls rallies to dissolve foreign debt, but in fact went on a borrowing spree during the last three years to finance its mega projects mainly across Punjab.

Infrastructural development is certainly important but ignoring the development of inclusive institutions is a sin which should not be replicated as it was under previous democratic and military regimes.

Pakistan must undergo political and economic transformation to generate sustainable economic growth. This should result in creative explosion and innovation to flourish paving way for future economic development and revenue generation.

This way Pakistan could improve its national income and denounce its reliance on foreign debt. Otherwise, Pakistan will have to adhere by the IMF’s unpopular financing and painful restructuring programs which could hurt Pakistan’s future and make us more reliant on the IMF.