Humayun Akhtar. The author is a former commerce minister and the CEO and Chair of the Board of the Institute for Policy Reforms. This feature is based on the Institute’s recent report “What to do about Pakistan’s mountain of debt?’.
PAKISTAN'S ECONOMY: SLEEPWALKING FROM CRISIS TO CRISIS
ISLAMABAD: There is not much wisdom in doing the same thing over and over again and expecting a different result. Yet that is how successive governments in Pakistan have managed the economy. When faced by an economic crisis, our first reaction is to seek external loans under an IMF programme. This course of action also has a parallel requirement of economic reforms to avoid the crisis from happening again. Pakistan has never cared to do that.
Decision makers celebrate each agreement with youthful optimism, as if it is a win. Citizens, on the other hand watch with trepidation. They see the loan meter tick higher like a helpless passenger in the back seat of a lost taxi, knowing that in the end they must pick the tab. No decision maker is ever held to account.
So, we borrow with no plan about how to return the money. And the economy has sleep walked from one crisis to the next, hand-held by one IFI or another. We may now have come to a point from which there is no easy exit. There are also not too many countries and organizations willing to help. They know that this is a child that refuses to grow.
Meanwhile, discussions with IMF have floundered. It has forced GoP to take the step it had said it would not take, which is to partly cut fuel subsidy. Yet, removal of fuel subsidy is not the only hurdle in reviving the IMF arrangement. GoP and IMF disagree also on several revenue and expenditure targets for the coming budget, as well as on the primary balance. IMF expects GoP to do away with power tariff subsidy, i.e., increase electricity tariff or cut DISCO revenue leakage. No government is willing to do the latter. IMF also wants a realistic estimate of provincial surpluses, a useful tool employed for years by governments to show lower than expected budget deficit.
Why is an IMF agreement insufficient response? IMF’s mission is not growth and development. It helps with temporary balance of payment emergency. IMF looks at debt sustainability from a cash flow point of view. So, if Pakistan will receive enough loans to enable it to meet this and coming years’ external payment obligations, including interest and amortization, IMF considers the situation sustainable. This is a short-term perspective emanating from the IMF’s mission to help member countries meet emergency BoP challenges. But piling debt on debt worsens the malady. As our over 20 visits to IMF testifies, Pakistan’s case is more enduring in nature and entirely of its own making. It stabilizes the economy while under the programme but goes back to old ways very soon. At each visit, Pakistan is in worse shape than it was the last time.
In the last 30 years, both public and private investment has declined in Pakistan. But nothing has been done to correct it. Investment in manufacturing is shockingly low at 1.5 per cent of GDP. As a result, export as a percent of GDP has declined. That figure stood at 19 per cent of GDP in 1990. It is now 8.5 per cent. In some respects, the current account crisis is the other side of the coin of underinvestment.
The economy is under investing in key growth inducing infrastructure support. Expenditure as per cent of GDP on health and education has been flat despite alarmingly low indicators in both. While public investment declined, fiscal deficit has stayed at high levels throughout the 30 years. Our flawed political choice is evident from the trendlines added to the chart below. Budget deficit has stayed at about 6 per cent of GDP, while PSDP has fallen rapidly.
Let’s take a minute to dwell on the logic of public finance in Pakistan. We use 78 per cent of net federal revenue (equal to 38 per cent of total federal expenditure) for interest payment, and then government borrows more money to pay for its other expenditure, which further adds to subsequent interest payments. And as IMF now stipulates that the primary deficit must stay positive, so each year, government spends more and more funds to meet interest expenditure, while restricting most other expenses. Citizens and businesses suffer for want of public goods and from the ever-increasing demand for levies and taxes.
Consequently, debt and debt servicing are now out of hand. Let’s briefly look at the numbers. Total foreign debt was less than $ 60 billion in 2015. In six years, it has more than doubled to over $ 130 B in December 2021, and the borrowing continues. Returns on the labour of Pakistanis is being handed over to outsiders.
On the other hand, in FY 2015, exports of goods and services was $ 30.4 billion. It barely increased to $ 31.5 billion in FY 21. So, while foreign debt grew by over 200 per cent in six years, exports grew by a small 3 per cent. During the same period, debt servicing grew by about 250 per cent. So, how would more loans help? They only worsen the situation.
Continuous dependence on debt has forced us to borrow from expensive sources as concessional sources dry up. Thus, we see that between 2010 and 2021 share of low cost mostly long-term Paris Club debt have gone down from 25 per cent to 8.8 per cent. Share of multilateral debt, another source of concessional loans, fell from 42.7 per cent to 27.6 per cent. As against this, the share of high-cost bonds/sukuks went up from 2.7 per cent to 6.4 per cent. Cost of the three bonds floated in FY 21 ranged between 6 per cent and 8.9 per cent. Share of commercial loans are up from zero in 2010 to 8.4 per cent of total debt in 2021. Their cost is in the range of 5 per cent.
Since FY 2001, Pakistan has paid an average of US $ 1.4 B annually in interest alone. Average interest paid in the last four years is US$ 2.7B annually for a total of US $ 10.7 B since FY 18. Since FY 2001, Pakistan has paid external creditors more than it has received from them. In 20 years, it has received $ 112.6 B and it has paid back $ 118 B in interest and principal. Yet its external debt has grown by 228 per cent from $ 37.2 B in FY 01 to $ 122.2 B in FY 21. We may have paid back the original loan more than once and still owe it to the creditor. This is because often the purpose of new loans is to repay past loans with the result that over 70 per cent of new debt is to meet balance of payments needs. Returns on the labour of Pakistanis is being handed over to outsiders.
External debt must finance projects that create GDP growth and exports to enable the economy to repay. If over 70 per cent of new debt is consumed, the economy does not create the means to repay. About 4 per cent of our GDP has flown out annually in debt servicing in recent years.
As a result, the economy is caught in a trap of low investment, low productivity, low exports, and high debt and debt servicing. It is not clear if there is a plan to correct it. Whatever the reason, it shows the inability of successive governments to reform. While government should do everything to help the economy produce more and industrialize, it stays focused on the short-term.