The numbers recently released by the State Bank of Pakistan (SBP) are staggering, frightening, unsettling and thought-provoking at the same time. This has been the case since the last decade or so, when Pakistan began a disastrous infatuation with taking on debt at a pace that would put even Moore’s law of technological change to shame. Why is Pakistan gobbling up so much debt?
Let me state the problem briefly in numbers (rounded to nearest approximation), just to give the reader a perspective. From 1947 to 2007, Pakistan’s total debt stock stood at Rs7 trillion. The democracy-is-the-best-revenge era, from 2008-2013, saw this double to Rs14 trillion. Then came Ishaq Dar’s era (who is now an absconder). His disastrous management did set records - the true extent of which was revealed in the recently-released SBP report. This report has informed the Pakistani nation that by June 30, 2018, our total debt stock stood near Rs30 trillion, which is 87 percent of the total size of the economy.
Of this Rs30 trillion, the federal government’s debt amounts to Rs25 trillion (72 percent of the GDP), meaning that under Dar, the government took on debt equivalent to Rs11 trillion. The rest of the Rs5 trillion is attributable to provincial governments and the private sector. Summary: In the first 60 years of its existence, Pakistan owed Rs7 trillion. In the next 11 years, we poured on an additional debt of Rs23 trillion. Welcome to Naya Pakistan’s biggest challenge!
Any astute observer, especially the one conversant with economics and issues of debt, may object to the above written as unnecessary fear mongering and pessimism. He or she could, for example, point out that many other countries have a debt-to-GDP ratio that is higher than that of Pakistan. Japan, for example, has a debt-to-GDP ratio of 222 percent, Belgium’s is 106 percent, and it is 99 percent in France. So what is the fuss about? Sorry to disappoint, but these comparisons serve little purpose. I’ll explain in the following lines, but first it is imperative to understand the raison’ d’etre of taking on debt.
In modern economies, what necessitates debt accumulation is mainly meeting the “financing gap” for the purpose of economic growth and development. There are times when a country’s own resources, at any given moment, are not enough to meet the required expenditures for growth and development. Therefore, it is not a bad idea to use someone else’s savings to fuel domestic economic expansion, especially if it comes at a low cost (meaning low interest payments). This prevents that particular opportunity at that particular time from going to waste. Additionally, it is important not to lose that opportunity since an expansion in economic activity imparts various short and long term advantages, from more employment to higher tax revenue that helps pay off the debt in the future (at least this is what the theory posits).
Aside from the above, there are a few other major and minor reasons that lead governments to accumulate debt. A major one relates to the goal of economic stabilisation, whereby governments take on debt in lieu of additional expenditures in order to ward off economic recessions. In this case, it is a necessary evil since recessions (if left unattended) could easily snowball into economic depressions, a situation too gruesome to allow.
If these reasons are understandable, then it becomes easier to understand why Pakistan’s debt elicits such worries. If we had taken on debt for financing economic growth, then Rs23 trillion in the last 11 years should have easily ensured a very high growth rate. Yet, between 2008 and 2018, Pakistan’s economic growth rate averages a dismal 3.53 (calculated using World Bank data). It is obvious, then, that all that debt has little to do with financing economic growth. Did all this debt avert economic recessions (periods of low economic growth)? Again, we mostly get a negative answer as nowhere do we witness any reversion to high or sustainable growth rates.
It is puzzling then, is it not? Why did we take on so much debt? Sifting through the money numbers of a decade is no mean feat, especially when official numbers are not very reliable. But I’ll spare the reader this excruciating experience by generalising and offering a few probable answers. Basically all debt that the government (mainly federal government) has taken up has been used for financing current account deficits (paying for ever-increasing imports), financing its ever-increasing non-development obligations (war on terror, public sector entities like PIA and Steel Mills racking up more than a trillion rupees in debt, wages and perks of public officials), and of course for showing off a bit to claim unwanted records (accumulating dollar debt when there was little requirement, courtesy of Dar. Read, for example, how Euro bonds were floated at a high interest rate when there was little need).
Thus, Pakistan is gaining little mileage out of its debt accumulation. Now it is time to clarify the other misconception, of comparing debt-to-GDP of other countries with that of Pakistan. The trick here is to see where the money is being spent. The largest component of Japanese government expenditure goes to welfare (33 percent), Belgium’s major expenditure component (30 percent) is also welfare, and the same figure in France is 32 percent. Without going into further statistical jugglery, the governments in these countries also spend a considerable percentage of the GDP upon investment. To put in simple English, their high debt-to-GDP ratios are not problematic in the sense that they go towards enhancing the overall welfare and happiness of their citizens, and for generating economic growth for present and future benefits.
This is reflected in their high scores in terms of human development indicators and overall happiness of citizens. Contrast this to Pakistan’s dismal human development scenario and an almost non-existent, ineffective social security system.
Make no mistake: Pakistan is drowning in debt. More important, this debt binge has done little to improve the quality of life which has remained either the same or even declined. Half of our tax revenues are going towards paying off our cumulative debt, and as we take on more debt, the payments will only increase, leaving little for development and welfare. This is a travesty of epic proportions. It is unsustainable, and it is disastrous.
As we take on more debt, our corresponding ability to pay it off is gradually declining. Scour through the historic episodes. One lesson that peaks out is that when catastrophes strike, they come quickly and unannounced. Just take some time out and study the disaster unfolding in Venezuela, a vivid reflection of what unsustainable debt and expenditures can do. Time, then, to take some corrective actions, and quickly.
The writer is an economist and can be reached on Twitter @ShahidMohmand79
Let me state the problem briefly in numbers (rounded to nearest approximation), just to give the reader a perspective. From 1947 to 2007, Pakistan’s total debt stock stood at Rs7 trillion. The democracy-is-the-best-revenge era, from 2008-2013, saw this double to Rs14 trillion. Then came Ishaq Dar’s era (who is now an absconder). His disastrous management did set records - the true extent of which was revealed in the recently-released SBP report. This report has informed the Pakistani nation that by June 30, 2018, our total debt stock stood near Rs30 trillion, which is 87 percent of the total size of the economy.
Of this Rs30 trillion, the federal government’s debt amounts to Rs25 trillion (72 percent of the GDP), meaning that under Dar, the government took on debt equivalent to Rs11 trillion. The rest of the Rs5 trillion is attributable to provincial governments and the private sector. Summary: In the first 60 years of its existence, Pakistan owed Rs7 trillion. In the next 11 years, we poured on an additional debt of Rs23 trillion. Welcome to Naya Pakistan’s biggest challenge!
Any astute observer, especially the one conversant with economics and issues of debt, may object to the above written as unnecessary fear mongering and pessimism. He or she could, for example, point out that many other countries have a debt-to-GDP ratio that is higher than that of Pakistan. Japan, for example, has a debt-to-GDP ratio of 222 percent, Belgium’s is 106 percent, and it is 99 percent in France. So what is the fuss about? Sorry to disappoint, but these comparisons serve little purpose. I’ll explain in the following lines, but first it is imperative to understand the raison’ d’etre of taking on debt.
High debt-to-GDP ratios are not problematic when they go towards enhancing the overall welfare and happiness of their citizens, and for generating economic growth for present and future benefits
In modern economies, what necessitates debt accumulation is mainly meeting the “financing gap” for the purpose of economic growth and development. There are times when a country’s own resources, at any given moment, are not enough to meet the required expenditures for growth and development. Therefore, it is not a bad idea to use someone else’s savings to fuel domestic economic expansion, especially if it comes at a low cost (meaning low interest payments). This prevents that particular opportunity at that particular time from going to waste. Additionally, it is important not to lose that opportunity since an expansion in economic activity imparts various short and long term advantages, from more employment to higher tax revenue that helps pay off the debt in the future (at least this is what the theory posits).
Aside from the above, there are a few other major and minor reasons that lead governments to accumulate debt. A major one relates to the goal of economic stabilisation, whereby governments take on debt in lieu of additional expenditures in order to ward off economic recessions. In this case, it is a necessary evil since recessions (if left unattended) could easily snowball into economic depressions, a situation too gruesome to allow.
If these reasons are understandable, then it becomes easier to understand why Pakistan’s debt elicits such worries. If we had taken on debt for financing economic growth, then Rs23 trillion in the last 11 years should have easily ensured a very high growth rate. Yet, between 2008 and 2018, Pakistan’s economic growth rate averages a dismal 3.53 (calculated using World Bank data). It is obvious, then, that all that debt has little to do with financing economic growth. Did all this debt avert economic recessions (periods of low economic growth)? Again, we mostly get a negative answer as nowhere do we witness any reversion to high or sustainable growth rates.
It is puzzling then, is it not? Why did we take on so much debt? Sifting through the money numbers of a decade is no mean feat, especially when official numbers are not very reliable. But I’ll spare the reader this excruciating experience by generalising and offering a few probable answers. Basically all debt that the government (mainly federal government) has taken up has been used for financing current account deficits (paying for ever-increasing imports), financing its ever-increasing non-development obligations (war on terror, public sector entities like PIA and Steel Mills racking up more than a trillion rupees in debt, wages and perks of public officials), and of course for showing off a bit to claim unwanted records (accumulating dollar debt when there was little requirement, courtesy of Dar. Read, for example, how Euro bonds were floated at a high interest rate when there was little need).
Thus, Pakistan is gaining little mileage out of its debt accumulation. Now it is time to clarify the other misconception, of comparing debt-to-GDP of other countries with that of Pakistan. The trick here is to see where the money is being spent. The largest component of Japanese government expenditure goes to welfare (33 percent), Belgium’s major expenditure component (30 percent) is also welfare, and the same figure in France is 32 percent. Without going into further statistical jugglery, the governments in these countries also spend a considerable percentage of the GDP upon investment. To put in simple English, their high debt-to-GDP ratios are not problematic in the sense that they go towards enhancing the overall welfare and happiness of their citizens, and for generating economic growth for present and future benefits.
This is reflected in their high scores in terms of human development indicators and overall happiness of citizens. Contrast this to Pakistan’s dismal human development scenario and an almost non-existent, ineffective social security system.
Make no mistake: Pakistan is drowning in debt. More important, this debt binge has done little to improve the quality of life which has remained either the same or even declined. Half of our tax revenues are going towards paying off our cumulative debt, and as we take on more debt, the payments will only increase, leaving little for development and welfare. This is a travesty of epic proportions. It is unsustainable, and it is disastrous.
As we take on more debt, our corresponding ability to pay it off is gradually declining. Scour through the historic episodes. One lesson that peaks out is that when catastrophes strike, they come quickly and unannounced. Just take some time out and study the disaster unfolding in Venezuela, a vivid reflection of what unsustainable debt and expenditures can do. Time, then, to take some corrective actions, and quickly.
The writer is an economist and can be reached on Twitter @ShahidMohmand79