In recent months, there has been considerable discussion about the government’s growing debt burden especially once it crossed the US$200 billion mark earlier this year. It has since risen to reach Rs37 trillion (US$230 billion) in September 2020. Of this, about two thirds is domestic debt and one third is foreign debt, including to the IMF. The basic tone of these discussions has been of worry and concern – and of course blame on the inept handling of the economy by the PTI government. The basic assumption is, of course, that debt is bad; it shows that you are economically weak; and that the country is living beyond its means.
But ask any entrepreneur or business person what they think of debt, and he or she will tell you that it is essential to do business. Loans are used to buy land, plant and equipment and to cover working capital needs; and if a company is doing well and wants to grow – instead of relying on internally generated funds, it is often best to turn to debt – from banks, investment funds or the stock market.
Let us also look at things another way. Not from the view of the borrower but of the lender. People never spend all the money they have. The put some aside for future events – foreseeable or unforeseeable, happy or sad; for buying large ticket items such as a car, a piece of land or a house; or to try and pass on something to their children. These savings are channeled through finance and banking systems and is on the lookout for a safe investment home. And here is the crucial factor – if you can put this money to good use, generate good returns and make regularly service these loans, they are people and institutions ready to lend.
Let us not forget that in this period the world is awash with saving. People and institutions are desperately looking for things to invest in. In fact, low-risk institutional borrowers in developed countries can get away with paying zero interest rates and even negative interest rates. With loans essentially having zero cost, as is currently in most countries, it just makes a lot of sense to borrow. This includes borrowing in Pakistan where the State Bank’s policy rate is seven percent and with inflation projected in the 7-9 percent range, the real interest rate is effectively zero.
It is not exactly the same for governments and countries – but not that different. Governments want to provide good services, build infrastructure, explore for natural resources. Tax revenues are often not enough to cover these needs and hence governments regularly turn to borrowing. Being rich or poor has little to do with this. In fact, most often the governments of richer counties are most in debt. Pakistan’s debt to GDP ratio is about 80 percent whereas the highest debt to GDP ratio today is Japan whose national debt is about 250 percent of its GDP. It is as if Pakistan has a debt of US$770 billion instead of US$230 billion.
Is Pakistan’s debt burden worrying? Yes, it certainly is. But not because we have debt but because of what we are doing with the money raised by government – both through debt, as well as through taxes
Government debt has much to do with the political and economic conditions facing the country. In order to fight the Axis powers, the UK borrowed heavily and ended the Second World War with a debt to GDP ratio of over 200 percent, a large part owed to the USA. Much of the post-war reconstruction was also funded by loans which it has just finished paying off in 2006. So to build a country’s infrastructure, fight wars, or meet emergencies such as the impacts of the current COVID-19 epidemic, it is quite natural for national debt to increase.
Is Pakistan’s debt burden worrying? Yes, it certainly is. But not because we have debt but because of what we are doing with the money raised by government – both through debt, as well as through taxes. A large part of public funds are wasted – on ineffective subsidies in the name of the poor but which end up in the pockets of the rich; on paying hundreds of thousands of state employees who do almost nothing, if and when they turn up to work; on covering the losses of state owned enterprises; on financing projects that replace rather than encourage private investments; on investments that generate no returns as projects are not implemented in an efficient and timely manner. It is this – the poor use of public money – which should be worrying us and not the level of debt as such.
A special place in our external debt is occupied by borrowings from the development finance institutions such as the World Bank, Asian Development Bank, the IMF, etc. As is well known, these loans come with strings and conditions which are often bemoaned as an infringement of our sovereignty. This is getting the wrong end of the stick. These agencies are certainly funders of “last resort” – we go to them we cannot raise funds from other sources and they have an institutional and legal obligation to make sure that resources are put to good use and loans can be repaid. As a result, these projects and programs go through an intensive process of technical, economic, social and environmental review – much more rigorous that in the case of most national projects. Moreover, they are carefully supervised with constant attempts to keep implementation on track. Eventually they are subject to careful evaluations. Turning away such high quality assistance makes no sense. If anything, we should seek more assistance from these sources and also learn from their processes and procedures to improve our own national processes. In this regard it is worth pointing out that China, despite the fact it certainly does not need extra resources, continues to borrow from the World Bank and the Asian Development Bank.
Daud Khan works as consultant and advisor for various governments and international agencies.
Leila Yasmine Khan is an independent writer and editor based in the Netherlands