"We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow" Lord Palmerston speech, House of Commons, 1 March 1848.
Now we all know who said that!
It can perhaps be argued that this simply showcases the imperialist mindset at the zenith of the British Empire; except this utterance, at least in this author's opinion, even today remains the most precise and concise articulation of foreign policy objectives for any nation situated anywhere on the face of this planet.
The operative words in this particular quote are "interests" and "duty". Therefore it is imperative that a nation must be very clear about its interests in the first instance, and thereafter is duty bound to protect those interests at all costs.
At this point, a relevant question might well be why a column which is stubbornly apolitical is even discussing foreign policy. Hang on a minute, all will be revealed.
The fundamental interest of any nation is freedom, and without economic freedom there can be no freedom. Economics precedes security; you need money to fight wars, or simply to defend your borders. A debtor has to first pay off its creditors, and when available money is insufficient to meet debt obligations, a debtor can never have freedom.
Our own recent history appropriately showcases the relationship between economics and security. The ability to defend, even project, national interests is entirely subservient to the ability to negotiate with your creditors.
In simple English, debt is death.
As per SBP at 30 September 2019, Pakistan's total debt and liabilities stand at RS 41,489 billion. However, the good news is that our economic reform program, given to us by IMF, is on track.
The IMF just completed its first review under the extended arrangement under the extended fund facility (whatever that means), country report 19/380.
Frankly, there was no doubt in my mind at least that we would pass; but whether or not passing the review is an encouraging sign becomes rather unclear when the report itself asserts, "Following rapid but unbalanced growth in recent years, propped up by unsustainable policies that led to a soaring debt burden and depletion of reserves...". Recent years are when we were in the previous IMF program, were we not?! And did we not pass all the reviews back then as well?
But let's ignore that.
In any case they (IMF) are the experts, and if according to them the programs on track so far and producing early results, let's go with that.
But, on the other hand, the report does also observes that debt continues to remain unsustainable; "However, debt sustainability has become subject to somewhat higher risks due to the fiscal underperformance in FY 2019, a higher debt outturn, and higher financing needs."
If debt remains unsustainable, what track are we on?
The December 2019 review report (19/380) now projects national gross public debt at 87.8% of GDP for the year 2019, whereas it should have been 79.1% percent of GDP as per the projections in July 2019 report (19/212). So what happened in a short span of 5 months, did we get the assumptions wrong? And are they correct this time?
Albeit, for the ratio to have worsened, obviously, either GDP went down or debt went up, or both; the problem is that when you measure your debt (your freedom) as a percentage of an indicator which, in my opinion, is at best a guesstimate and at worst an impostor, you really are not sure about anything. The pertinent question for me is: - is debt in absolute terms going up or down?
Would it be unfair to say that the statement "debt is on a clear downward path", now projected to be 69.8% in 2024, does raise scepticism? Interestingly, both the reports (19/380) and (19/212) project debt to GDP ratio to come down under 70% of GDP by 2023/24; despite the major hiccup in the model for 2019!
Considering that for the next five years, we are projected to have a fiscal deficit, even if a lower one, and the deficit on goods, services and income is projected to remain above US$ 32 billion every year, all through the period (19/380) - then, in absolute terms, how can debt come down?
The assumption that workers' remittances will keep increasing every year to reach US$ 26.9 billion by 2023/24, and that FDI will successively increase year on year to touch US$ 5.6 billion by 2023/24 probably balanced the external budget in the model; so let's hope and pray they pan out as projected. But when you suddenly increase FDI by US$ 0.6 billion in the latest projections, it does raise red flags.
Nonetheless, irrespective of the public component, the review report projects that Pakistan's external debt will increase to US$ 137.8 billion by 30 June 2024 (previously projected at US$ 133 billion in the July 2019 report). For the record, the review report projects that public external debt will increase from US$ 73.7 billion in 2018/19 to US$ 97.1 billion in 2023/24.
How is that debt reduction?!
For my money, the capacity to borrow is directly associated with the ability to pay, not some economic indicator. And if the trade deficit is not projected to go away, how we are ever going to pay this external debt is a question which needs to be pondered. And what is the projection for the rupee dollar exchange rate in 2023/24?
What will be Pakistan's total debt and liabilities amount to according to IMF projections on 30 June 2024, and will we have the money to service that debt in 2024/25?
There is a definite possibility that I am reading the wrong reports altogether, and all my facts are wrong, and if that is the case, my apologies everyone.
For the moment, taking a cue from the looking good article a few weeks ago, the current review does further amplify the looking good mode, so, kudos finance team!
Hopefully the IMF got its assumptions and model right this time, and things remain on track as concluded by the Review.
(The writer is a chartered accountant based in Islamabad. Email: [email protected]. The views expressed in this article are personal. The views are not necessarily those of the newspaper)
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