ISLAMABAD: Pakistan’s growing external debt has reached a level where further borrowing may destabilise the economy, while the gigantic volume of debt and servicing of the interest prevent the country from using its fiscal resources for infrastructure development. This has been stated in a report “Developing Infrastructure in Central Asia, impacts and financing mechanisms” carried out by the Asian Development Bank Institute (ADBI).
The report stated that the declining development expenditures of the public sector without ensuring substitution from the private sector have damaged the economic growth of Pakistan.
The report further stated that the burden of these debts is transferred to the next generation, and repayment is the foremost problem in Pakistan’s fiscal policy.
The external debt liabilities are dominated by long-term loans from international finance institutions, multilateral agencies, and the Paris Club. The share of sovereign bonds (market-based external debt) in public debt is less than five percent.
Another problem that exacerbates the high level of external leverage is the impact of the deteriorating value of the Pakistan rupee.
The devaluation of the currency means that the country will have to pay more interest in real terms, which will require higher levels of resource mobilisation from domestic sources. This will lead to higher taxes on business and the public at large, especially since tax rises for the rich are not politically feasible. It indicates that the present burden of external debt does not allow the dependency of infrastructure development on foreign debt. The majority of the present outstanding external borrowing belongs to programme loans. The share in infrastructure-related projects has declined significantly, the report noted.
The lack of appropriate infrastructure, declining business competitiveness, lower rate of growth, and economic miseries are interconnected variables. The lower growth of the economy has resulted in falling tax revenue and insufficient resources to operate government institutions.
It is also a common phenomenon that in the case of lower tax receipts and insufficient financial resources, government has to cut back necessary development projects and investment in the public sector infrastructure.
It further stated that in Pakistan, the government has tended to prioritise spending to meet its recurring expenditures such as debt servicing, defense, and general administration. Therefore, spending on the development of infrastructure has become the lowest priority.
This situation has led to deterioration in the physical infrastructure of Pakistan. The economy now faces a crisis in the supply of energy, a shortage of water, a badly damaged sanitation system, and outdated means of transportation.
The deterioration in infrastructure has led to a lower ranking in business competitiveness, such that industries cannot utilise their available production capacity because of energy shortages, frequent interruption to energy supplies, and poor logistic facilities in transportation.
The badly deteriorated physical infrastructure in Pakistan does not support economic progress and industrialisation. The lack of physical infrastructure has become the primary cause of declining growth in GDP.
A consecutive decline in the inflow of foreign direct investment is also a drastic indicator for the economy of Pakistan. Attracting foreign and local investment and discouraging the outflow of domestic capital are natural requirements for rapid industrialisation and economic development.
It is obvious that inducing private sector investment—both foreign and domestic—requires a significant and visible improvement in public goods infrastructure.
The concern with these suggestions is the lack of sufficient funds for the required development.
A declining trend in development expenditures by the government and the negligible role of the private sector in infrastructure development in Pakistan indicate an alarming situation.
According to estimates from the Global Infrastructure Hub and Oxford Economics (2016, 2017) Pakistan faces a shortfall of $124 billion in infrastructure development between 2016 and 2040.
The size of this gap is more than the country’s total outstanding external debts.
The development expenditures-to-GDP ratio in the federal budget was always greater than six percent before 1993, but was reduced to less than four percent after 1993, and even reached 1.8 percent in 2018-19. The last decade has reflected the fast deterioration in macroeconomic indicators, and Pakistan currently has the lowest development ranking in the region. A global comparison also confirms the deterioration of physical infrastructure in the country in terms of international ranking.
Pakistan ranks 110th in the overall infrastructure ranking of 137 countries (WEF 2011, 2018).
The deterioration in infrastructure has badly damaged the country’s economic competitiveness.
Despite the badly required infrastructure development, the spending on this sector is negligible compared to the spending on non-development expenditures. Even the investment in infrastructure with private participation is not up to the required level.
The report stated that no significant contribution from the private sector has been noted in infrastructure-related projects. The negligible share of the private sector in infrastructure development activities and the declining development expenditures of the government reflect the country’s deteriorating global infrastructure ranking.
A deterioration in infrastructure was the obvious outcome of this policy and led to a declining rate of GDP growth.
The private sector was reluctant to invest in gigantic infrastructure projects where the required magnitude of investment is much higher and risks are greater than other types of businesses, while several complicated factors are involved in the estimation of risks and returns on such long-term investments.
Infrastructure financing requires more prudence in investment decision making because of the longer duration of projects, high political risk, higher cash outflow at an earlier stage, and barriers to exit before the payback period.
Another risk that is always associated with large infrastructure projects (particularly in the construction of highways and land development) is “free riding.”
To ensure payments by beneficiaries through user charges, fees, and taxes, government support is required.
This is the reason why public–private participation is always required in infrastructure-related projects despite the private investment.
Several types of support and guarantees from government are required to make such investments feasible, the report noted.
Copyright Business Recorder, 2021
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