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ISLAMABAD: Pakistan’s external debt and current account deficit are the biggest economic issues and require solutions on an urgent basis for economic revival and security; otherwise, the country may face a Sri Lanka-like situation.

The Institute of Policy Reforms in its report on “What to about Pakistan’s Mountain of Debt” forewarned that if these problems are not addressed, there is every chance that the economy may default or face a Sri Lanka type situation. The Ukraine war with the ensuing supply problems and inflation compounds further an already intractable situation. However, it regretted that so far the government’s only response is more loans from the IMF, although it is known that the problem does not arise merely from a lack of access to foreign assistance.

While IMF is needed, it is an insufficient response and one that ensures that before long, the country will have the same problem again. Therefore, it is critical to know why such a crisis kept on happening every few years, exacting a huge cost on the citizens, it also adds to the nation’s gloom and despondency. It said that even a casual analysis reflects that government must revisit its entire economic policy agenda with a plan to avoid future current account crises should be at the centre of any substantial engagement with the IMF and to do so, the country must set its own house in order and make some difficult and delicate political choices

The report proposed that; (i) Analyzes what causes the current account’s frequent breakdowns;(ii) recommends near-term measures to manage the current account deficit;(iii) recommends medium-term measures to put the current account on a sure footing to avoid future such emergencies.

An IMF agreement is an insufficient response because the Fund’s mission is not growth and development rather it helps with temporary balance of payment emergency. The 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, coming years’ external payment obligations, including interest and amortization (to service past loans) would increase. This is a short-term perspective emanating from the IMF’s mission to help member countries meet emergency BoP challenges and Pakistan over 20 visits to IMF testifies that Pakistan’s case is more enduring in nature and entirely of its own making.

The depth of reforms that the country’s economy needs can only be set right by strong and committed political leadership engaged with the people of Pakistan and working for growth and development. Pakistan has a constant trade deficit, which the country has not come to terms with and which results from an inability to invest and produce more.

The economy’s debt level grows by a higher margin in the years when the trade deficit is higher. When the economy grows by two to three per cent Pakistan’s export and remittances are enough to meet most imports but when the economy grows by about three to five per cent, additional loans are required to finance higher imports which results in higher interest and amortization payments and a current account crisis. The same happens when the price of essential imports such as energy and food suddenly increases and the crisis results in a high cost to the economy from which it takes years to recover.

The sum of the economy’s infrastructure, human resource, and institutional assets is good for the economy to grow by up to three per cent. Trouble arises when it wishes to grow at a higher rate. In short, the economy has not accumulated enough capital for high growth. Clearly, a growth rate of 2 to 3% is not an acceptable goal for the economy.

The report also highlighted the causes of the country’s economic crisis with short- and medium-term recommendations and stated that so far government’s only response is to seek more loans from IMF which is not enough as in this way Pakistan will never exit the problem because, between 2015 and 2021, foreign debt grew by over 200 percent while payment of interest and principal grew by 250 percent whereas exports have grown by just three percent. How the country would repay the debt with this so little growth in exports.

The solution is that the policymakers must get serious and IPR recommended that each year, the government must set targets for fiscal and current account deficits and cut its coat accordingly besides earmarking a part of the $30 billion remittances for repayment of external debt, by limiting imports.

In addition to indirect taxes, the government must increase direct taxes and reduce exemptions and the country must seek debt relief from international creditors. In the fiscal year 2021, 38 per cent of federal expenditure paid off just the interest on domestic and foreign debt which was 78 per cent of the federal revenue receipt. Most of the other expenditure was met from borrowings.

Until exports increase substantially from the production of more goods, it must do away with all non-essential goods imports and make an item-wise review to find domestic substitutes for them and bring some items quickly into production with incentives.

In addition to a Saudi facility for deferred payment for oil, the country may request the same from Qatar. Restrict portfolio investment and end the volatility and transfer of resources that it causes and gradually start accessing external debt to only finance projects that create GDP growth and exports. If over 70% of new debt is consumed, the crisis will never go away. Getting out of the crisis would not be quick and easy, it would be a gradual process aided also by some medium-term measures such as making the power sector more sustainable and reliable.

According to the report IMF has estimated Pakistan’s gross foreign financing needs to be $35.068 billion for the fiscal year 2022-23. IMF gives its estimate of the financing that Pakistan has arranged already $ 33.450 billion. Of the $33.450 billion ‘available financing’, the estimated FDI is $ 3,063 million. The rest $ 30,259 million, or 91% is debt from private and official creditors. IMF estimates balance needs to be $ 1,618 million, most of which IMF would fund. The balance $ 533 million will be reserve depletion. The major consideration for IMF in analyzing the sustainability of Pakistan’s BoP is the amount of external debt that Pakistan will receive.

The report noted that Pakistan must exercise a more robust watch on debt sustainability. Our debt levels and annual servicing must support the goals of economic stability, growth and development. IMF’s rationale is to offer a temporary short-term balance of payments help to meet a crisis. It assumes that the recipient economy will undertake reforms to avoid such a crisis again. But Pakistan has not made those fundamental reforms. Its especial crisis is of a permanent nature.

Pakistan must not look at the situation from the IMF’s perspective of making sure the creditors get paid, but from what is good for the government’s finances.

The IMF deal is necessary without which the country may default. Yet, how long we can pile debt on debt at a huge cost to citizen welfare is for the government to look deeply at.

Since FY 2001, Pakistan has paid an average of US $ 1.4 billion annually in interest alone. Average interest paid in the last four years is $ 2.7 billion annually for a total of $ 10.7 billion since fiscal year 2018. Since FY 2001, Pakistan has paid external creditors more than it has received from them. In 20 years, it has received $ 112.6 billion and it has paid back $ 118 billion in interest and principal. Yet its external debt has grown by 228 percent from $ 37.2 billion in the fiscal year 2001 to $ 122.2 B in the fiscal year 2021.

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% of new debt is to meet the balance of payments needs.

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 have the means to repay. This is a simple metrics that most village elders understand well. Just the amount spent on interest on domestic and foreign debt (no repayment) is 38 per cent of the federal government’s total expenditure. In the last three fiscal years, we have spent between 78 per cent and 103 per cent of net federal revenue on just interest payments. Most other expenditure is met from debt. We have piled debt on debt. This approach may serve the elite interest, but the economy cannot go on like this.

Copyright Business Recorder, 2022


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