Dealing sustainably with debt

The issue of debt is based on three aspects - identifying the causes of built-up of debt, enhancing its productive and allocative efficiency, and then retiring debt, or debt servicing. In all of these aspects, Neoliberalism, austerity, pro-cyclical policy, existential threats, and democracy are the key underlying determinants feeding into the issue of debt. Dealing sustainably with debt requires appropriately addressing these determinants.

Neoliberal policy called for low and diminishing role of public sector to become mainly the facilitator of private sector, and low-level regulator markets, reacting only to market failures. This not only resulted in over-profiteering of big market players feeding into cost-push inflation, and denting private investment, hurting economic growth, along with revenues, and exports and, in turn, capacity to repay debt and widening gap to fill with new debt.

Born out of the over-board role of aggregate demand in controlling inflation, this view of neoliberal policy gave way to over-board practice of monetary, and fiscal austerity policy which, in turn, hurt public investment, producing negative consequences of growth, its distribution, and weakened the relationship of public opinion on public policy, which overtime got more influenced by moneyed interest.

In the meantime, higher cost of capital not only fell a lot short of controlling inflation – more so, over the medium- to long-term – since lacking role of government to boost aggregate supply, especially in an allocative efficiency way, resulted in both greater cost-push inflation but also lack of growth, and one that enhanced resilience. Once again, lack of growth, and little role of public investment depreciated capacity to repay debt, and enhanced necessity to take more debt.

Austerity-heavy policy mindset, meant that during downturn when there was need for monetary and fiscal stimulus, that is counter-cyclical policy was needed, on the contrary, practice of pro-cyclical policy at the government- and central bank level further deepened the downturn. Moreover, lack of institutional reforms and investment on the aggregate supply-side created a stagflationary situation.

Another sort of pro-cycle attitude whereby investors in the stocks and bonds – for which also monetary austerity was practiced to attract otherwise very volatile foreign portfolio investment (FPI) – pulled out from developing countries’ financial markets during the downturn, which further enhanced it, and in the process not only increased debt distress but also increased the need for greater debt – mostly more expensive debt in the wake of country weakening on its creditworthiness – to even roll over new debt.

Then, in the wake of fast-unfolding climate change crisis, and the related ‘Pandemicene’ phenomenon, frequent and more intense climate catastrophes, and the Covid pandemic act as shocks, enhancing need for greater debt.

Unfortunately, wrong practice of over-board austerity policy has considerably worsened the debt repayment situation of not only developing countries, but also advanced countries, given the same sort of policies in those countries are nonetheless hurting them, although of course in not such an amplified way as in developing countries, including Pakistan.

The recently released ‘Chief Economists’ Outlook’ report by World Economic Forum (WEF) ‘…builds on the latest policy development research as well as consultations and surveys with leading chief economists from both the public and private sectors, organised by the World Economic Forum’s Centre for the New Economy and Society’.

As per the opinion of these chief economists, and rightly so, the issue of debt is not only of high concern to fiscal policy, but it is no more a main issue just for developing countries, but also advanced economies.

While the report, like most mainstream reports that (wrongly) continue to feed their thought process on so-called ‘sound economics’ based Neoliberalism/Washington Consensus see debt accumulation/distress as primarily a consequence of expansionary fiscal policy, even though evidence is clear in terms of negative consequences for growth, debt sustainability, resilience, inequality, poverty, and political voice from this brand of economic policy, as evidenced from instance from causes behind Global Financial Crisis 2007/08, and lack of preparedness to effectively deal with climate change, and Covid pandemic-related shocks.

Notwithstanding the serious shortcoming of such reports in terms of their analytical approach, most of them, like this one point towards the fast-brewing crisis with regard to debt accumulation, and significant fiscal space it takes away from spending on resilience, and sustainable development goals. Specifically with regard to diminishing capacity for public investment in the wake of rising debt servicing requirements, and increasing cost of capital, the report pointed out, ‘For developing economies, by contrast, capital is overwhelmingly seen as the critical input for growth, highlighted by 93 percent of respondents. Yet access to capital remains a persistent challenge. At the firm level, unmet financing needs are weighing on private-sector growth. …Public investment is also under pressure, with many developing economies facing net capital outflows as debt-servicing costs increase more rapidly than new disbursements.’

Hence, this report pointed out with regard to the issue of debt in the following words: ‘In total, 45 percent of chief economists rate disruption in public finances and fiscal policy as high or very high, citing unprecedented debt accumulation and major shifts in fiscal stances. Global public debt exceeded $100 trillion in 2024, and more than one-third of countries, accounting for 75 percent of global GDP, are projected to see further increases this year.’

Copyright Business Recorder, 2025