That most Pakistan’s households are struggling with debt is a commonly held perception expressed both in political rhetoric, and in drawing rooms of the urban elite. But if IMF’s dataset is any guide, size of all forms of household debt and loans is fairly small in Pakistan, even when compared to other South Asian economies. Could it be so that both the IMF dataset and popular perception are correct?
Much like the case of unemployment, household debt is an understudied subject in Pakistan, whereas the much-needed cross-sectional datasets and surveys required to assess the underlying short- and long-term trends and problems are hard to find. (See BR Research’s Is unemployment really Pakistan’s big issue?, Sep 5, 2019)
In their recent working paper titled ‘Household debt in Pakistan: Conflict, borrowing and structural indebtedness’, authors Sajid Amin and his colleagues note that even “literature on household indebtedness in Pakistan is very scant, despite household borrowing being common in the country”.
That gap inspired these authors to assess the general prevalence and magnitude of household indebtedness in Pakistan, along with the impact of prolonged conflict on household borrowing from the informal credit market. Their chosen area and nature of conflict was the war-on-terror hit Swat valley.
What are some of the key findings? As it turns out, the analyses show that “an average of one-fifth of households in Pakistan are indebted”, whereas in the conflict-affected Swat district about 52 percent of district’s households are in debt. These estimates are based on trends seen over the last fifteen years using data from Household Integrated Economic Survey [HIES] and 2010’s Pakistan Panel Household Survey [PPHS].
The working paper commissioned by Secure Livelihoods Research Consortium - a British and EU funded network whose research revolves around fragile and conflict affected situations - also found that nearly 76 percent of indebted urban households in Pakistan consume 30 percent or more of their income to repay their household debts. This lends credence to domestic banking practice where bankers insist that an individual’s debt burden should be no more than a third of her monthly income.
The paper’s findings provide evidence to the notion that bank lending and other forms of formal lending is rather small in the country; as the graphs show, majority household debt is informal in nature, serving about 85 percent of total borrower households. It also shows that everyday household consumption needs, and crop-related activities are the primary reasons for borrowing, where “roughly 80 percent of indebted households across Pakistan” have consistently been unable to repay their loans between 2005-2016.
These are important findings, enough to start a discussion on household debt even though only 20 percent of households appear to be in debt as against the popular perception that a wide majority is stuck in the quagmire of debt.
Be that as it may, what is not known about household debt in Pakistan is equally important. For instance, thanks to this paper it is now known that about 35 percent of household debt is interest-based (arthis, money lenders and banks), which begs the question: what the corresponding number in the case of loan quantum is. The two could possibly have different implications.
Similarly, it will be useful to find out the sources and purpose of debt separately for urban and rural households, segmented across income quintiles, and perhaps by banked/unbanked households as well. It will also be fruitful to assess the size of household debt as a percentage of GDP, which in turn could help explore the prospects of latent demand for bank loans.
Given Pakistan’s culture, family values and religious considerations, many people may still choose to borrow from friends, family, neighbours and closest grocery store than from formal sector, be it a commercial or a micro bank. Indeed trends, thereof, are also important to be studied.
Going back to the earlier question, it can be argued that both the IMF and popular perception may be correct. The IMF looks at formal sector household debt, whereas the SLRC paper covers both formal and informal debt. But one cannot be too sure about the size, trends, and drivers of both formal and informal household debt unless further research questions stemming from SLRC’s paper are answered and compared. In the meanwhile, Pakistan Institute of Development Economics (PIDE) and World Bank should initiate another round of PDHS since the last exercise was done a decade ago, and a decade is a long time for socio-economic and demographic trends.