Another IMF deal is not a solution to Pakistan’s economic woes
Some countries like to live beyond their means as their political elite make a conscious choice to opt for extravagance by relying either on the pockets of their overseas friends or their own countrymen. Pakistan could fall in one such category, at least for the time being. The country had to receive an injection from the International Monetary Fund (IMF) 21 times in its history with the first program dating as far back as 1958.
There hasn’t been a dearth of experts to recommend a debt-based stabilization and growth strategy for Pakistan. Every Finance Minister who has ever negotiated an IMF program had said that this would be the last of such deals. A lack of political will to address structural issues which result in recurrent fiscal deficits has now led the country to a point where successive governments have continued to breach the Fiscal Responsibility and Debt Limitation Act (FRDLA) – which requires debt to gross domestic product (GDP) ratio to be not beyond 60 per cent. The gross public debt has seen an increase of almost 17 per cent during the current fiscal year, double the rate of increase seen in the previous fiscal year. To support large import payments and prevent the currency from experiencing a further plunge, the Ministry of Finance (MOF) requested loans from China, commercial banks and has also issued sukuk and euro bonds. Perhaps the more worrying aspect of the increasing external debt is that most of the recent loans have been negotiated on floating interest rates and one can already observe the interest payments on the external debt rise due to an uptick in the London Inter-bank Offered Rate (Libor) and an overall increase in the stock of external debt.
So how sustainable is Pakistan’s debt? Unfortunately, solvency and liquidity indicators show a deterioration. It is expected that if impediments faced by exporters are not resolved, debt servicing capacity indicators may also remain under stress. According to the central bank’s annual report, the external debt and liabilities to the GDP ratio during 2018, rose to almost 34 per cent after remaining in the vicinity of 26 per cent, on an average, during the past five years. Similarly, foreign exchange reserves to total external debt and liability – a key indicator which measures solvency -- went down by eight percentage points in 2018.
A lack of political will to address structural issues which result in recurrent fiscal deficits has now led the country to a point where successive governments have continued to breach the Fiscal Responsibility and Debt Limitation Act.
Dr. Vaqar Ahmed
Unfortunately, the ongoing debate that a large part of this debt is due to Pakistan investing in the China Pakistan Economic Corridor (CPEC) program is not completely correct. One can observe that CPEC-related imports alone did not contribute to the major chunk of trade deficit. Neither is CPEC-related debt (less than one-fourth of the total value of the on-going CPEC projects) an immediate liability to Pakistan.
Then perhaps a fair question would be; who are the actual drivers of Pakistan’s debt burden? First, an increase was seen in short-term domestic borrowing by the MOF. Of course, this happened because the government’s revenue collections could not cover the growing expenditure requirements. Apart from the public debt, an increase was also seen in debt due to bleeding public sector enterprises, most notably the Pakistan International Airlines Corporation (PIA), the Water and Power Development Authority and the Pakistan Steel Mills Corporation. The loans for commodity operations provided to government, public sector corporations or private sector companies for procurement of commodities such as cotton, rice, wheat, sugar and fertilizers also witnessed an increase. This was much expected as 2018 was an election year where the outgoing government exercised an expansionary fiscal policy.
Apart from the above mentioned reasons leading to the government’s domestic debt, the drivers of its external debt included a widening current account deficit – where value of the goods and services imported exceeds the value of exported goods and services. The recent decline in the value of the rupee against major currencies has also increased the value of the government’s external debt burden. The higher interest payments on sovereign bonds and borrowing from commercial and multilateral sources will also keep the interest payments on external public debt high. The private sector’s external debt was also allowed to increase by almost five per cent in 2018. Most notably this increase was seen in energy, transport (read PIA) and financial business sectors.
Can Pakistan’s economy be assured of a future without resorting to recurrent debt? For this the MOF will need to put in place an economic design which respects the FRDLA, reduces the size of the government (and its non-essential current expenditures), expedites tax administration reforms which improve revenues, curtail non-essential imports, remove impediments to exports, slash losses of PSEs and circular debt in the energy sector and do away with subsidies except for the poorest of the poor. Unless these measures are put in place, another IMF program will not be an answer to Pakistan’s economic woes.
— Dr. Vaqar Ahmed is Joint Executive Director of the Sustainable Development Policy Institute, Pakistan. His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press. @vaqarahmed