Daily Times

The better half’s perception of debt seems to mirror that of the majority of Pakistanis: out of sight, out of mind. According to her fiscal policies, anything not paid out of the cash budget is not an expense and hence nothing to be concerned about. Astonishingly, despite repeated attempts, the simple fact that charges on the credit card are required to be paid in cash at the month end fails to compute with the lady of the house — as they say, perhaps the will to understand is absolutely missing. Fortunately, at the family level, and probably this holds true for most domestic families, the other half is around to balance the budget, albeit unfortunately from his perspective.
The question is: what acts as the debt safety valve or who performs the great balancing act at the government level? Frankly, the previous government had it easier — by the time the coterie of senior analysts, regularly invited on television talk shows, stumbled upon the economic indicator referred to in economic parlance as total debt to GDP, they were on the way out. By the way, the omission of the word ‘economic’ in between ‘senior’ and ‘analyst’ is deliberate; if there had been such a professional, hue and cry would most definitely have been raised when the milk was being spilt and not after it was down the drain. No wonder Mark Blaug defined economics as, “an intellectual game played for its own sake”.
Nonetheless, a colleague recently forwarded an article wherein former finance minister Dr Pasha, who now manages a think tank called Institute of Policy Reforms, claimed that the current government had, in less than a year, contracted loans amounting to $ 52 billion to be disbursed over the next decade. According to Mr Pasha, the Chinese are not actually investing $ 32 billion but, in fact, are lending the money to Pakistan. The rest obviously is being borrowed from Pakistan’s all time favourites the World Bank ($ 11 billion) and IMF ($ 6.64 billion). Finally there was the launch of the Eurobond for two billion dollars.
While only the government can confirm whether the Chinese are investing or lending, it has on the other hand been claiming laurels for its performance vis-à-vis borrowing from the IMF and meeting all its conditions; the investor confidence evident by the oversubscription of the Eurobond, World Bank lending, when along comes Mr Pasha and disrupts the party, insisting, “This is too much. This is not acceptable.”
Somebody surely needs to arbitrate these conflicting positions. As things stand currently, even senior analysts in the opposition camp have been conceding that all this borrowing is laudable; the larger picture is apparently blurred. And whoever arbitrates, there is also the question of the cost of these debts. According to the government, the more than planned issue of Eurobonds will be utilised towards retiring expensive foreign debt costing 12.5 percent per annum. An exposé on why debt of two billion dollars at 12.5 percent per annum was ever contracted in the first place, and by whom, would be in sync with transparency norms expected under democratic rule.
Getting back to the size of the debt, considering that currently the national debt is approximately at Rs 17 trillion, yes trillion, another Rs 5.2 trillion in 10 years, if the dollar rupee parity is maintained at Rs 100, is not bad at all; in fact it might be termed underperformance if it finally transpires that borrowing money can indeed be categorised as a key performance indicator. Recall that the previous government almost doubled the national debt in five years. On the other hand, if the incumbents can contract $ 52 billion in one year, imagine how much they can borrow in their five-year term.
If it looks too good to be true, it is; this is a general rule from the world of finance. While the enthusiasm of foreigners to continue to lend to Pakistan remains a mystery, which in fact should attract suspicions regarding their motives, the ultimate $ 114 billion question is: how will Pakistan pay them back? As things stand, it is a challenge recalling the last time the nation had a net reduction in its foreign debt; has debt ever been paid back or has borrowing more to retire previous obligations always been the preferred option? Pakistan definitely does not have an ‘other half’ to worry about this debt and while out of sight might work with one half at the family unit level, at the national level, debt eventually has to be paid.
But what then is the solution? If Pakistan does not have the money to invest in critical projects, energy or railways or ports or all else, what option is there other than borrowing? The theory is that if borrowing is utilised for productive and economically feasible projects then it is good, which obviously begets the question as to how successive governments utilised the existing $ 62 billion debt. Perhaps a detailed exercise to identify how the previous debt was spent can provide lessons for the future; after all, $ 62 billion is a lot of money.
Theory also postulates that a nation’s current account should balance, so if there is a net inflow of currency then the country is most likely running a trade deficit, meaning imports exceed exports — more money flowing in, the larger the trade deficit. This suggests that Pakistan’s historic cumulative trade deficit is approximately $ 62 billion, equivalent to the nation’s total foreign debt. Finally, in theory, currencies of countries with large trade deficit should weaken, which consequently should make their exports cheaper thereby balancing trade at some point in the future. In Pakistan’s case, the rupee strengthened while the country ran huge trade deficits, and there appears to be no sign of trade deficit ever disappearing. Talk about topsy-turvy!
However, as Yogi Berra famously said, “In theory there is no difference between theory and practice, in practice there is.” Then there is the problem pointed out by Messer Reinhart and Rogoff: countries experiencing large inflows of capital are at risk of having a debt crisis and this epiphany has nothing to do with how the debt is utilised. Apparently, even if debt is contracted for productive investments, there is an upper limit to how much money can be safely borrowed by a nation.
As usual, every time an article builds up the punch line, space constraints force a quick closure. The editor needs to relax the allotted space at least for articles that discuss the economy. However, until such time that this particular nirvana is achieved, the shortcut conclusion is that the nation can only hope for the best. Until such time it can undoubtedly be concluded whether or not all this debt is excess baggage!

The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com and on twitter @leaccountant