An ever-abused economic term in our political rhetoric is loan. Loans are integral part of an economic discourse for any country and so are debts. There is no country that does not have loans and debt of some kind, internal or external, in its economic portfolio. Pakistan is no exception.
Does that mean that all countries of world are beggars? Or corrupt? Or inefficient? And/or all existing governments are paying for the economic crimes of the preceding governments? Or is it exclusive to Pakistan that we have synonymised loans with begging and made it a new category of national shame? Loans are instruments of economic policies and its’ only their inefficient usage that makes them look bad. So why demonise an instrument when the fault lies with weak economic policy and management. If generic loan shaming remains unchecked it will become equivalent of ‘honour killing’ where there is no honour in killing.
Our attempt today is to clarify why some loans are not only good, necessary tool for public financing in an economy but also a scaffolding for the social sector development for a country like Pakistan.
Pakistan has a debt servicing problem. The debt to GDP ratio in the last five years has gone from 51 percent to 67 percent. That while GDP growth went from 4.1 percent to 5.3 percent. That means all borrowing is not bad. Rather it indicates skewed, politically motivated economic decisions. Government of the day needs to align prudent economic policies with its political agenda; bring the curtain down on uncertainties; and inform the nation as to why next 2-3 years would be economically tough on all.
In terms of borrowing, we averaged at $4 to $5 billion per annum during 2008-2013, which jumped to an average of $11 billion per year starting 2014. This surely soared our loan portfolio but not necessarily all of it turned into debt for Pakistan. It is important to understand that only the disbursed amount of a loan converts into debt. So, in a given year, we might have disbursed only one billion of, say, the $4 billion worth of loans. Thus, the debt incurred for that year would be $1 billion.
Why then loans, which are globally regular part of public finance management, becoming a pariah concept in Pakistan. Why all loans are being cursed as death by debt? The loans taken for balance of payment support are normally disbursed in single tranche. These loans are parked with State Bank. Once in SBP account, they are considered disbursed, hence instant addition to the debt burden — relatively bad loans, depending on its terms, but provide fiscal breather.
67 percent debt to GDP ratio translates into a requirement of approximately US $2 billion per month for debt servicing in Pakistan. The knee jerk reaction to this is economic austerity measures. Social sector impact is registered as Public Sector Development Programmes (PSDP) get the major blow and are reduced. In a country like Pakistan, with an estimated 18 million children out of school and 37 percent rate of stunting, such economic austerity will not let any government deliver on attaining SDGs and improving its Social Progress Index (SPI).
It has been established that thinking of poverty in GDP terms alone is a twentieth century concept. In the twenty-first century, it needs to be grounded in social progress as a measure. It is about time that the government converts its social development agenda into coherent socio-economic policies
So where is the much-needed financial scaffolding/stimulus for the social progress agenda? The option is to use concessional financial mechanism being offered for investment in human capital development. These concessional arrangements have nominal principal and repayment rates and longer periods of maturing. These can be used not only, relatively, guilt free but can demonstrate the viability of a government’s socio-economic vision and delivery.
To elaborate on these concessional mechanism, let’s keep our discussion to examples from the two most known lending entities, the World Bank (WB) and the Asian Development Bank (ADB). The examples that we pick from these two are:
International Development Association (IDA): It complements the WB’s original lending arm — the International Bank for Reconstruction and Development (IBRD). IDA lends money on concessional terms. IDA credits have 0 to 0.5 percent interest charge and repayments are stretched over 30 to 38 years, including a 5 to 10-year grace period. IDA also provides grants to countries at risk of debt distress.
Ordinary Capital Resources (OCR) & Asian Development Fund (ADF): ADB soft loans are financed from OCR and ADF mechanisms. OCR loans are provided to middle-income countries at a quasi-market rate. Under ADF, concessional loans and grants are offered at 0.15 percent to 0.75 percent interest rates with 15 years maturing period and 3 years grace period. Pakistan has been in top 5 ADF recipient countries. ADF and OCR have been merged since 2017, called Concessional OCR Lending (COL), for improved benefit for its borrowers.
Pakistan has been contributing to both the WB and ADB since 1950’s. Pakistan’s share-holding in ADB and WB is 2.7 percent and 0.52 percent respectively. Therefore, utilizing these concessional financial windows is a right as well for Pakistan, both as a client and a shareholder. Pakistan is the 3rd largest borrower from the ADB after China & India whose economies surely are in a better condition than ours.
The ADB’s new strategy-2030, emphasises human capital development as unfinished poverty agenda. 30 percent of IDA for 2018 was in support of social sector. Pakistan through Act of parliament have owned SDGs-2030 as well which also need financing. Therefore, not availing these concessional financial arrangements, in times of economic constraints, would mean compromising to deliver on social development — a key slogan of the government. There is no reason to be scared of this aid for development — its not AIDS!
The jury, seemingly, is still out on whether to borrow from IMF or not. The option of borrowing from IFIs, through these concessional mechanisms for both mega projects and social sector, in short to medium terms, should not be discouraged. When the lending is clearly linked to revenue generating projects e.g. Dams construction, facilities like Partial Credit Guarantees (PCG) and Policy Based Guarantees (PCB), facilities from the WB&ADB, can also be used for financing at favourable than market terms.
What does not availing these favourable financing windows mean in layperson terms. It’s like paying your share consistently into the neighbourhood kitty, the colloquial, comity system, and not claiming your share. At times, you may even get an advance on your future payments.
It is a foregone conclusion, that in the longer run, among others, the tax base has to widen; FDIs have to increase; exports need to expand for a stable and sustainable economy and social growth. Using IDA and COL can provide the requisite fiscal breathing space, especially in times when PSDPs have already been reduced by approximately 8 percent in the first quarter of the current fiscal year.
It has been established that thinking of poverty in GDP terms alone is a twentieth century concept. In the twenty-first century, it needs to be grounded in social progress as a measure. It is about time that the government converts its social development agenda into coherent socio-economic policies and avail all such concessional financing windows to achieve clearly defined policy objectives in the larger public interest.
Fauzia Yazdani @yazdanifauzia and Shirin Gul @shiringul
Published in Daily Times, October 26th 2018.