FeaturedNationalVOLUME 18 ISSUE # 09

How can Pakistan get out of the debt trap?

At the donors’ conference in Geneva last week, Pakistan received commitments of nearly $10bn for flood recovery. The bulk of the money — $8.7bn — is promised by multilateral agencies which will be available over the next three years.

However, it remains unclear if the multilateral assistance will be in the form of loans or one-time aid/grants. Saudi Arabia has also expressed its willingness to raise its deposits with the State Bank of Pakistan from $3bn to $5bn, as well as boost its promised investments to $10bn in the coming days.

But the million-dollar question is: will the pledges made at the conference solve Pakistan’s dollar liquidity crisis? As it is, the SBP reserves have declined to around $4.5bn or equivalent to less than four weeks of imports after recent loan payments to two UAE-based banks. As a result, the country direly needs an immediate cash inflow. Let us not forget that the flood recovery pledges from multilateral lenders will not materialise if Islamabad fails to sew up an agreement with the IMF. To tide over its financial difficulties, Pakistan has requested the IMF for ‘a pause’ in its tough demands for economic reforms, especially with regard to maintaining a single, market-based exchange rate and increasing electricity and gas prices as well as taxes. The latest reports show that the IMF is in no mood to relent unless Pakistan undertakes macroeconomic reforms in order to conclude the ninth review of the Fund’s programme.

But it is apparent that Pakistan’s debt problem is too deep rooted to be tackled by these short-term aid pledges and palliatives. Our debt burden has been rising inexorably over the past three decades. The latest estimate shows that Pakistan owes the world about $100 billion and has to repay $21bn to foreign lenders during the current fiscal year. What is worse, in the next three years, it will have to return similar or larger amounts each year totalling about $70bn.

We just don’t have the resources to repay all the loans unless we take more loans from abroad. That means Pakistan will sink deeper and deeper in the morass of foreign debt. The reason why we are in such a mess is that we have been running a current account deficit for years and to close the gap we have been borrowing foreign exchange from one source or another. Pakistan has also gone to the IMF time and again for a bailout.

It is a matter of regret that during the last two decades no steps were taken to boost our industrial production and exports. Instead, due to faulty planning we have become an import-based economy. For years our imports have far exceeded our exports, with ever ballooning current account deficit.

During the PML-N’s tenure from 2013 to 2018, as a result of a fixed exchange rate, Pakistan’s export-to-GDP ratio declined sharply and all the money borrowed from commercial banks and Eurobonds was spent on financing the current account deficit. The same has been the case with the budget deficit which we have been financing from loans taken from foreign banks or lending agencies.

Another aspect the policymakers must understand is that now it is not enough to reduce the current account deficit to get out of the problem facing us. With large debt repayments looming ahead, we will either need to borrow more or earn foreign exchange through exports.

What is the long-term solution to our mounting debt woes? There are several ways provided we have the political and economic expertise and efficiency to introduce structural reforms and turn our import-based economy into an export oriented one. To this end we need to cut waste in official expenditure and promote austerity at all levels in order to achieve a budget surplus.

On the other hand, we need to rev up our industrial machine to enable it to produce exportable surplus to earn precious foreign exchange. To this end we need to adopt appropriate policies to encourage the savings habit in the country which will create indigenous funds for investment. At the same time, a new package of incentives should be devised to create a conducive climate for foreign investment.

Other steps in this direction include reducing all current expenditures to below the inflation rate and taxing the untaxed, especially the agriculture sector which at present yields minimal revenue not commensurate with its share in the GDP. It is also time we launched a comprehensive plan to develop our agro-industries which have the potential to produce exportable surpluses. As we face an economic emergency, we should ban all inessential imports such as luxury cars, cosmetics and fashion gadgets. The objective should be to strike a balance between imports and exports. That is the only way we can get out of the debt trap.