In the seven years that have passed since this present style democracy reestablished itself, clear thinking has been in notably short supply. But this fuzziness must now end. Recent events in Pakistan pose a fundamental challenge for its economy: Can the country get past the myths and the moralizing, and deal with reality in a way which respects a nation’s core values that revolve around safeguarding the present and future of its people? If not, the whole democratic project – the attempt to build peace and democracy through shared prosperity – will suffer a terrible, perhaps mortal blow.
First, about those myths: Many people seem to believe that the loans Islamabad has received in recent years have been subsidizing Pak spending. The truth, however, is that the great bulk of the money lent to Pakistan has been used simply to pay interest and principal on debt. In fact, for the past two years, more than all of the money going to Pakistan has been recycled in this way: The Pakistan Government is taking in more revenue than it spends on things other than interest, and handing the extra funds over to either its creditors (domestic lenders and others) or using them in a non-transparent manner in projects that may not necessarily be financially productive for the country. Or to oversimplify things a bit, you can think of Pakistani debt policy as involving a bailout, not for Pakistani economy, but of our financial lenders, Messrs IMF (mainly), World Bank, etc with the Pakistani government simply acting as the middleman – and with the Pakistani public, which has seen a catastrophic fall in living standards, required to make further sacrifices through taxes and in not receiving its full benefits of reductions in global commodity and oil prices, so that it too can contribute funds to this bailout of the lending institutions that have lent to Pakistan and perhaps feel that their funds may in fact be stuck in the Pak economy.
One way to look at the demands of the critics of this government’s debt policy is that they want a reduction in the size of this contribution presently being made to simply service the needs of the IMF or to a lesser extent the World Bank. Nobody is asking Pakistan to duck its foreign debt obligations; all that they want to bring on the table is about focusing less on areas that merely interest our lenders and instead more on things like education, health care and aid to the destitute. And doing so would have the side effect of greatly generating employment, alleviating poverty and ensuring equitable distribution of the state’s financial resources. But doesn’t Pakistan have an obligation to pay the debts its own successive governments of the past chose to run up? That’s where the moralizing comes in. It’s true that Pakistan voluntarily borrowed vast sums. It’s also true, however, that international financing institutions voluntarily lent Pakistan all that money. We would ordinarily expect both sides of that misjudgment to pay a price. And this is precisely where the role of the economic leadership can be so crucial. For it to find ways to negotiate with the lenders in a manner that on one hand satisfies their concerns, but on the other hand also convinces them to allow it that operational space to be able to realize the full underlying growth potential of its economy and to better the lives of its people.
Finally, we have just learnt from the break through works by Thomas Piketty and Jeff Madrick that not all forms of infrastructure investments are beneficial unless they are properly aligned with public priorities. More dangerously, for countries that are already heavily indebted, further imprudent borrowings, which are then subsequently spent on non-productive sectors, tend to unleash the debt pain multiplier; meaning the marginal negativity tends to by far exceed the marginal increase in the debt burden itself. Pakistan debt is reaching a worrisome level where any further debt accumulation without first ascertaining resulting productivity benefits can push the country down a vicious debt trap. Already this government has raised funds/debt through some expensive bond issues – five year Eurobonds at 7.25% which is 5.58% above US Treasury rate, ten year Eurobonds at 8.25% which is 5.56% higher and recently the Sukuks also much above market rate – and in addition has borrowed heavily both from internal and external lenders. As per the government’s own internal report to its Federal Cabinet, Pakistan’s public debt is set to further increase by a mammoth 5.716 trillion ($57.16 billion) over the next four years. One can only pray that better sense prevails in the days ahead!