Another borrowing spree for the better?

The government’s plan to add more debt to its stockpile seems to be never-ending as it has now hired a consortium of financial advisers to raise at least $750 million from international debt markets. The aim is to issue Islamic bonds, which are backed by assets, and pledge the Lahore-Islamabad Motorway as collateral that would lower the cost of borrowing in the range of 1 to 1.5%. In the time PML-N has been in power, the government has raised $3.5 billion by issuing dollar-denominated conventional and Islamic bonds. This includes the expensive Eurobond the government issued earlier, which many critics felt came at an expensive rate of interest at a time when the cost of borrowing could have been lower. Interestingly, Finance Minister Ishaq Dar, at the time, justified the bond issue by saying that money was needed to repay another loan Pakistan had taken during former president Gen (retd) Pervez Musharraf’s tenure.

Pakistan’s habit of raising money through international debt markets and lending institutions is not a new one. But even the government would agree that its borrowing spree has touched new heights. The government contracted $17.1 billion in foreign loans — the highest ever in a single year in the country’s history. According to the Economic Survey of Pakistan, the country’s historical average of contracting loans has hovered around $4 billion, a number that has gone up drastically in recent years. Low levels of inflation and interest rates have helped ease the cost, but it still comes largely due to the need to finance the budget and implement development projects. The question as to how much of those loans translate into on-ground progress is another story altogether. The worrying aspect is something else entirely — these borrowing sprees are coming at a time when the country’s external accounts are under extreme pressure. A global economic slowdown, coupled with the country’s own competitiveness issues as well as hindrances to conducting business, has meant that exports are free-falling to alarmingly low levels. A government arm may have set $35 billion as the export target, but realistic estimates suggest only a little over half of it would be achieved this fiscal year, with no hope of improvement. Meanwhile, Bangladesh, Vietnam, and India have tapped markets where Pakistan filled gaps, meaning that there is more to the cause of falling exports than just a global economic slowdown. Cotton production has left Pakistan to import the commodity. In such a scenario, there is always going to be pressure on the country’s foreign exchange reserves that have been largely built, in the first place, on the back of borrowings and the $6.2 billion IMF programme that has now ended.

There has been a slowdown in the growth of remittances, which has for long been Pakistan’s saviour, but the borrowing never ceases to stop. On the other hand, the import bill has continued to rise even as oil prices remain depressed, pointing towards renewed worries of the widening trade deficit. What is the long-term plan then? Or is it just the PML-N looking at its five-year tenure and not beyond. These loans, for however long contracted, will have to be repaid. Structural issues, on the other hand, will continue to bar Pakistan from making meaningful progress. Are future generations supposed to pick up the slack? The gradual, but steady, increase in tax rates has meant that the effects are being felt already. All hope is pinned on the success of the China-Pakistan Economic Corridor, which is supposed to serve international interests, while giving the country a by-product benefit. Mr Dar continues to boast of foreign reserves, but those are now going down as well. One cannot wait to hear what he has to say about the future.

Published in The Express Tribune, September 27^th, 2016.

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