The debt balloon

The report that Pakistan has taken on an additional $3 billion in foreign loans in the last four months, and that those loans are being used to finance budget commitments as well as bolster foreign currency reserves is worrying. The inflow of foreign economic assistance between July and October 2016 was $2.95 billion, of which $2.2 billion or 75 per cent of the toal loan was for what are described as ‘non-productive purposes.’ In laypersons terms that means that the government is not borrowing to build or develop planned and existing projects but to support existing debt, and the commitments made in successive budgets as well as fatten the forex reserves that have dropped of late. Loans to support projects in the same period amounted to a paltry $750 million.

The point to draw from the above is that foreign loans are only truly beneficial when they are used to build assets because assets — projects — eventually (in theory) turn a profit once the loans used to capitalise them are paid off. The argument is being made that the shift from project loans to programme is leading to a collapse or at least degradation of infrastructure as insufficient funding is available to either upgrade or develop new-build. This is not the picture that the government would wish to have the nation believe as it rolls out ever more ambitious infrastructure projects across the country.

The trouble with debt is that it has to be paid. The economic argument runs that so long as the rate of return on borrowing is 1 percent or higher then foreign debt presents no management problem. As we now know that does not appear to be the case as most of the new foreign debt is holding up the budget. With forex reserves now below $19 billion — reduced by a drop in remittances and foreign exports as well as those irritating repayments that have to be made — there is a developing sense that the government is not managing the money as well as the ever-optimistic finance minister tells us it is. Balloons have a tendency to burst. Careful where you put those pins, Mr Dar.

Published in The Express Tribune, November 29^th, 2016.

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