Forever indebted

The decision to borrow $600 million from the Chinese in order to bolster our shrinking forex reserves does nothing to dispel the impression that Pakistan is forever at the side of the road begging bowl extended. Twice in the last three years the Nawaz Sharif government has gone to an allied country in search of forex support. The last time it was the Kingdom of Saudi Arabia that stepped up to the plate with a gift — not a loan — of $1.5 billion paid in two installments in 2014. However, there are no free lunches with the Chinese and the loan is provided on a commercial basis over three years at a rate of 3.1 per cent and 3.2 per cent interest. The Chinese have already lent $700 million in support for balance of payments in the last fiscal year.

Pakistan appears to have fallen into a debt trap. Total debts and liabilities rose to Rs22.5 trillion in the last fiscal year which was an increase of over Rs2.6 trillion on the year before. When considered against the total size of the economy our liabilities have increased by 3.7 per cent of GDP to an eye-watering 75.9 per cent — where around 50 per cent is considered sustainable for a developing nation.

The exchequer and the finance minister are forced to borrow to sustain budgetary needs for no other reason than that the government has been unwilling or unable and probably a combination of both to broaden an extremely narrow tax base. This is a failure that locks the national finances into a version of the circular debt that plagues the power sector; and from which recovery or retirement of the debts is difficult.

The maintenance of forex reserves has been almost exclusively by foreign loans in the last three years. The government has not attracted much by way of foreign investment and exports have declined as have overseas remittances which have been long the safety cushion. Complex economic formulae aside, rocket science is not needed to deduce that it is not possible to borrow one’s way out of debt. The taxation elephant in the room cannot be ignored forever.

Published in The Express Tribune, February 11^th, 2017.

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