Digging a deeper hole: The risky strategy of borrowing to pay off loans

Published: March 28, 2011
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As debts soar the rich need to pay their share.

As debts soar the rich need to pay their share.

The country is passing through one of its worst ever economic crises and the omens are not good as the government is seeking to borrow more from the internal and external resources to pay off foreign debts which have surged to $59 billion.

And sources in the finance ministry accept the fact that the economy is caught in the vicious cycle of having to borrow externally to pay off existing foreign debt.

Fast increasing public debts clearly indicate that the financial managers should look at the option of falling back on the internal resources for debt-servicing. The country’s total foreign and domestic debt at the beginning of 2011 has touched the dangerous mark of almost Rs 11 trillion. The debt-to-GDP ratio has gone up to 74 per cent from 64 per cent in January 2010. The government is continuously borrowing heavily to meet its burgeoning budgetary deficit. According to the State Bank of Pakistan, domestic debt increased to Rs4.958 trillion by September 2010, from 4.018 trillion in September 2009.

The external debt of the government increased to Rs3.864 trillion in September 2010 from Rs3.656 trillion in September 2009. By September 2010, the foreign debt was $58.41 billion as against $55.62 billion in June 2010, showing an increase of $2.79 billion in three months.

And this trend was echoed by domestic debt growth as well. By the end of 2010, our domestic debt went up to Rs5.50 trillion as a result of the government’s insatiable borrowing quest. In September 2010, domestic debt and liabilities were of Rs 5.191 trillion, which registered an increase of Rs306 billion in just three months. During 2009 to 2010, domestic debt showed an alarming growth of Rs1.05 trillion. In December 2009, domestic debt/liabilities stood at Rs4.447 trillion rupees, which increased to Rs5.5 trillion by December 2010.

In the first quarter of 2010-11, debt servicing amounted to 1.2 billion US dollars as per State Bank of Pakistan figures. Since then, the size of debt servicing has increased by about 49 per cent as compared to the same period last year. Pakistan had to pay 5.641 billion US dollars as debt servicing in fiscal 2009-10, which accounts for more than 33 per cent of the country’s total foreign exchange reserves. The total foreign debt and liabilities of Pakistan reached 58.512 billion US dollars, up from 47 billion US dollars two years ago.

In 2008 the global financial crisis had an impact on Pakistan as well and foreign currency reserves almost evaporated as a consequence of the high oil import bill. During those times the country was once again required to borrow from the IMF. The IMF agreed to give us $11.3 billion but attached harsh conditions for reforming the economy. With international oil prices rising once again, and at a very rapid pace, posing a threat to forex reserves, the country’s ability to finance external debt is doubtful.

Pakistan’s balance of trade shortfall was over 11.4 billion US dollars last year, despite receiving 8.9 billion US dollars as remittances from overseas Pakistanis.

According to taxmen fewer than three million of Pakistan’s 175 million citizens pay any income taxes, and the country’s tax-to-GDP ratio is only nine per cent. This is one of the lowest tax-to-GDP ratios in the world. In comparison, Sri Lankans pay 15 per cent of their GDP in taxes, Indians pay 17 per cent, Turks pay 24 per cent, Americans pay 28 per cent and Swedes pay as much as 50 per cent. The main reason for this low ratio is tax evasion by the country’s elite. And unless the government can find a way to drastically increase this ratio, the only remaining option will be to borrow more and more resulting in a never-ending cycle.

Published in The Express Tribune, March 28th, 2011.

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Reader Comments (13)

  • A. R.
    Mar 28, 2011 - 11:30AM

    I hate the fact that our government keeps attributing the economic downturn to the global financial crisis. Check the data, the global crisis did not impact Pakistan’s economy at all. Not in exports, imports, remittances, or any other variable that affects us. The ex-SBP governor Shamshad said so as well. It just a convenient scapegoat. Recommend

  • Mar 28, 2011 - 1:35PM

    A repeat of what I have been commenting since 6 months.Recommend

  • MK
    Mar 28, 2011 - 2:31PM

    “The debt-to-GDP ratio has gone up to 74 per cent from 64 per cent in January 2010.” Historically, countries where Debt to GDP ratio crossed over 82% have never been able to save themselves from defaults.

    Result:
    This means that further debt of a trillion and a half will be enough to cross irreversible 82% level. This can happen year maximum if agricultural sectors and other untouchables are not taxed. Salaries class don’t have more blood to spill. Harsh times are not far away for Pakistanis!Recommend

  • MK
    Mar 28, 2011 - 2:37PM

    A reminder to what is coming up:

    A woman in Germany owned 1 million mark in 1920 which she had kept in a bank account. She was considered rich those days. After some months she received a letter mentioning her to contact the branch for some reason. She did not visit the branch and six months went by. After 6 months she received another letter mentioning that her balance in the bank account did not meet the minimum balance criteria. She was shocked and ran to the bank to check the balance. What! She said she had a million mark in her bank account but unfortunately due to hyperinflation the amount was worth less than the minimum balance amount.Recommend

  • Tony Singh
    Mar 28, 2011 - 2:50PM

    Ask USA to impart with manufacturing machinery as aid and not F16s.Recommend

  • Hammad Siddiqui
    Mar 28, 2011 - 7:24PM

    Pakistan has holes in its buckets, nothing will happen!Recommend

  • Raj
    Mar 28, 2011 - 7:52PM

    The govt is waiting for divine intervention to pull it out of this mess!!!!
    Its obvious that the majority of people in pakistan simply can not grasp the extent of this or any other crises, as their media will never actually have any debate regarding the issues that really affect them.
    There is no turn around from this situation! The elite will simply be not taxed and the lenders will start to simply refuse to lend.
    Hence the begging bowl, round of globe trotting for the President, PM, Ministers etc.
    What a sad state of affairs in a country that had so much potential, thanks to the Army, Clergy and Politicians, to turn a society which was secular and with very cosmopolition base into one which survives on the alms!!!!!!
    ZAB’s brave statement may come true sooner than anticipated, That People will Eat Grass to have a BOMB.Recommend

  • pakeco
    Mar 28, 2011 - 9:55PM

    overseas pakistanis need to be careful of sending money home it will be devalued about 20 to 25 % in 6 months to 1 year please dnot remit any money if not requiredRecommend

  • MK
    Mar 28, 2011 - 10:48PM

    If non-resident Pakistanis won’t send money to the country then the devaluation can be 100-1000%. What is the need to put PKR in the gutter companies like KESC? When KESC admits theft and they also know who are thieves but only posts ads in newspaper of FIR and maybe they took action against 100 people or so. Just a small example is Cloth Market and Boulton Market which is full of kunda. KESC staff is fully involved in all the corruption and our CJ is taking no suo-moto action. Suo-moto action is usually taken against bechari government only. Wake up call for JUSTICE!!!!Recommend

  • dr. Aslam khan
    Mar 28, 2011 - 10:56PM

    pakistani money is losing its value due to inflation a 100 rupee today will become 85 rupee after 1 yearifinflation i1%Recommend

  • Meekal Ahmed
    Mar 29, 2011 - 12:33AM

    The balance of payments crisis was on the cards before the commodities price surge in 2008. That was only the tipping point.

    India’s tax-to-GDP ratio is higher than reported here if you add the provinces.

    We know what needs to be done. The solutions to our economic ills are glaringly obvious. No rocket science needed. Recommend

  • Zahid Hussain Khalid
    Mar 30, 2011 - 12:15PM

    What Pakistan needs the immediate formation of a panel consisting those economic experts who have the vision and the capability to prepare a “Genuinely Original National Economic Revival Plan” through the mobilization of Pakistan’s indigenous natural and human resources within three short-term (immediate), mid-term (transitionary) and long-term (lasting) time-slabs.

    Pakistanis have sufficient liquid assets to immediately get rid of foreign debt but the reason for not doing so are:

    1: The money partially but significantly belongs to criminals and parked in countries that are least interested in Pakistan’s economic recovery.

    2: The Pakistanis who have the money and the desire to remit and invest their savings in Pakistan either do not have faith in Pakistan’s economic certainty and viability or they do not trust the Money Managers in Pakistan.

    The proposed panel of economic experts will have to come up with a strategy to target both the groups of Pakistanis and convince that their ultimate investment destination is Pakistan… But WHO WILL TAKE THE LEAD?!

    ON TOP OF ALL PAKISTAN NEEDS TO GET RID OF WORLD BANK / IMF SPONSORED MONEY MANAGERS AND THOSE WHO BELONG TO BANKING SECTOR IN PAKISTAN AND ARE PATRONIZED BY DONORS.Recommend

  • Hedgefunder
    Mar 30, 2011 - 1:37PM

    @Zahid Hussain Khalid:
    Its very innovative idea !! ambitious but plausable too!!
    Are their any candidates in pakistan capable of being on the panel??
    I would suggest appoint the best foreign economist, managers and financial investigators and accountants money can buy and set them the task of recoveries, targets, goals to be achieved on economic and fiscal front and keep the politicians and the army out of interferance !! Oh Yes do allow them too reside in the countries of their choice and provide security too, as in todays world, one can function and conduct meetings and conferances etc thru telephony and other communications. So they don’t really have to be residing in the country, as that would be big deterrant to anyone who would even consider taking up the challenge!!!!!Recommend

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