Forever indebted

Borrowing money costs money, and a prudent housekeeper will always seek to balance the books. Debt has to be afforded, and if it cannot be afforded then it cannot be taken on. So goes the conventional wisdom of fiscal common sense, a virtue widely ignored with varying degrees of success by governments worldwide. If you are a rich developed country then you can afford to stick your neck out debt-wise. If you are a developing state with an ongoing power and energy crisis and an economy that is sluggish, and with a tax base that is bordering on the laughable then debt gets a tad risky.

The queue to write on Pakistan’s wall is long and there are many scribes, Moody’s Investors Service being one of the regulars. It rarely posts good news and the latest from Moodys is predicting that external debt is going to grow to $79 billion by June of this year which is higher than was originally predicted and further the fiscal weakness is, unsurprisingly, going to impact on the ability to afford the burgeoning debt. The Moodys report pushes all the red buttons — social and physical infrastructures are weak, political risks are high despite this being in relative terms a stable period politically and the position regarding external payments is described as ‘fragile’.

Alongside the gloom there is a cautious optimism. Prospects for growth have improved after completion of the IMF programme in September 2016 and on the horizon is a potential cornucopia in the form of CPEC. Much is hanging on the potentially transformative project. Foreign and domestic investment may be stimulated but this is all downstream, and CPEC dots are going to take years to join up to make a fully functioning single entity. Managing the ‘gap years’ between now and CPEC maturity is going to be crucial and the debt burden and the associated risks need to be under tighter control.

Published in The Express Tribune, May 10^th, 2017.

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