Focus on inflows!

Pakistan’s current external debt rose to $105.8 billion recently. A major hike came by issuing sovereign bonds and taking expensive commercial loans. For a country like Pakistan, this is a horrendous situation. There was no certain debt in the first decade after Independence. By the next two decades, Pakistan borrowed $14.5 million in 1956-60 and $2,959 million in 1969-70, externally and internally. The country’s first public debt in 1979-80 was of $988.23 million. After that, both debts increased rapidly. If we look back from 1990 to 2000, Pakistan’s debt increased by $17.4 billion and by $20.6 billion in 2008-13. After 2007-08, Pakistan has been facing an enormous debt crisis because of the large fiscal and current account deficits.

The last two governments borrowed externally to raise the foreign exchange reserves in order to maintain foreign exchange rates. As a result, we have dumped almost $10 billion in the market. From 2013-18 the debt increased by $34.2 billion. Over the last 20 years, Pakistan’s external debts increased to $72.2 billion — 79% of the total debt. As the external debt reached $95.097 billion by 2017-18, the increase in the total public debt was $24.078 billion, including the $13.94 billion external debt. Yet analysis shows that the government’s revenue mobilisation targets for the coming fiscal years are overly ambitious. In dealing with soaring debt, Pakistan should either follow Malaysia or Sri Lanka.

Pakistan needs a carefully calibrated policy that will minimise the various risks associated. The IMF won’t solve our debt problem, we have to do so ourselves. Firstly, we must focus on non-debt creating inflows. Pakistan needs to provide an amicable environment for foreign direct investment (FDI) through investment opportunities and stability in the country. To attract investors, it needs effective trade policies and tax incentives. Moreover, since a lot of Pakistanis live in the Middle East, the UK and the US, they regularly send remittances, especially during religious events. More remittances are good for the country’s economic health as they increase foreign reserves and consequently our debt repaying capacity.

Secondly, we must learn to live without any foreign borrowing or IMF support so that we do not lose our financial sovereignty. We can no longer afford a further demand destruction policy. We must restrict imports of nonessential goods and require negotiated FTAs with friendly countries like China, Saudi Arabia, the UAE, Turkey, Thailand, etc, with more cautions.

Thirdly, we have to improve our small and medium industries by creating clusters and industrial zones and giving them easy access to the market and skilled labour to overcome poor growth performances. The government should invest in long-term projects like education, health, human development, and mobilise our own resources.

Fourthly, to tackle our budgetary challenges, we need to improve our tax policies and administration, broaden our tax base and review tax rates. Competent people should be hired in the policy department. Appropriate fiscal discipline is required so that new borrowing is not squandered in unproductive expenditures. For a sustainable growth in the GDP and foreign exchange earnings, the government should employ strategies for debt management to reduce public debt including its external components.

Lastly, the vicious circle of larger fiscal deficits, debts, debt service payments, balance of payments deficit, increase in money supply, consequent inflation, and continuous rupee depreciation to maintain the competitiveness of exports in the face of internal inflation has become an almost built-in feature of the financial scenario of Pakistan in recent years. We must break this vicious cycle through sheer fiscal discipline, lesser borrowings, and controlling inflation by controlling the money supply. Pakistan must acknowledge this disease now before it spreads across the economy.

Published in The Express Tribune, August 28^th, 2019.

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