How debt accumulates

External borrowing without considering sustainability makes the economy relatively more vulnerable than the domestic debt for the simple reason that we can’t print dollars. On 30 June, 2020, total public debt stood at Rs36.3 trillion. In two years, the PTI government contributed Rs11.35 trillion. Out of this, Rs4.6 trillion came from abroad, an increase as high as 54%. By its own admission, the government borrowed to repay past debts. Who will, however, bear the burden of the debt that is being contracted now? Of course, the future government which will again put the blame on the preceding government.

In its first fiscal year, the PTI government paid Rs305.8 billion in interest and Rs928.8 billion as principal, or a total of Rs1.23 trillion. Interest payments in the second year were Rs335.4 billion and the principal repayments were Rs1.25 trillion, totalling Rs1.58 trillion. In two years, the debt servicing was Rs2.81 trillion. Out of the additional foreign debt of Rs4.6 trillion, an amount of Rs2.81 trillion was borrowed to pay past debts and Rs1.79 trillion was the new debt left to be paid by the future government. This is the classic debt trap or the never-ending cycle of re-borrowing. In the current year’s budget, the government plans to borrow Rs2.2 trillion, but will be left with only Rs495 billion after paying for past debts.

Fiscal deficit and rupee depreciation are important reasons for the ballooning debt burden. However, an important factor that is ignored is the structure of the debt itself. Loans are contracted for hard projects – such as dams or power stations, roads – that eventually yield a return payoff. Despite harder terms, inefficiencies in implementation and corruption, there is something tangible at the end of the day. Then there are programme loans that are meant for a sector or reform of policies or governance. There is also the category of budget support that gives fungible resources to the government. While project loans are utilised on the import of machinery and equipment not available locally, and on consultancies in areas of weak local expertise, programme loans finance activities that the government agencies should be undertaking anyway. It is wasted on pilots, consultancies, trainings, seminars, launches, useless foreign travel, purchase of unnecessary equipment, vehicles, you name it. Budget support borrowing is unashamedly what it says, and more – easy money in lieu of revenue mobilisation. As there is nothing tangible to generate some return payoff, the concessional loans are more burdensome than the harder terms project loans. Non-project loans now comprise more than two-thirds of the total external debt. Worse, these concessional loans, in effect, become costlier when expensive short-term borrowing takes place to repay them.

Take the case of the World Bank for illustration. Since 31 May, 2019, as many as 24 loans worth $4.7 billion have been signed. Only three – Dasu Transmission Line ($700 million), Karachi Water and Sewerage Services Improvement ($40 million) and Karachi Mobility Project ($382) –will have tangible outcomes. The rest are baits, with fancy names, such as Resilient Institutions for Sustainable Economy (RISE) or Securing Human Investments to Foster Transformation (SHIFT). There is also the Pakistan Raises Revenue, a new loan to re-reform FBR. The three loans provide $1.4 billion to encourage the government to undertake the reforms agreed with the IMF. If borrowed money could propel Pakistan to RISE, SHIFT or Raise Revenue, it would have happened long time ago. Reform requires indigenous thinking and political will, not money from abroad. Till then, cycle on booms and busts.