Managing a heavy debt burden in uncertain times

With war raging in Ukraine on the heels of a pandemic, the world faces a scenario similar to what we saw a hundred years in the past, when the Great War and Influenza pandemic collided. The war in Ukraine is further compounding a global economy already disrupted by Covid-19 and its aftermath.

These crises have generated a “perfect storm”, with 85 million people being pushed back into extreme poverty since the beginning of the pandemic with a rise in commodity prices and disruptions in global supply-chains. The world has also had to contend with the indirect impact of sanctions, which have caused an overall increase in global energy prices by 7.7%, as well as greater pressure on world stocks, oil, food prices, and other commodities.

In the Asia-Pacific region, these challenges have further deepened existing inequalities and economic vulnerabilities of several countries, leading them down the treacherous path of borrowing to salvage economic solvency. Countries like Sri Lanka, Afghanistan and Pakistan are facing a grave ‘debt distress’ and are being forced to make difficult decisions of budget cuts on critically needed development spending.

As UNDP’s recent policy analysis shows, Sri Lanka’s prolonged external borrowing, a deteriorating social sector, rising inflation, and indefinite negotiations with the IMF brought the country to the state of economic default. Similarly, our research on Afghanistan highlights how the ongoing humanitarian and economic emergency in the country is driven by deep structural and policy imbalances that need to be corrected to preserve the gains of the last two decades.

Meanwhile, though Pakistan witnessed a growth of 5.97% in 2020-2021 – the second highest in the last 14 years -- it is currently faced with a debt in excess of $250 billion, rising from 57.9% of the GDP in 2013 to 74% in 2021. It is also experiencing the highest inflation in the last two years – increasing to 13.8% in May 2022 from 12.7% in March 2022. Additionally, the country faces the stubborn burden of Current Account deficits, with the fiscal deficit forecasted to increase to 6.3% of the GDP in FY22. A trade imbalance and depleting foreign exchange reserves have also resulted in currency devaluation. On top of these figures are those of a perennially narrow national tax base: in 2021-2022 taxes formed only 12% of the GDP, depicting the huge revenue gap that is required to meet public expenditures.

There is now a dire need to focus on mitigating the downward economic spiral in Pakistan as quickly as possible, while simultaneously alleviating human development impacts. UNDP’s Pakistan National Human Development Report 2020 on the ‘Three Ps of Inequality: Power, People, and Policy’ emphasises this point, establishing the need to increase outlays on human development and social protection, creating policies and reforms to bridge socio-economic gaps, and promoting decent work and gender equality as essential levers to mitigate inequality and promote sustainable development.

This is especially so as the path of external borrowing has been a precarious one for Pakistan, even as prolonged borrowing from multilaterals and external donors has been the preferred policy solution to fund national development and finance expenditures. For developing countries like Pakistan, political stability combined with good governance and a dynamic strategy for managing sovereign debt and public finance with support from development partners, is the minimalist formula required to overcome financial and economic challenges. Hence, there is a critical need now for home-grown solutions that are centred around the principle of sustainability and self-sufficiency.

One solution is leveraging alternative financing mechanisms, including private sector impact-oriented investments in SDGs-aligned development projects and climate financing instruments such as green bonds, to help decrease the reliance on external borrowing and avoid current account deficits. To achieve this, UNDP is proposing a bold moonshot to globally promote $1 trillion of public and private investment in the SDGs, focusing on mobilising public finance, unlocking private capital, and strengthening SDG impact management, with the foundational aim to achieve Agenda 2030.

As part of our Financing for Development portfolio in Pakistan, UNDP is developing and supporting innovative financing solutions by engaging both the government and the private sector to reduce the pressures on public expenditures for development programmes. In partnership with the Government of Pakistan, UNDP is positioning Pakistan’s SDG investment portfolio at global investment platforms; producing policy reports such as the first Pakistan SDG Investment Report 2021; the first Pakistan SDG Investor Map; facilitating disaster risk insurance and financing solutions; and setting up Pakistan’s first SDGs Project Development Facility for investments and financial structuring to spur sustainable development.

With the Agenda 2030 clock ticking, Pakistan is faced with an urgency to optimise the quality and structure of its economic stabilisation and growth policies if it aims to be a strong economy by 2047. It needs to move towards investment-based, export-led growth, powered by renewable energy. Such growth needs to be supported by a high productivity services sector and a flourishing agriculture sector that may help import substitution of essential food items.

This would only be possible through investments in human capital and aligning the national economic policies to the globally accredited Financing for Development paradigm. Fully utilising the country’s youth potential, as highlighted in UNDP’s Pakistan National Human Development Report 2017 on ‘Unleashing the Potential of a Young Pakistan’, positioning women as power-agents of economic growth and prosperity, and channelling marginalised segments of society into sustainable and community-driven social safety nets, can reduce burdens on the state and accrue overall benefits for the economy.

Innovations in global economic foresight point towards a fundamental emerging need to align economic growth with diversified development outcomes. For decades, GDP has been viewed as the sole indicator of economic growth. However, now with other vital components such as environment, social sector dynamics and inclusion directly or indirectly impacting countries’ economic progress, it is time to reimagine and reposition Pakistan’s economic model. This is where the transition to a robust economy centred on Financing for Development comes into motion, and where social impact-led investments can power economic growth as a way out of the crushing debt trap.

Published in The Express Tribune, June 18^th, 2022.

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