The Political Economy of Debt

No. The numbers seem massive but the reality is far from apocalyptic. Our per-capita debt is a meagre $567, lower than our next door neighbour’s $681 and dwarfed when compared with the per capita figures of developed countries. The total debt stock as a percentage of GDP is still within the 60 per cent limit prescribed by the Fiscal Responsibility and Debt Limitation Act of 2005. In fact, keeping everything else aside, Pakistan is eligible to join the European Union based on this criterion alone! There is no devil in the details either. About four-fifth of the external debt is medium and long-term, which means it has a very low interest rate (between 0.5 and 2 per cent) and payback periods varying between 15 and 40 years, not something to grey your hair over. Contrary to popular belief, therefore, the real problem lies not in debt itself, and even less so in external debt. It is the political economy of debt servicing and debt accumulation where the real knot is.

Debt servicing

Of course, debt does not come cheap. Debt servicing comprises 32 per cent, nearly one-third, of our total expenditure and is equivalent to half of the entire projected tax revenue for the current financial year. This translates into only one thing: less spending on development since neither the military, nor the government is willing to cut down their non-development expenses. Annual debt servicing at present, about $7.5 billion during the first nine months of fiscal 2009-10, is not just at an all-time high, it is nearly twice as much as it was during former prime minister Shaukat Aziz’s tenure, and increasing. “It comes down to scandalous debt management,” commented Raza Rumi, a private development consultant. Two-thirds of this amount goes to interest payments on domestic debt while the remaining is for foreign debt servicing, interest and principal repayments. There are three reasons for this phenomenal increase. One, we are piling up more domestic debt due to a paucity in foreign inflows and unlike external obligations, which come at concessional rates, domestic debt is issued at market rates by the State Bank of Pakistan. The second reason is International Monetary Fund’s Standby Arrangement which ‘includes tranches with a shorter repayment horizon and relatively higher interest rates, thereby skewing the maturity profile of our debt portfolio, according to the Economic Survey of Pakistan 2009-10. Thirdly, devaluation of the rupee against the US dollar in 2007-08 led to ‘a peak of $3.1 billion in translational losses’ in that year. Without a comprehensive currency hedging framework, Pakistan is bound to not only remain vulnerable to such losses but unable to capitalise on favourable currency movements in international markets.

Debt for what?

Most people question the rationale for stocking up debt, especially for development sector projects when they seem to translate into little or no results. There exists little empirical data to prove the efficiency of multilateral loans, mainly from the Asian Development Bank (ADB) and World Bank. The banks themselves admit to mixed results and partial achievements of their targets.

The World Bank’s self-assessment of its programmes in Pakistan during 1994 – 2003 concludes: “Although improvements have been made in some areas of macroeconomic management and growth, reforms in those areas are still fragile. When taken together with disappointing outcomes in social sector and poverty reduction, governance, agriculture and NRM, fixed infrastructure, and revenue mobilisation and expenditure management, overall outcomes (of the programmes) are moderately unsatisfactory.” ADB’s self-assessment of its strategy and operations over 1985 – 2006 is not very flattering either. “While the Country Assistance Programme Evaluation (CAPE) confirms that ADB’s development responsiveness and credibility is recognised in Pakistan, ADB’s overall programme and sector performance was rated partly successful… The CAPE found that the large ADB programme covered too many sectors and interventions with too few staff, complex project designs hindered implementation (and) there were gaps in analytical work to support policy dialogue in important sectors,” noted the bank’s Country Partnership Strategy for Pakistan, published in March 2009. This has not gone unnoticed by the public and the development sector. If Pakistan’s social, economic and political indicators remain a national embarrassment after billions of dollars taken to improve them, what was the point of all that debt? More importantly, should we keep drudging down the beaten path? To be fair, the mixed successes were as much a result of Pakistan’s internal instability as they were a product of ill-conceived programmes, and the agencies are quick to cite that. But was curing the instability not the point behind the entire exercise in the first place? Besides, the instability seems to be hovering over the horizon in the near future irrespective.

Illegality of debt

While most of Pakistan’s foreign debt was accumulated during periods of democratic governments, there is no denying that a large chunk of debt was contracted by unelected and non-representative governments led by military dictators. What is the legality of such debt and is it binding upon the citizens of Pakistan? While the question may be snubbed as impractical by policy makers, it is rearing its head amongst the chattering class. The parliamentarians are also taking note. A private bill for an amendment to the Fiscal Responsibility and Debt Limitation Act of 2005 was presented by PML-Q’s Dr Donya Aziz in August 2008. In an effort to ensure the supremacy of parliament, the proposed amendment called for taking people’s elected representatives into confidence “before incurring further burdens that will eventually be paid back by the citizens.” Whether the bill will climb the agenda and eventually be taken up by our Speaker is a matter of the government’s priorities and seriousness.

What next?

There will be many firsts in debt stockpiling for years to come because unless Pakistan drastically revamps itself, rids itself of corruption, cuts down on non-development expenditure and broadens the tax base, we will have to resort to debts for development. Anyone expecting otherwise is delusional at best. Instead of wasting our energy on protesting against that, we need to focus on what can be achieved. The elected parliament must study, scrutinise and then approve any further debt undertakings on behalf of Pakistani citizens. If it is not doing so already with the upcoming commitments, parliamentarians are shirking their responsibility. And they need to work on Pakistan’s chronic structural deficiencies to be able to eventually walk out of the debt trap. With vehement denunciation by any sector that is roped into the tax next (capital gains tax, reformed general sales tax, wealth tax and so on), we know we are not yet ready to live within our means. Until that realisation sinks in, there is little hope for change.

Note of caution

Rest assured, public debt will continue to make headlines in the years to come. With an expected $3.5 billion loan from the IMF, World Bank and ADB in the pipeline, we are set to cross the 60 per cent of GDP limit set by ourselves. For the pro-debt camp, it is an issue of credibility. The more debt they can solicit from donors abroad, the more they can brag about their credentials and the trust the international community places in them. Meanwhile, the opposing side will continue to stoke popular resentment against all things foreign and smacking of nefarious imperialist designs. Debt from abroad, of course, tops that list.

Published in The Express Tribune, September 23^rd, 2010.