Debt Crisis Risk – Journal
A NEW report by the World Economic Forum has named Pakistan’s debt crisis as the biggest risk facing the country. The debauchery of the country’s ruling elite – the politicians, the civil and military bureaucracy and the business community – has brought the country to a stage where we need to borrow more money not only to run the state, but also to repay past debt.
The country’s debt consists of two parts: domestic loans and external borrowings. Simply put, domestic lending means the accumulation of a fiscal or budget deficit, or the gap between what we collect in taxes and what we need to spend to keep the state afloat and the economy running. External debt is the accumulation of current account deficit, or the shortfall in dollars that we earn through exports, remittances, FDI, etc. and that we spend on imports, essentials and luxuries.
Over time, the growing deficits accumulated in the fiscal and external accounts have become unsustainable, undermining the sovereignty of the nation. The government’s caving in to IMF demands to grant absolute autonomy to the SBP and impose new taxes that will hurt lower-middle income households the most is the latest example of the gradual loss of sovereignty of lenders. Rising debt levels have also limited Pakistan’s ability to grow the economy at the rate needed to create new jobs for the 3 million people entering the labor market each year and reduce abject poverty.
A recent World Bank forecast indicates that the country’s economy is expected to grow by 3.4% this fiscal year, much slower than the government’s target of 4-5% and at half the rate required to absorb new entrants to the labor market. As soon as the government tries to stimulate growth, the economy runs into external imbalances, forcing it to ask the IMF for help.
Read more: Will have to approach IMF again if there is no increase in exports: PM Imran
Successive governments have tried to control the accumulation of the stock of debt by reducing public spending on social and economic infrastructure at the expense of health, education and growth and/or by taxing the segments already taxed from the economy. Clearly, such programs do not work, as evidenced by the consistent violation of the Fiscal Responsibility and Debt Limitation Act of 2005, which aimed to cap total public debt (domestic and external) at 60% of the GDP. Currently, the ratio is around 80% of GDP.
The SBP governor said Reuters the other day that the “country has the capacity and financial cushion to cope with growing pressures on the external accounts, driven by a surge in global commodity prices”. We will indeed do so with the IMF and other multilateral organizations that support us with their dollars. But is it a lasting solution? The only way forward for the country is to widen its tax net and control unproductive civilian and military public spending.
Simultaneously, we must increase productivity to boost exports and reduce non-essential imports. In other words, we will have to change our way of life and learn to live within our means if we are to tackle the exploding debt crisis.
Posted in Dawn, January 13, 2022