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Tuesday, June 01, 2010 Add to Clippings Print Story
Debt, growth and stability
Dr Ashfaque H Khan
This is my fifth article on the subject in the last ten months,
which clearly reflects my concernabout the rising debt and its
implications for the economy going forward. It is well known
thathigh and rising debt burden is a serious threat to
macroeconomic stability and hence, togrowth, employment generation
and poverty alleviation. Higher debt burden also discouragesforeign
investment, puts pressure on the exchange rate and generates a
high-risk environmentfor doing business in the country. Pakistan
had experienced serious debt crisis in the 1990s andwitnessed its
growth faltering, unemployment and poverty rising.
Pakistan also witnessed reduction in its debt burden to one-half
during 2000-07. Public debtwas down from over 100 per cent of GDP
to 55 per cent and external debt was reduced from 66per cent to
28.2 per cent during the period. The IMF termed this "large and
sustained decline inthe external debt-to-GDP ratio as one of
Pakistan's most remarkable macroeconomicachievements of recent
years". Pakistan received the dividend of debt reduction in terms
ofacceleration in economic growth, creation of jobs, decline in
poverty and improvement inincome distribution (Gini Coefficient
declined from 0.275 in 2000-01 to 0.21 in 2007-08).
Pakistan has once again landed in a difficult debt situation as
it has recklessly borrowed fromdomestic and external sources during
the last three years. Pakistan's external debt andliabilities stood
at $40.3 billion in end-June 2007 but surged to $54.2 billion by
end-March 2010 an increase of almost $14 billion in less than three
years. Similarly, public debt increasedfrom Rs4,814 billion to
Rs8,922 billion during the same period an increase of Rs4,108
billion inless than three years. It is painful to note that it took
60 years to reach at Rs4,814 billion of
public debt but in less than three years, we added another
Rs4,108 billion to reach at Rs8,922billion.
Debt is nothing but deferred taxation. It was indeed a highly
irresponsible act of the economicmanagers to accumulate huge debt
in such a short period. Our coming generations will bepaying off
our debt for decades to come through higher taxation. The young
generation istotally oblivious to the fate that awaits it. What are
we leaving behind for them: a mountain ofdebt and expected higher
taxation? Is this an inter-generation distributive justice?
Why have we landed in such a difficult situation? Pakistan
witnessed a serious balance ofpayment crisis owing to extraordinary
external shocks in terms of astonishing rise of oil andcommodity
prices on the one hand and global financial turmoil on the other.
Absence of policyresponse to address the growing challenges further
accentuated the difficulties and Pakistanapproached the IMF for a
balance of payment support. The IMF moved quickly and saved
Pakistan from certain default.
The question I am putting forward to the economic team which
negotiated with the IMF is: wasit necessary to seek over $11
billion (or 753 per cent of quota) assistance from the IMF? TheIMF
is a respected institution and its support to a country, as I see,
is enough to restoreinvestors' confidence and arrest the flight of
capital. The support of the IMF is more importantthan its
resources. Pakistan has seen many episodes of balance of payments
crisis in the 1990sbut never sought resources from the IMF more
than 100 per cent of its quota ($1.5 billion). Onemay argue that
the extent of difficulties was far greater than what Pakistan
witnessed in thepast. Even then, as I believe, seeking over $11
billion resources from the IMF was a greatmistake. The IMF standing
behind Pakistan with resources equivalent to 250-300 per cent
quotawas enough to stem the crisis of confidence.
The IMF itself has expressed serious concern about the
arrangement with Pakistan. They
believe that "the proposed level of access is large in terms of
most relevant matrices, includingthe size of Pakistan's economy and
its debt servicing capacity" (See Pakistan Assessment ofthe Risks
to the Fund and the Fund's Liquidity Position, IMF, November 20,
2008). The IMF has
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further pointed out that "continued portfolio outflows,
insufficient financial support from donorsand other creditors, and
weak policy implementation are major downside risks to
theprogramme. The above risks may adversely affect Pakistan's
capacity to repay the Fund".
Certainly Pakistan will not be able to repay its debt to the IMF
and as such will be negotiatinganother three years programme during
November-December 2010. Shaukat Tarin, the thenfinance adviser who
negotiated with the IMF, should have realised that these amounts
would
have to be re-paid to the IMF in three years' time. He should
have also realised theconsequences of rising debt burden to the
economy of Pakistan. He never realised that he wasbequeathing a
mountain of debt to be serviced by the nation for decades to
come.
Pakistan has already landed in a difficult debt situation. The
seeds of macroeconomic instabilityhave been sown. Pakistan will
have to live in a low-growth, rising unemployment and
povertyenvironment for years to come. The only way out is to keep
"twin deficits" (budget and currentaccount deficits) as low as
possible in a medium-term framework. Pakistan does not have
theluxury of sustaining twin deficits in the range of 5 per cent of
GDP, lest it may default inexternal payment obligation in the next
two years. It is for the sake of our current and futuregenerations
that we keep the budget and current account deficits at 4 per cent
and 2.5 percent of GDP respectively in 2010-11 and 3 per cent and
1.5-2.0 per cent in 2011-12. Let thenew finance adviser correct the
mistakes of his predecessors by maintaining
financialdiscipline.
The writer is director general and dean at NUST Business School,
Islamabad. Email:[email protected]
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