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Yes, you read it right with a big question mark from Pakistan’s perspective. Recently global lending institution International Monetary Fund (IMF) has rang bell that world economies are on borrowing spree, globe’s current debt pile of $164 trillion is bigger than at the height of the financial crisis a decade ago.
Pakistan is facing economic headwind since more than three decades, which resulted in need for external loans. However Pakistan’s loans rose sharply in recent past, as State Bank of Pakistan reported for third quarter of financial year 2018 total debt liability touched PKR27,237.4 billion. IMF forecast that Pakistan’s external debt would shoot up to $103.4 billion by June 2019.
Economic growth remained weak which called for global lenders to play their part. The ultimate purpose of loan taking is to prosper country’s economy, accordingly Islamabad choose to borrow from global lenders i.e. IMF, ADB and World Bank to help dwindling economy. Long hopes were attached with loans that they will lift Pakistan from looming economic collapse to renewed growth. Unfortunately due to flawed policies it didn’t resulted as per expectations. It has remained PML-N government’s policy of building foreign currency reserves through expensive loans and ignoring the export performance has come to haunt the policymakers.
Economic gurus – who fear that further loans will push country over the edge. The argument is that debt servicing cost will exceed growth of the economy even if economic reforms succeed. Recently published report by IMF found that “Gross fiscal financing needs will likely exceed 30% of GDP from 2018-19 onward, in part reflecting increased debt service obligations”.
Consideration needs to be given to the fact that external financing at favourable rates could become more challenging in the period ahead against the background of rising international interest rates and increasing financing needs. Also arranging finance at favourable rate will be a big challenge due to risks to the Pakistan’s debt paying ability and widening gap of current account deficit.
Fact of the matter is when debt is high governments have to impose unpleasant taxes to fund spending on debt-interest payments. Paying down the debt is most sensible approach as once said by George Osborne, Britain’s Chancellor of the Exchequer, “fixing the roof while the sun is shining”. But when a government is faced with a high debt load, is it better to impose austerity and pay it down, or take advantage of low interest rates to invest? The answer depends on the amount of “fiscal space” a government enjoys.
In Pakistan’s scenario paying down the debt remained first priority of every elected government or Martial law administrator. Which resulted in different revenue collection schemes i.e. gateway amnesty schemes for black money, imposition of reproached taxes etc. These taxes are a drag on the economy and worst enemy of any democratically elected statesmen. Interesting fact about Pakistan’s borrowing is that all elected government has used election slogan kashkooltoordain gay (no more borrowing). It has been observed aforementioned statement has remained as election slogan nothing more than that.
Road to prosperity
Now if I could have your attention, these loans can be turned into drivers of prosperity. If government could manage to improve transparency in public finances, mainly by involving the private sector more in state-driven projects. Loans will be geared towards finding lasting solutions for failing infrastructure. However, there are several deterrent factors. Large-scale engineering solutions will take time to plan and implement, but the waste, water and electricity problems are urgent, inviting inefficient stop-gap measures.
To date, political disagreements based on individual (and often corrupt) economic interests have stymied decisions. Large-scale reforms would require greater political unity and focus on national interest.