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Managing debt

At the outset, this is not another article on the size of the national debt; enough said already on that, except no amount of fantastic imagination can come up with a scenario where Pakistan can ever pay back its debt. Frankly, if the nation concludes every fiscal year with a whooping trade deficit, the debt can only increase, not even considering the repayment obligations year on year. To an extent one empathises with the finance team, who perhaps correctly asserts that further borrowing was necessitated by previous obligations, a classic debt trap scenario, albeit the size of debt was never a national secret.

Fundamentally, how this mountain of debt was accumulated remains a mystery. Billions of dollars of debt spent on productive projects might have in entirety fulfilled Pakistan’s wish list of development projects, as things stand, except for a couple of dams and stretches of Motorway, there is nothing much to show for it. The logical conclusion can only be that foreign debt was contracted for current expenditure, most of it to finance trade deficits, perhaps arising out of the fatalistic policy to facilitate consumer choice. With all the discussion on fiscal discipline, an exercise to link past debt with spending might provide useful lessons and guidelines for what not to do in future.

Let there be no doubt, the nation’s future, as of today, appears to be fraught with more debt and one can only hope that the current leadership’s efforts for maximising debt curtailment bear fruit. If further debt is contracted just to pay previous obligations, the end result can only be abject bankruptcy. The suggestion to monitor and curtail imports also emanates from the view that there has to be an upper limit to debt, for how long will creditors keep substituting older debt with new, simply to get repaid, at some point foreclosure is eminent. In essence, privatisation is a form of foreclosure; if debt repayment burden is eliminated from the budget equation, losses of State Owned Enterprises would not appear so indomitable.

The only way, universally, to payback debt is to earn more, and the way to earn more is either through curtailing costs or through revenue generation. Cost cutting initiatives, at the national level, include improving the trade balance and austerity measures. On the other hand, revenues can be increased by selling assets or by investing in productive projects which have the capacity to generate future economic benefits. Reliance on the private sector to pursue national economic interests will most likely be confounded. Whether or not increase in property and stock prices are indicators of a booming economy, one thing is for sure, money deployed in existing assets is unlikely to result in growth. The central bank can continue utilising its magical powers to create money, but in a high risk environment most of it will end up being pumped into existing assets resulting in a boom, if not a bubble, hardly conducive for the economy.

Admittedly, the suggestion alludes towards the government nudging investment in the right sectors and in fact goes beyond national debt, encompassing management of private credit. Hence, most economic gurus are expected to vehemently oppose the view hook, line and sinker. After all, economic theory insists that planned economies are a failure; it is time to bring out the big guns!

The Economist in last week’s edition, while taking credit for its farsighted urgings during the dotcom bubble and the housing bubble, proposes that “…central bankers should tweak their unconventional tools to favour investment in new assets over the purchase of existing ones.” In fact, the suggestions go even further, enactment of government policies that bolster the desire to invest in the private sector, and also to boost public investment.

It is irrelevant whether contrarian views regarding a planned economy existed beforehand or were stimulated by the above write up, what is important is that now even the West believes that some sort of intervention is necessary in desperate time. With the requisite credibility under the belt, let’s move on.

In a sense, fortunately, the government has already decided to focus on infrastructure and power projects. Critically, even if the private sector cannot be motivated in coming forward to carry the banner, the government should bulldoze ahead with key investment initiatives on its own. If the size and investment horizon of hydel-power projects are prohibitive for the private sector, what is the harm in setting them up in the public sector?

Beyond public investment, perhaps once again there is an urgent need to direct private credit. A few decades ago, in the good old days, it was acceptable to push the private sector through carefully designed incentives towards projects which substituted imports or enhanced exports. If it is in fashion for government policy to foster private sector desire to invest, what is the harm in also nudging it in the right direction?

Again the government has decided to facilitate entrepreneurship for the unemployed through provision of debt flexible terms. A focus on the “have nots” is indeed credible and encouraging, but then the “haves” have a larger role to play in economic growth. The belief the foreign direct investment will increase when domestic investors shy away is over optimistic. More importantly compared to domestic investors, foreign investors will invariably have a much shorter investment horizon, meaning that the former will hardly invest in long term manufacturing. It is therefore imperative that policy initiatives should firstly be directed towards wooing Pakistani investors. If money is to be created why should it not be directed towards reduced interest credit for desired sectors?

The government also needs to revive the housing sector, considering that the housing shortage is one of the leading hot topics in every planning debate. Adjustable rate loans are risky for borrowers drawing a fixed salary. While inflating property prices are conducive for mortgagees, annually increasing debt obligations are a hurdle for most. The broader impact on the economy of a housing construction boom can hardly be underscored except that the focus should be on building rather than buying existing property.

Finally another sector which should be considered for provision of flexible credit is the agriculture sector. In a predominantly agricultural economy, it is quite discerning that most might not be able to recall the name of the Agriculture Minister; in fact it would be very surprising if somebody did. For the record agriculture is now a provincial subject. With an ever rising population, domestically and globally, food prices are expected to continually rise pursuant to which even the rich Middle Eastern states are looking to invest for food security in nations blessed with fertile lands. Accordingly what is the harm if Pakistan designated agriculture as an essential sector?

Admittedly, the choice of policy and the sector for any such initiative will require extensive deliberation and setting up of priorities, especially considering the limitation on the resources. Accordingly, the discussions above are explanatory and hardly exhaustive; the submission is to consider a forgotten path to economic growth, managing debt in the best interest of the nation. In fact the government is already moving in this direction, the suggestion is to simply consider what more can be done.

Finally, for the critiques, don’t waste time with identifying economic blunders, perfect theories have hardly accomplished much in the last three decades.

(The writer is a chartered accountant based in Islamabad)

Syed Bakhtiyar Kazmi, "Managing debt," Business recorder. 2014-01-01.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic growth , Economic planning , National debt , Investment , Economy-Pakistan