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Repaying our debts

At a recording last year for a PTV programme on the state of the economy, Gen Hamid Gul, a fellow co- panellist, argued for the repudiation of Pakistan’s external debt, as these were “odious” loans. In response to my previous column, a reader also suggested the same as the “silver bullet” that will save Pakistan’s economy from collapse.

The good general and the dear reader are echoing a fairly popular sentiment that has reared its head at the end of each debt-accumulation binge Pakistan has undertaken after yet another round of mismanaging the economy. When the time comes to repay, talk of repudiating our obligations and liabilities becomes the vogue. (Somewhat surprisingly, this gains traction in conservative circles where one would imagine running away from an obligation is considered even more so an act of dishonour.)

So instead of devoting this week’s column to the wretched tax amnesty scheme — which will sink Pakistan’s tax effort once and for all, unless by some stroke of luck or divine intervention it is stopped by parliament — I will lay out my position on Pakistan’s “odious” foreign debt. Firstly, it is a common misconception that all of Pakistan’s debt has been poured down the drain, or used to line pockets. Almost the entire infrastructure of Pakistan — from Tarbela and Mangla dams, the irrigation network and waterworks, the national highways network (including the motorways), electricity and gas transmission and distribution infrastructure, to the ports and airports — has been funded by loans from the Bretton Woods Institutions (BWIs) and Pakistan’s bilateral creditors.

At the same time, there has been an egregiously poor use of many loans too — in building garrison golf courses or stables for polo horses in the presidency, purchasing 7-series BMWs for the military top brass or planes for chief ministers, etc. And corruption has been a large factor too in reducing the efficacy of the loans and making repayment ever more onerous.

However, the fundamental point is that the recourse to borrowing — whether domestic or external — on such a scale and with such persistence, largely represents a massive failure on our part to manage the economy in a responsible manner. Pakistan is a global laggard not just in collecting tax revenue from its own citizens, but also in terms of expanding its exports (or displacing a portion of its imports).

Hence, while Bangladesh has managed to increase its exports four-fold since 2000 (from $6 billion to $24bn), and Vietnam over five-fold (from $14bn to over $72bn), Pakistan’s exports have risen from $9bn to $24bn in the same period. India’s exports have grown from $42bn to $305bn since 2000.

On the import front, better management of our indigenous resources, be it the river system Pakistan is endowed with or its fertile soil and natural eco-systems, can significantly reduce dependence on imports of energy and food commodities.

Combined, imports under these two heads amounted to $20.3bn in 2011-12 (nearly half of Pakistan’s total imports for the year).

But it is the apathy towards taxing Pakistan’s elites, combined with unchecked expenditure that mostly favours the same cohort, which is the biggest cause of our public debt build-up — and the fairly frequent crises the country has experienced on the debt front.

As I have written before, a rough calculation suggests that if we had managed to raise our tax-GDP ratio to around 13 per cent in 2005, instead of the nine per cent it had sunk to, and sustained this level, Pakistan’s public debt could have been lower by around 15 per cent of GDP today. In monetary terms, this would translate into a public debt stock that would be at least Rs3.1 trillion lower, if not more under favourable conditions. In terms of annual saving on interest payments, it would translate into roughly Rs300bn per annum — or 27 per cent of the current budgeted debt servicing, and nearly 10 per cent of the entire budgeted outlay.

Pakistan needs to buckle down and adopt a ‘back-to-basics’ approach. Self-serving gimmicks like tax amnesty schemes or waiver of capital gains on equities are not going to release it from the clutches of a debt trap. On the contrary, these policies will only intensify the pressure.

The bottom-line is that Pakistan is not a poor ‘Third World’ country that has been forced to accept “odious” loans by the BWIs or other institutional creditors. Its power elites have consciously sought and taken these loans — and partly used them well, and to a not insignificant extent used them poorly too.

The corruption and mismanagement of our own people is the root cause of our frequent debt crises. It is morally wrong to make the savers and taxpayers of other countries pay for our mistakes and “sins”. Their governments and their institutions have lent the money to countries like Pakistan in good faith — it is an ‘amanat’ and should be treated as such. (It is inconceivable that there is any tenet of Islam or the Sunnah of the Prophet [PBUH] that supports a repudiation of any obligation, even a non-contractual one).

Running away from our debt obligations is irresponsible, unethical, and in my book, immoral. We should grow up and start acting like a responsible and mature nation. We should also learn a lesson from the pain we have inflicted upon ourselves — and start managing our affairs better.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Sakib Sherani, "Repaying our debts," Dawn. 2012-12-28.