Debt trap

Many renowned economists have recently warned that Pakistan is dangerously enmeshed into a severe debt trap as the country’s external debt is projected to swell up to $110 billion by 2020. As per the figures released by the State Bank of Pakistan, the total Central Government debt as on 30.09.2016, stood at Rs19.9 trillion, ‘excluding liabilities’, and of which the domestic debt constitutes Rs14.4 trillion while external debt makes up Rs5.5 trillion. During the first quarter (July-September) of this fiscal year, the government added to the debt by some Rs858 billion, taking the debt to GDP ratio to nearly 69.50%, which in June 2016 stood at around 66.50%.
This is an alarming trend, as contrary to earlier predictions, the national debt, instead of coming down, is going up. Last year, in order to hide its inefficiencies, the government had made a clever move to avert criticism over mounting debt by amending the ‘Fiscal Responsibility and Debt Limitation Act of 2005’, through a Finance Act that literally changed the debt limits. The Finance Ministry not only diluted the law but also got relaxed the statutory limit of restricting the public debt at 60% of GDP. Both the previous PPP government and the present PML-N governments have violated this condition, but with the help of new legislation the PML-N government has set a new statutory deadline of June 2018 to bring the debt back to 60% GDP level, as against the earlier deadline of June 2013.
Borrowing in itself is not essentially a bad thing as long as it can be spent in a productive manner. If all the borrowing had been put to productive use in self-sustaining projects, it would have generated growth. But this was not done. The growth continues to remain elusive at under 5%, while independent economists say it is closer to 4%. But the point is that unless the GDP growth rate goes up to 6.50% or beyond, the present level of debt is unsustainable. The problem is compounded by the fact that Pakistan’s exports are rapidly declining and foreign remittances have also slowed down considerably – both these trends are likely to continue in the near-term. Pakistan’s external debt to export ratio is projected to be at 442% by 2019-20, which will make it un-serviceable. Exports, which used to finance 80% of imports in the early 2000s, now finance less than 50% of imports. Over the last decade, our exports have grown by merely 4% compared to 12% in Bangladesh and 10% in India.
Pakistan has been placed among four out of 10 countries that would default soon on repayment of external debt. Venezuela has already defaulted, while the other three countries in line are Pakistan, Egypt and Ecuador. With the rising debt burden, the economy presents a dismal picture. Our foreign exchange reserves t are debt driven, circular debt in the power sector is touching dangerous levels and all state enterprises are in the red. Unless the government moves quickly, the debt trap may strangulate the national economy.

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Mian Bilal