Fear of debt

IT is easy to be alarmist about a topic like the level of the national debt, and it is equally easy to mislead people into thinking that the problem presents some sort of an emergency. So at the outset, let’s understand it is a natural and desirable thing that all sovereign governments should carry some level of debt, and that often this debt will be very large by comparison to the size of the economy.

By itself, debt is not a problem, and cutting the numbers to try and show that “each citizen of Pakistan owes X amount of money” is a totally misleading presentation of the facts. No government should ever seek to be totally debt free.

What matters most when talking about national debt is not the absolute amount of the debt, but the carrying capacity of the government or the economy. So when a country like Japan has a national debt that is 253 per cent of its GDP in 2017, the figure may sound alarming because Pakistan has only 60pc. The problem for Pakistan is that our revenues, exports, remittances and foreign investment levels are not rising nearly as fast as they need to in order to enable us to carry even this smaller level of national debt.

Having said that, let me carefully present a picture of where our external debt is going until the year 2023, because something very important is happening in the coming few years and there needs to be greater awareness and debate about this.

What appeared to be a relatively stable external financing situation last summer today looks like a dismal path to bankruptcy.

The data that follows is from the latest Post Programme Monitoring report of the IMF, which is based entirely on data provided by the government, so these are official numbers. The reason they merit detailed scrutiny is because the government’s numbers are telling us one story, whereas its words are telling us another.

With its words the government acknowledges that levels of external debt are set to rise very sharply in the years to come, but the carrying capacity of the economy will improve and make this debt sustainable due to CPEC investments which will boost productivity in the economy.

But the data in the Fund’s report shows otherwise.

Start with this: Pakistan’s total external debt is projected to rise from $93.4 billion this fiscal year, to $145bn by 2023, in five years time. At a 50pc increase in five years, this is one of the fastest rates of growth in recent times. The last 50pc increase in the level of external debt was in the period stretching from 2009 till 2018, ie nine years (data from IMF 2013 Article IV report).

Next take a look at what they call “gross external financing needs”, which includes the current account deficit, plus debt service payments in the period being projected. When Pakistan entered the IMF programme in 2013, this figure was at $9.5bn, and was projected to stay at that level till the time the programme ended in fiscal year 2017.

Instead, by the time the programme ended, the figure, $21.5bn, was well over double where it should have been. This year the figure is expected to rise to $24.5bn, and by the year 2023 it will reach $45bn. Again, this is the fastest rate of growth in gross external financing needs over a five-year period (considered the medium-term outlook) in recent times.

Incidentally, in July 2017, when the Fund made the same projections out till 2022 (five years forward), the gross external financing needs were projected at $20.6bn by the end of the period. The projections made now show these same financing needs coming in at $41.1bn in 2022 instead, meaning the projections have been revised upward very significantly already. And the borrowing binge has yet to start in earnest.

So if our level of gross external debt and external financing needs are rising this fast in the next five-year period, the question is, will the economy be able to sustain this additional burden? The government claims that CPEC investments will enhance the carrying capacity of the economy and make the additional burden sustainable.

The best place to look for validation of this claim is in the projections of the foreign exchange reserves. If the government’s claim is true, the projections should show reserves remaining at a level sufficient to finance more than three months of imports till 2023. Four months’ import cover is considered adequate, three months is bad, two months is serious and one month is critically low.

But the figures show the opposite. They show reserves falling to critically low levels by 2022, barely enough to finance one month’s worth of imports, the level where governments are forced to seek emergency assistance. The decline is steady. From three months of import cover last year, we will drop to 2.2 months this year, 1.8 months the year after that, then 1.5 and 1.3 before hitting the critical level.

Incidentally, the July 2017 Article IV report of the IMF presented a very different outlook. It showed reserves rising slightly from $18.9bn by the end of the current fiscal year to $20.4bn by 2022, with import cover staying comfortably above three months throughout this period. Now suddenly the projections show a very different situation, with reserves at $12bn by the end of the current fiscal year, and falling to $7.1bn by 2023.

What happened in the one year between the last time these projections were drawn up and now? What appeared like a relatively stable external financing situation only last summer today looks like a dismal path to bankruptcy instead.

Would anyone in government (or the IMF) care to explain these numbers? Five years is not that far away, and their own data shows that the economy will be burdened with far higher levels of external debt than it can bear. If the carrying capacity of the economy is expected to increase with CPEC investments, how come this does not show up in the projections?

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