For a developing country to take on some debt for its development and running the government is not an unusual thing but the real issue is, how much and what kind of debt one takes on that is important.
What are the kind of pressures that are contributing to the accumulation of this debt. In our case, we have domestic debt, international debt, circular debt, and quasi-debt. The latter is that of power companies where the government has guaranteed returns or tariffs. Pakistan has a debt limitation law called the Fiscal Responsibility and Debt Limitation Act which was passed in 2005.
The real issue is, that we are taking out lots of debt for very inefficient investment ventures.
The law states that our overall debt should not exceed 60%, our current debt to GDP is around 67%, which is a violation of our law. It was coming down very rapidly, in fact, it had come down to about 54% of GDP by 2008, from there it has gone back up again to 67%, maybe even higher.
The second issue is we have to see how sustainable is the foreign debt. Foreign debt is being driven by large current account deficits where the trade deficit is ballooning. We import a lot more than what we export and as a result, we have to finance that through debt. There are other ways for financing; Investments that should come into the country, but that’s not happening.
Even though remittances do finance the trade deficits to an extent, the trade deficit is still very large. That inevitably becomes a problem because if you can’t raise more than that to repay the old debt then you end up losing your reserves and if you lose your reserves, it’s destabilizing for the economy as the rupee loses its value very sharply.
The latter is that of power companies where the government has guaranteed returns or tariffs.
The money which you are spending on lots of these projects such as CPEC etc. would go up substantially. The cost of CPEC would increase rapidly; so the cost of a $ 50 billion investment for example at Rs. 80 to a dollar Vs Rs. 160 a dollar in rupees term, would be much more, that would have to be financed through domestic borrowing or through the budget.
With regard to CPEC related debt, the real issue is what is good debt and what is not good debt? The assumptions we make about debt is that the government is very efficient in the utilization of the debt but that is the fly in the ointment. For example, if we look at the power projects that we have ended up with, our energy is twice the cost as compared to other countries in the region, such as India or Bangladesh, there seem to be lots of padding in these projects.
In other words, if we are spending $2 billion on our projects, the real cost is $1 billion and the other is bad management, incompetence, and corruption, these factors come in and make the debt unsustainable.
Once you decide to take on the debt then you have to ensure that you are putting it into those activities that will generate sufficient economic growth, sufficient revenue and that revenues should be sufficient to repay and service the debt. The real issue is, that we are taking out lots of debt for very inefficient investment ventures.
Dr. Salman Shah was Pakistan’s Finance Minister in 2004-2008, he is currently, CEO of Bridge Asia Financial Services, a financial advisory firm that provides consulting services for the financial restructuring of companies, mergers & acquisitions, and raising of capital for new projects. He has been a member of many corporate and public companies, including the Lahore Stock Exchange, PIA, and State Bank of Pakistan. He has a Ph.D. in Finance and Economics from Indiana University, Bloomington’s Kelley School of Business. Dr. Salman has 16 years of teaching experience at institutions such as the University of Michigan, Indiana University, University of Toronto, and Lahore University of Management Sciences.