Dealing with debt
THERE has been a sliver of good news recently on the public debt front — but more bad news too. In response to points of order by some members, the honourable speaker of the National Assembly constituted a special committee to examine all loans taken in the past.
In response, the Ministry of Finance and the Economic Affairs Division put in a splendid effort and burnt the midnight oil to provide all the data requested by the committee in record time. The committee, which has met a number of times, also requested input from external experts.
Unfortunately, the ‘good’ news ends there. That the National Assembly deliberated briefly on the issue, on the initiative of some members, and felt it important to form a special committee for the purpose is a small step in the right direction.
However, Pakistan’s debt ‘crisis’ needs far greater attention, not in a special committee and in a fleeting manner, but in the august house itself. Parliament should dedicate a full sitting to debating the debt issue — its root causes as well as its consequences. And, equally important, the consequences of policy inaction.
As I informed the special committee, going over each and every loan agreement Pakistan entered into over the past two decades, its terms and its utilisation (which for programme loans is fungible), may be laudable but is actually missing the woods for the trees. Viewing the problem through such a narrow prism will lead nowhere.
The running of government on borrowed resources on such a scale, year after year, is essentially a question of a complete absence of an economic reform vision. To use a Paul Krugman quote I have often referred to, a debt or balance of payments crisis is usually a result of “over-financing and under-adjusting” by a government on a sustained basis.
Sustained imbalances in public finances and in the external account more often than not also reflect deeper issues with the institutional framework (or more broadly, ‘governance’ issues). At its most basic, governments borrow because:
1) They collect inadequate revenue
2) Expenditures are larger than revenues
3) There is an external payments imbalance
Wider issues in the domain of economic reform are nested within these three basic propositions. Are governments unable, or unwilling, to collect tax revenue — or both, as in our case? On the expenditure side, is government allocating resources effectively and efficiently? Is it spending the right amounts in the right areas?
The ongoing debate on corruption and tax avoidance, and possible evasion, by parliamentarians and the wider debate on governance, is central to the debt issue — why the tax base is so narrow, how to address the conflicts of interest that lead to such outcomes, how to minimise policy capture by groups with entrenched vested interest.
In the case of external loans, perhaps the honourable parliamentarians have not thought about the connection between Pakistan’s reliance on imported energy (which is only getting larger by the day), and its increasing need for foreign exchange. If they make the connection, they may then also realise that there is a cost the nation is paying for diverting gas to the CNG stations they own — which leads to more borrowing because the government has to import furnace oil or diesel to run the power plants, or fertiliser to make up for the closed plants in the country.
They may also then make a connection between non-meritorious ‘jiyala’ appointments in strategic institutions such as Oil and Gas Development Corporation Limited (OGDCL), and its ability to reportedly dig only three wells in the past year. If OGDCL were allowed to function professionally, the close to 60 wells a year it should be spudding could displace a sizeable portion of energy imports.
The lack of genuine reform in the energy sector is also an important contributor to high-cost domestic borrowing by the government — to fund the nearly Rs500 billion annual general subsidy given to the sector. The list goes on, of policies that are largely ‘transactional’ in nature and their wider, often unthought-of, consequences.
There are a number of recommendations on dealing with public debt that I have promised the chairperson of the NA special committee, Shahnaz Wazir Ali (which I will share with readers in a subsequent column). However, the most important recommendation is to stand back and understand the ‘big picture’.
If parliament is at all serious about finding a way out of Pakistan’s debt issue, a resolution — or, at least, a recognition for starters — of the debt problem needs a much wider debate in the full house. As indicated by just a few of the connections made between economic policy and public debt in the foregoing paragraphs, the debate on the issue will need to be holistic, encompassing the full spectrum of economic reform the country so badly needs.
There should be some sense of urgency as well. Contrary to what some people (including it appears the finance minister) believe that Pakistan’s debt burden is under control, the country is not just heading into a full-blown external debt crisis, slowly but surely, it is slipping into the uncharted territory of a domestic debt crisis as well. That prospect should be enough to shatter the sanguinity and complacency of any responsible government.
The wider debate I have referred to is the one now being played out in the Greek parliament. With their backs to the wall, Greek politicians — in government as well as in opposition — have finally acted with a measure of responsibility and maturity in approving the reforms needed to turn the economy around (only after causing enormous damage to their economy and society).
One can only hope a parliament in Pakistan can similarly rise to the occasion before it’s too late.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.