A commission is proposed to be set up to probe ‘a massive rise in foreign debts and misuse of loans, if any, during the last decade.’ The proposed composition of the commission however indicates that the focus would be on investigating the ‘misuse’ of funds rather than reviewing policies responsible for the ‘massive’ surge in external debts.

The factors responsible for a debt-ridden economy are well known though a deeper study by economists and fiscal experts can help resolve a long persisting mounting problem of the economy if the objective is not merely to gain some political mileage for the PTI. For a serious analysis of the problem, the composition of the commission has to change as it is not the job of spy agencies.

The commission will investigate why foreign debt had increased by Rs2,400 billion between 2008 and 2018 during which, according to the prime minister’s aides, no mega project was completed.

First of all, the figure should be in dollar terms in view of rising cost of foreign debts when measured in the constantly depreciating rupee. Secondly, debt burden should be seen as a ratio of growing national income (GDP) and export earnings to give a realistic picture.

Enjoying the comfort of foreign crutches, we are sleepwalking into an unknown future

Talking of mega projects, the preceding regime of President Musharraf did not launch a single mega project including any mega dam during his tenure. This was despite the international market then being awash with excess liquidity resulting in peaking of foreign direct investment inflows into Pakistan which is so far remains unmatched. This was apart from the liberal foreign economic assistance coupled with meaningful debt write-offs and debt rescheduling by donors.

The state of the economy the regime left induced the incoming PPP civilian government to immediately seek an IMF bailout. That Pakistan is now availing the International Monetary Fund’s (IMF) credit facility for the 22nd time indicates that the malady lies much deeper and has not been merely a handiwork of the last decade.

In that decade Pakistan was also impacted by the global financial crisis and the Great Recession 2007-08 which saw some foreign banks and non-financial companies withdraw from the Pakistani market. Since then the adverse effects of the fragile global recovery are still being felt worldwide. Pakistan is not immune from it.

In April, different international organisations came out with reports on World Economic Outlook for 2019. They revealed further global accumulation of both private and public debt, drop in official international development assistance, decline in global foreign direct investment flows and fall in world trade.

These developments made the IMF revise downwards its forecast for world GDP growth for the year. About 40pc of the low income countries are facing a high risk of debt distress or are already in debt trap. Debt sustainability has emerged as a major global challenge.

No doubt the previous two civilian governments in Pakistan cannot escape part of the blame but their ability to take bold decisions was restricted by constant extraconstitutional pressures during their entire tenure of office.

With the situation getting out of hand, the IMF has now come to the rescue of the PTI government in its efforts to boost revenues and cut government spending. Both are prior conditions for the Fund’s bailout.

Because of political instability, all successive civilian and non-civilian governments have found it easier to borrow than collect taxes. Over the past 72 years, governments and prime ministers have found it hard to complete their terms, resulting in national policies changing after every few years.

We began by borrowing for development projects, then started seeking balance of payments support and for quite some time now, as Dr Shaikh rightly points out, are also borrowing to repay foreign debts. It is common knowledge that foreign dependence has surged because of our collective, national failure to reduce triple deficits — fiscal, trade and investment gaps — to manageable levels.

Trade imbalance financed by foreign debts has become the main barrier in international economic cooperation as the decline in investment by Chinese companies in CPEC projects in Pakistan indicates.

Debt is a highly complex governance issue. Foreign multilateral loans are cheap but become expensive with devaluation. The continuous rupee depreciation and high interest rates have in the past turned industrial units sick, burdening the banks with bad debts. Once again now the cost of doing business is shooting up.

Perception or misperceptions about debt misuse abound. The proposed commission can sift facts from fiction. How much of the debt was sunk in much delayed execution of foreign-aided projects, virtually a normal practice, despite financial provisions for cost escalation? Why was the cost benefit ratio of foreign-aided projects never carried out? How much money was ‘looted’ by politicians or dissipated in patronage, lost to crony capitalism and rent seeking activities? In case of Pakistan, external credit thus became less of a leverage and more of a liability, eroding capital formation.

The PML-N government borrowed heavily to push for economic growth. The current stability phase is marked by more and more external borrowings. The IMF deal will facilitate borrowings from other international financial institutions and the global market.

Enjoying the comfort of foreign crutches, we are sleepwalking into an unknown future. Will the proposed commission help change the course or merely lead to blame game?

Published in Dawn, The Business and Finance Weekly, June 24th, 2019