Perspective

Is Pakistan heading towards a serious debt problem?

Published Dec 16, 2016 07:53pm

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Photo courtesy Reuters
Photo courtesy Reuters

For several months, Pakistani economists have been warning that the country is heading towards a serious debt problem that will destabilise the economy. The overall debt, estimated at 12.7 trillion rupees in 2016, is considerably higher than the 9.5 trillion rupees in 2013. External debt, at 73 billion dollars, has also increased substantially, compared to 61 billion dollars in 2013.

There is nothing wrong with debt in itself. Private businesses borrow happily, as long as the rate of return on the debt-financed investment is higher than the cost of borrowing. Similarly, countries should borrow if their Gross Domestic Product (GDP) growth is faster than the rate at which debt is serviced (interest plus principle payments).

However, governments can shift the bad consequences associated with debt to the private sector or to the next generation. ‘Feel good’ projects, that translate into votes, but do not help the economy, do this.

Good economists, therefore, look for early warning signs.

One sign is the size of the total debt relative to the economy (total debt to GDP ratio). If this ratio rises fast, the government will either increase taxes or borrow huge amounts from banks — thus raising interest rates.

The other warning sign concerns the external debt. The cost of external debt is incurred in foreign currency, so that the appropriate ratio to focus on is the cost of external debt service to exports. A rapid increase in this ratio depletes foreign reserves, triggers devaluation and increases the cost of debt.

Using Ministry of Finance data, the World Bank estimates the debt-to-GDP ratio to be at 67.4 per cent, considerably higher than the 60 per cent limit. Interest payments will thus continue to eat into the budget, squeezing much needed infrastructure and social sector investments.

The State Bank of Pakistan estimates that external debt service-to-exports ratio at 20 per cent for 2016, which is better than the 22.5 per cent last year. The worry, however, is that exports are stagnant, even declining (27.4 billion dollars in 2016, compared to 31.5 billion dollars in 2013), which means that our ability to service future external debt liabilities is eroding.

An important message, therefore, is that there be no surprises (unaccounted for contingent liabilities) in large debt -financed investments (including those associated with the China-Pakistan Economic Corridor), and that there be improvement of export performance.

Otherwise, debt service will become a huge burden on the economy.


This article was originally published in the Herald's December 2016 issue. To read more subscribe to the Herald in print.


The writer an economist and a professor at Lahore University of Management Sciences.

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Comments (62) Closed



sam Dec 16, 2016 10:14pm

No interest in this topic. Says a lot.

Zak Dec 17, 2016 08:13am

On the contrary we will be cash surplus within a decade and will be able to open our own international bank like ADB and lend money to poor nations.

Daksha Dec 17, 2016 08:19am

Cpec is game changer.no need to worry

Khalid Dec 17, 2016 08:44am

What the professor has not factored in is the impact of CPEC.

M. Emad Dec 17, 2016 08:50am

Pakistan needs wise economy management. Otherwise, a debt crisis quite possible in few years time.

M. Emad Dec 17, 2016 08:54am

National Debt (% GDP, 2016): Pakistan-68%, India-63%, Bangladesh-32%.

truth Dec 17, 2016 09:02am

once CPEC is fully operational debts will ease out. there are many countries in the world with much much higher debt to GDP ratio. japan has 250 % we have in 60's .so nothing to worry

IbRahmday Dec 17, 2016 10:07am

I think Pakistan is at par with India 66% . So we are not in bad situation better then many other big economies.

Zubair Ahmad Dec 17, 2016 10:16am

So,what is the best way to get rid of this debt service ?

A Dec 17, 2016 10:51am

@M. Emad

What matters is Forex earning capacity and cash-flows to honour timely repayment.

Vivek Dec 17, 2016 11:01am

Whatever be the current figure , but it is sure that CPEC will increase the debt burden and repayment obligations.According to three prominent economists it will rise to 110 billion $ by 2020 and country would have to pay $ 22 billion annually towards it.

kranti Dec 17, 2016 11:02am

CPEC is there, don't worry...

y-fi Dec 17, 2016 11:47am

PK MOB ARE ENSURED THAT CPEC WILL HEAL EACH AND EVERYTHING ... AND OF COURSE THEY'LL DO AS THEY WERE DOING IT BEFORE AS PART OF THEIR JOB BUT AT THE END NOTHING WILL COME INTO THIS DEPRIVED NATION HAND ... THEIR SUFFERING WILL CONTINUE BECAUSE OF THEIR OWN IGNORANCE AND STUPIDITY ... FOR SUCH IDIOTS, I M PROCLAIMING THAT TAKE A PEN AND PAPER AND NOTE DOWN THAT NEXT YR WILL BE ONE OF THE WORST FOR US ...

SYED HASSAN HASEEB Dec 17, 2016 12:03pm

the problem is payments . it is easy to take loans but returning when the loans are not invested correctly is difficult. last time also NAWAZ govt when was taken over by army the country was on the line to be declared bankrupt plus the international comunity was going to declare pakistan a terrorist state . now we see what will happen . cpec money how they will return repayments will start sooner the the completion of projects

deva Dec 17, 2016 12:16pm

CPEC will be gamechanger and all problem will be solved by road

Fudayl Z. Ahmad Dec 17, 2016 12:40pm

Very nice article, but I am afraid, this is not an issue for economists, but corporate finance experts. Debt to GDP ratio does not have universal limits, and varies from country to country. Pakistan's debt needs to be seen in three categories, if not more; (1) Earning project specific loans from WB/ADB/suppliers' credit/etc.; (2) Loans to merely address the fiscal deficits given mostly by IMF; and (c) other loans that are not really earning project specific, for example for capacity building. Each category has its own dynamics.

Aysha Dec 17, 2016 12:57pm

Yes the writer is absolutely rite when saying that the debt burden is expected to increase... even CPEC would also pose a burden on this aggravating variable... as two third of the early harvest project's investment is on commercial loan basis where 7 to 8 percent interests would be applied.

shahid Dec 17, 2016 01:00pm

Its not 12.7 trillion, it's 22 trillion. Besides, bring me a neutral expert who trusts government figures. With Dar at the helm, its all about fudging figures to make accounts look good.

Ali S Dec 17, 2016 01:05pm

The author is spot on about vote-grabbing 'feel good' projects (overpriced metros and infrastructure) and shifting the debt onto salaried professions (via income taxes) and private sector. Typically shameless PML-N approach. When will people wake up to this farce? Probably not in a long time, since Pakistanis as a whole are a dumb lot.

ABID Dec 17, 2016 01:08pm

Definitely. Pakistan leaders have dug their heads in the sand. These is a very serious economic problem. The biggest problem is that the treasure and state Bank governor are incompetent and have no clue of international monetary challenges and their ultimate impact on Pakistan economy and upon its poor masses.

Economic Management score: BIG 0.

Mahmood Dec 17, 2016 02:49pm

It is called 'cooking the books' and 'creative accounting' to keep fooling the public that all is good, and we 'don't need any more IMF loans', when the truth is, refinancing, restructuring of existing debt terms, and 'aid', 'grant's and 'JVs' can be used to hide the true extent of the borrowing.

As I've written here before, essentially Pakistani economy is insolvent, under the weight of nearly 13 Trillion debt that government is carrying. The serving part alone will ensure that the debt will continue to go, especially after the Feds raised the interest rates earlier this week.

Ishaq Dar's drama is being exposed. How else will this government keep government-financed public enterprises, such as PIA, PSO, PS, Railways afloat with bloated political payroll, without continuing to borrow? Surely, none of these institutions produce any profits to sustain themselves.

Skeptic Dec 17, 2016 02:51pm

@Daksha Such ridiculous thinking, Do you even know the extent of projected revenues from CPEC? And how long it will take for a government to pay off Rs. 13 Trillion with that dribble??

Ashok Saigal Dec 17, 2016 02:57pm

CPEC could add to the problems, as many Economists have pointed out. It is blind faith to believe that it is the solution and not examine the possibility that it can substantially add to the debt burden, being a loan and not a grant.

Ashok Saigal Dec 17, 2016 03:00pm

@Daksha Please explain how CPEC will be a "game changer." I (and many others!) would sleep a lot easier if you could explain the logic that has brought you to this conclusion.

M. Malik Dec 17, 2016 03:39pm

I would like to highlight three other areas of potential troubles for Pakistan:

1 ) External debt - as correctly pointed out by the author, is incurred in foreign currency, mainly in US Dollars. The US Dollar has appreciated against all major currencies since Brexit, thus making debt servicing will require more dollars from reserves, or you will be forced to purchase dollars at higher exchange rates.

2) U.S Federal Reserve earlier this week raised the fed funds rate by 0.25 % to 0.75 %, making loans more expensive. More alarmingly, the rates are projected to continue rising to hit 3.) % by 2019. Though Pakistan's existing loans are locked at older rates. However, if present debts are not paid off by due date, then restructuring at higher rates will make the debt burden much more painful.

3) If Pakistan defaults, things will get rough and painful for average Pakistani taxpayers, Flight of capital or black marketing is likely if Rupee is devalued further,

VINOD Dec 17, 2016 05:14pm

@M. Emad Imagine where Bangladesh is today even beating India in growth. Salute to their leadership that kept religion totally out of governance.

Raju Dec 17, 2016 05:36pm

In my views overseas Pakistanis can rescue the nation from this problem by transferring their hard earning money through banks and official channels.

Mahmood Dec 17, 2016 06:01pm

@Raju - And why would overseas Pakistanis do that, if they themselves are living overseas? Why would they bring the money to Pakistan to pay tax on it, even if they keep the money in the Paksitani banks??

Vijay B. Dec 17, 2016 06:49pm

As far as the external debt is concerned, Pakistan does not have much of an industrial base manufacturing exportable goods, Most exports at the present time, are either agrarian or raw materials without any value added. Due to the unrest in the country real and perceived, you hardly have a tourism industry worth the name, which could be another foreign exchange earner. So how does Pakistan propose to pay back the interest and principal of this proposed and much touted CPEC? India has a relatively booming tourism including medical tourism (Which even many Pakistanis avail of) many industrial exports including Mahindra tractors to the US, and many or most generic drugs dispensed in the US, to mention just a few. The base for all this prowess was instituted many decades ago. Reminds me of the story of a very old man planting a mango tree knowing he will probably not live long enough to partake of the fruits of that tree but is doing it hoping that his children and grand children will.

Kamal Dec 17, 2016 09:15pm

@Zak Srilanka was thinking on those lines as well.Don't want to rub it in... just google and see what is happening there this week.

sajed syed Dec 17, 2016 09:19pm

@Zak , so true.

sajed syed Dec 17, 2016 09:19pm

@Daksha , so true.

Masood Hussain Dec 17, 2016 09:20pm

Good early warning

Raj Patel Dec 17, 2016 09:23pm

How naïve Pakistani people are. They try to find solutions in CPEC for every problems they face and there is no plan B or C if CPEC fails.

Fudayl Z. Ahmad Dec 17, 2016 09:37pm

It is good to see the interest of so many of Dawn readers from India who are analyzing CPEC in their comments. You are mostly right; it is going to be a great thing for Pakistan, in fact the whole South Asia. China getting a shorter link to Arabian Sea, Gulf, and through them to Europe and Africa is likely to bring some prosperity to scores of millions of the poor people, irrespective of their nationality.

Madhan Rajendran Dec 17, 2016 09:40pm

@Daksha good one

Syed Ahmed, canada Dec 17, 2016 09:43pm

Who are responsible for the difficult situation that Pakistan is facing to day? The same group is sooner or later shall sabotage the CPEC. Their main concern are their personal businesses outside Pakistan including India.

The_Truth Dec 17, 2016 09:46pm

@Daksha I can feel your jealousy towards CPEC. But don't you belong to same country India which says they are not against development.

Sachin Dec 17, 2016 09:47pm

Most 3rd world nations are caught between rock and hard place. There is little wiggle room. US used its superpower status but with great degree if transparency and rule of law. China has a greatpower status. Will they follow rule of law, respect to agreements and general transparency ? If not that create economic havoc in smaller poor nations under China influence.

Muhammad Dec 17, 2016 09:52pm

Interesting take on our debt binge but comparing these ratios do not apply for an unconventional economic system such as ours. Nevertheless, keeping our debt aside, the political mafia will ensure we're doomed in the next decade, economically that is.

Vivek (Indore) Dec 17, 2016 10:18pm

I don't know why most of the people in the comment section are hailing CPEC even without analyzing author's points. You need to understand that CPEC is not some wizard's wand or a tree-of-cash, of course, it would be an aid to Pakistan's economy but anyone who has analyzed the numbers knows that it is much more beneficial for the Chinese rather than Pakistan. I don't know what makes a country of 200 million people depend upon one single project- CPEC.

venkat Dec 17, 2016 10:28pm

@M. Emad India,s debt to GDP ratio is 43%

IBN E ASHFAQUE Dec 17, 2016 10:48pm

Let us borrow today......till our eyeballs........let us worry for tomorrow.....when tomorrow comes.........

True Indian Dec 17, 2016 10:50pm

@M. Emad , keep your wrong statistics to yourself. India;s Debt to GDP ratio is 23.7% not 60% as You mentioned.

True Indian Dec 17, 2016 10:53pm

@Ashok Saigal , also a large amount of CPEC Loan is commercial Loan which attracts Commercial interest which is too high. I am not sure whether CPEC is game changer for Pakistan or not but surely, it is game changer for China.

Karachiwalaa Dec 17, 2016 11:19pm

Interesting, I like to know where all this money going and I am sure it is all going into our corrupt PM and his cronies and those who thinks CPEC is the answer than you all are dumber than a stick since corruption is like cancer of the society and nothing will prosper as long as we continue to elect these thugs and killers over and over.

Vijay Dec 17, 2016 11:31pm

@Zak Are you being sarcastic or optimistic?

Dr Siddiqui Dec 18, 2016 12:14am

When the country's finances are controlled by people who do not know an iota about macro and micro economics or international financial aspects or policy implications in this age of globalization, then the situation is like a run away train where the driver is enjoying the loud debt music...and the outside observers can vividly anticipate the end result!

NadiM Dec 18, 2016 12:39am

CPEC will resolve all our issues

NK Dec 18, 2016 01:37am

@Zak ”On the contrary we will be cash surplus within a decade and will be able to open our own international bank like ADB and lend money to poor nations."

Within a decade, if as the things are going you will become bankrupt. There is still time to wake up but people like you refuse to.

adi Dec 18, 2016 02:23am

@M. Emad for ex..india 290 billion..pak 23

ZAK Dec 18, 2016 03:34am

@sajed syed , Thanks for your support, I am a business owner and very good in economics.

Raji Dec 18, 2016 04:22am

@IbRahmday Pak debt to GDP ratio is around 64 now. India much higher and was 73 in 90s. What's the big fuss?

Nadeem Dec 18, 2016 06:35am

Heading ??? its already there

Aditya Sharma Dec 18, 2016 07:18am

@Daksha in what sense and how

illawarrior Dec 18, 2016 08:29am

Heading towards?? I suggest it may already be there!

Asif A Shah Dec 18, 2016 08:53am

Thank you for your time!

Asif Dec 18, 2016 12:02pm

@Daksha cpec is a game changer.. really? Many countries rejects Chinese goods due to low quality.. if middle East countries stop buying goods from China.. then what happen?

aslam shaikh Dec 18, 2016 01:34pm

I know 2 well known Pakistanis who can give their loot and half our debt.

aslam shaikh Dec 18, 2016 02:59pm

Force politicians to directly transfer money from their foreign accounts to our loan givers. They can have the rest of money tax free.

Hopeful Dec 19, 2016 07:48am

Those who think we are not already under a mountain of debt are seriously disturbed.

Zulfi Khanzada Dec 19, 2016 01:31pm

A balanced article.

CPEC will help in wealth creation, re-distribution and creation of jobs - but its unlikely to alleviate the debt problem. Pakistan has to be careful in ensuring that domestic industry does not suffer due to influx of cheap (and in some cases subsidized) Chinese Goods.

Additionally Pakistan must try to make peace with neighbors (esp. India) - and encourage investments and job creation.