Sunday, February 25

Debt trap: new govt urged to look for ‘creative’ solutions – Pakistan

KARACHI: Pasban Democratic Party (PDP) Chairman Altaf Shakoor has expressed the hope that the new economic team of Prime Minister Shehbaz Sharif would find some creative solutions to avoid a debt trap and take bold steps to generate internal funding so that the country “does not turn into another Sri Lanka”.

Expressing serious concern over swelling foreign loans and their devastating interest payments, Mr Shakoor warned that the huge debt burden might spell doom for the national economy.

I have pointed out that Pakistan is one of the 52 countries that are facing a severe debt crisis. The most critical problem faced by the country’s economy is repayment and servicing of external debt.

Persistent borrowing creates a spiral with more borrowing generating an impending economic crisis, he said.

Empirical evidence overwhelmingly supports the view that a large portion of government debt has a negative impact on economic growth potential, and in many cases the impact gets more pronounced as debt increases.

Mr Shakoor said the high degree of indebtedness has made Pakistan more vulnerable to economic shocks and weakened the country politically, vis-à-vis powerful external lenders. It has also greatly reduced the country’s ability to invest in education and healthcare.

He said according to projections of the International Monetary Fund (IMF), the government’s gross debt will be as high as 71.3 percent of the GDP in 2022. And the country’s GDP growth will be 4 per cent during the current fiscal year.

As per an IMF report, the inflation rate would be in double digits at 11.2 percent for the year 2022 against 8.9 percent in 2021.

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The PDP chief said this is a really worrisome situation as the outgoing government of the Pakistan Tehreek-e-Insaf (PTI) heavily burdened the country with costly loans.

Pakistan’s public debt soared by over Rs 18 trillion in the last three-and-a-half years of Imran Khan’s government, according to a statement of the central bank. This is more than the liabilities accumulated by any government in the country’s history.

He said the past governments of Pakistan Muslim League-Nawaz (PML-N) and Pakistan People’s Party (PPP) had added nearly Rs 18 trillion to the public debt in 10 years, a figure that the PTI government crossed in just three-and- a-half years.

Quoting a report, Mr Shakoor said the finance ministry has been left at the mercy of commercial banks that are taking loans from the central bank at around 9.8 percent but are giving funds to the government at 12.7 percent for up to one year.

The accumulation of debt is a direct result of the gap between expenditure and revenue, which is widening due to debt servicing obligations and defense needs. And the Federal Board of Revenue’s (FBR) failure to enhance revenue collection to a sustainable level is making matters worse.

He said the external debt of the federal government increased at an alarming pace of 90 percent to Rs 15.1 trillion in the last three-and-a-half years. “We are victims of debt-trap diplomacy. It is a trap in which a creditor country or institution extends debt to a borrowing nation partially, or solely, to increase the lender’s political leverage,” he said.

Mr Shakoor said a high level of external debt is linked to decreased economic growth but there are policy options that can help economies to keep growing. Countries often borrow from foreign lenders, that is, take on external debt to meet their expenditure needs.

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These loans are usually paid in the currency in which the loan is made. While an efficient use of debt financing can generate sustainable economic growth, high levels of external debt can be especially risky for developing countries.

He said finding workable alternatives to borrowing is the need of the hour. A significant increase in tax and aid will be needed to ensure that the country can afford the necessary investments in healthcare, education and social protection in order to end extreme poverty.

Mr Shakoor was of the opinion that the tax collection system should be improved to reduce the need for borrowing. He called for revamping of the tax collection policies of the FBR by increasing the ratio of direct taxes and tightening a noose around powerful tax evaders, mostly belonging to the powerful political class.

Copyright Business Recorder, 2022

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