AT a recording last year for a PTV programme on the state of the economy, Gen Hamid Gul, a fellow co- panellist, argued for the repudiation of Pakistan’s external debt, as these were “odious” loans. In response to my previous column, a reader also suggested the same as the “silver bullet” that will save Pakistan’s economy from collapse.

The good general and the dear reader are echoing a fairly popular sentiment that has reared its head at the end of each debt-accumulation binge Pakistan has undertaken after yet another round of mismanaging the economy. When the time comes to repay, talk of repudiating our obligations and liabilities becomes the vogue. (Somewhat surprisingly, this gains traction in conservative circles where one would imagine running away from an obligation is considered even more so an act of dishonour.)

So instead of devoting this week’s column to the wretched tax amnesty scheme — which will sink Pakistan’s tax effort once and for all, unless by some stroke of luck or divine intervention it is stopped by parliament — I will lay out my position on Pakistan’s “odious” foreign debt.

Firstly, it is a common misconception that all of Pakistan’s debt has been poured down the drain, or used to line pockets. Almost the entire infrastructure of Pakistan — from Tarbela and Mangla dams, the irrigation network and waterworks, the national highways network (including the motorways), electricity and gas transmission and distribution infrastructure, to the ports and airports — has been funded by loans from the Bretton Woods Institutions (BWIs) and Pakistan’s bilateral creditors.

At the same time, there has been an egregiously poor use of many loans too — in building garrison golf courses or stables for polo horses in the presidency, purchasing 7-series BMWs for the military top brass or planes for chief ministers, etc. And corruption has been a large factor too in reducing the efficacy of the loans and making repayment ever more onerous.

However, the fundamental point is that the recourse to borrowing — whether domestic or external — on such a scale and with such persistence, largely represents a massive failure on our part to manage the economy in a responsible manner. Pakistan is a global laggard not just in collecting tax revenue from its own citizens, but also in terms of expanding its exports (or displacing a portion of its imports).

Hence, while Bangladesh has managed to increase its exports four-fold since 2000 (from $6 billion to $24bn), and Vietnam over five-fold (from $14bn to over $72bn), Pakistan’s exports have risen from $9bn to $24bn in the same period. India’s exports have grown from $42bn to $305bn since 2000.

On the import front, better management of our indigenous resources, be it the river system Pakistan is endowed with or its fertile soil and natural eco-systems, can significantly reduce dependence on imports of energy and food commodities.

Combined, imports under these two heads amounted to $20.3bn in 2011-12 (nearly half of Pakistan’s total imports for the year).

But it is the apathy towards taxing Pakistan’s elites, combined with unchecked expenditure that mostly favours the same cohort, which is the biggest cause of our public debt build-up — and the fairly frequent crises the country has experienced on the debt front.

As I have written before, a rough calculation suggests that if we had managed to raise our tax-GDP ratio to around 13 per cent in 2005, instead of the nine per cent it had sunk to, and sustained this level, Pakistan’s public debt could have been lower by around 15 per cent of GDP today. In monetary terms, this would translate into a public debt stock that would be at least Rs3.1 trillion lower, if not more under favourable conditions. In terms of annual saving on interest payments, it would translate into roughly Rs300bn per annum — or 27 per cent of the current budgeted debt servicing, and nearly 10 per cent of the entire budgeted outlay.

Pakistan needs to buckle down and adopt a ‘back-to-basics’ approach. Self-serving gimmicks like tax amnesty schemes or waiver of capital gains on equities are not going to release it from the clutches of a debt trap. On the contrary, these policies will only intensify the pressure.

The bottom-line is that Pakistan is not a poor ‘Third World’ country that has been forced to accept “odious” loans by the BWIs or other institutional creditors. Its power elites have consciously sought and taken these loans — and partly used them well, and to a not insignificant extent used them poorly too.

The corruption and mismanagement of our own people is the root cause of our frequent debt crises. It is morally wrong to make the savers and taxpayers of other countries pay for our mistakes and “sins”. Their governments and their institutions have lent the money to countries like Pakistan in good faith — it is an ‘amanat’ and should be treated as such. (It is inconceivable that there is any tenet of Islam or the Sunnah of the Prophet [PBUH] that supports a repudiation of any obligation, even a non-contractual one).

Running away from our debt obligations is irresponsible, unethical, and in my book, immoral. We should grow up and start acting like a responsible and mature nation. We should also learn a lesson from the pain we have inflicted upon ourselves — and start managing our affairs better.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Updated Dec 28, 2012 03:04am

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Comments (15) (Closed)


S.A. Hyder, Ph.D.
Dec 29, 2012 08:31pm
Excellent article. The writer is not only smart in his assessment of the use and misuse of the foreign loans but also brave enough to criticize HAMID GUL, one of the many crooks in power in their times. No country has ever forced Pakistan at gun point to accept aid. It is entirely the recipient's choice. But how could the country refuse aids. It has always lived beyond its means. This could only be possible with the help of huge amount of "free" money coming in. The government-high ups flourished on aid and the army on aid plus "India phobia".
Nazar Sandhu
Dec 28, 2012 09:53am
"(It is inconceivable that there is any tenet of Islam or the Sunnah of the Prophet [PBUH] that supports a repudiation of any obligation, even a non-contractual one)." Yes there is. In his last sermon Muhammad cancelled all debts. between Muslims.
Altaf Hussain, Mumbai
Dec 28, 2012 01:33pm
Good article. At the time of independence both Pakistan and India started from scratch. The same people in both countries, yet why is it that Pakistan is not able to bring their rich in the tax net is inconceivable. Why can't they throw their tax dragnet far and wide is something difficult to understand from this side of the border. For every financial activity in India you need to submit tax returns of the last three years to your financing body, how is it that the rich in Pakistan are escaping the net?
G M Patra
Dec 28, 2012 02:42pm
Good Article. It shows how corrupt and and immoral of a man HAMID GUL is. It is shame that he was head of ISI and a very high level man in Pakistan. No wonder Pakistan is the way it is.
G M Patra
Dec 28, 2012 02:48pm
May be I missed where he talks about taxing the poor more. Main thrust was to collect from the elite, what they already owe and never pay, and spend less on pockets, BMW's, personal airplanes, etc. That is good governess was being pushed.
Nadir
Dec 28, 2012 11:28pm
Totally agree with what you say about Hamid Gul.
Islmail
Dec 28, 2012 12:13pm
I tend to partly disagree. Raising taxes on poor will definitely help ease our debt but at what cost. Raising taxes will encourage food prices to go up which would eventually mean more crime rate. We need to focus on industrialization if we want to get out of debt,
HNJ
Dec 28, 2012 09:21pm
A good read Sakib - the proverbial "right" is also "proverbial" hypocrite - anywhere, everywhere !
Different View
Dec 28, 2012 06:12pm
Sorry, I missed to comment about the actual topic being discussed. I think the author, Mr Sherani, points out correct solution with a practical approach. Both India and Pakistan need to increase the tax net. Pakistan should get a few pointers from India on that. But it will be difficult for Pakistan, mostly because of the religious beliefs.
Different View
Dec 28, 2012 06:08pm
I think India and Pakistan both need to quit their mindset of demonizing the west, i.e. developed world and their values. Rather than looking at them with a suspicion, we both need to have an open mind to study their processes and systems. That doesn't mean emulate them, just like that. Like the Chinese do. They thoroughly understand the western systems and then implement the most suitable ones in their country. The advantage India has over Pakistan, is the ruling power in India isn't obsessed with the religion as much. I think the religion should be personal choice.
meekal a ahmed
Dec 28, 2012 08:49am
excellent Sakib. Will send you an e-mail.
raw is war
Dec 28, 2012 06:00am
Most of the times, Pakistan is behind the western agencies with begging bowls. Once the loan is given- these terms crop up - odious, repudiation etc. Which brings us to the core values of Pakistanis- cheat where-ever you can and when ever you can.
Anup
Dec 28, 2012 06:15am
"It is morally wrong to make the savers and taxpayers of other countries pay for our mistakes and ?sins?".....Not just morally wrong sir, its a CRIME.
Fida Ahmed Advocate
Dec 28, 2012 11:49am
When a nation fails to take decisions that determine as important a question as its very survival, then the raw is war (and war is raw) types of non-sense start talking non-sense. But let me admit that I feel ashamed for whatever has happened to us due to our inability to respond to the challenges that could be turned into opportunities. We still can do it if the people refuse to further tolerate incompetent,irresponsible and corrupt rulers. But the problem is that the people have been pupils of the corrupt, so called leaders instead of punishing them for their mass crimes.
bharat
Dec 28, 2012 04:22pm
Its sad that a country with enough talent like Pakistan has become like this. I would not blame only the politicians. The necessary manpower had to be trained to do all this. Education was the biggest challenge which was never achieved. The few talented educated people left the nation. Secondly the whole environment is going from bad to worse. So,in an environment of insecurity ,investors do not wish to invest at all. Pakistan needs to create the right environment for investment and provide safety for its own countrymen first and educate more people . Sadly, i never see this happening there as the media and politicians keep on showing the wrong picture to the country's people and have no interest in improving the lives of the populace