OBSESSED as we are with non-issues like Malala’s jeans or Maryam’s tweets, two significant news items went unnoticed. One report said that some $16 billion worth of loans remain unutilised, the other that Pakistan is paying considerable interest on loans it has contracted but not used. In other words, Pakistan borrowed an amount which is just lying in an account but is paying interest on it.

Puzzled? Well, you are not alone.

First, a short primer. From 1947 to 2007, Pakistan’s total accumulated debt was around Rs7 trillion. By June 2013, it doubled to Rs14tr. Under the PML-N’s economic (mis) management, the amount has rocketed to Rs25tr (and rising). These figures and some accompanying facts can help dispel a few myths.

Default is not as scary as it is made out to be.

The biggest myth, which can be safely put to rest, is that loans helps us cover the financing gap for economic growth. If that were so, this astronomical increase of Rs18tr in a decade should have been accompanied by spectacular growth. But the average growth has hardly been three per cent. Evidently, in our case, taking loans has little to do with economic growth.

This myth is accompanied by a reality. Our federal and provincial public institutions hardly utilise even half of their budgets. And a substantial chunk of spending takes place in the last months of the fiscal year, just to strike a respectable pose regarding resource utilisation and to avoid returning the allotted funds.

On top of this the government’s ever-larger footprint on economic affairs means more obligations that, in turn, incur more expenditure. The bigger footprint usually is in the form of loss-making, unproductive policies, as seen in public-sector enterprises such as Steel Mills and PIA. These incur losses of over Rs500 billion per year. Saddled with ever-increasing debt, these PSEs keep getting ‘bailouts’ and subsidies. The expenditure on them helps create a fiscal void that must be filled by taking more loans.

If we are so unproductive at utilising debt, why do we incur so much? Aside from the usual suspects (repaying older debts, etc.), there are others like the fascination for shoring up reserves with borrowings just to show off and claim ‘records’. Consider the debt contracted through issuing Eurobonds a few years ago. Experts felt there was little need to do so when reserves were at comfortable levels.

In case of trouble, the drill is well known. Obliging creditors like the IMF come to our rescue from yet another (largely) self-inflicted crisis. End result? Almost half our tax revenue goes into the pockets of a tiny minority ie the creditors (domestic and foreign). It’s a travesty that the nation is paying a heavy price for something that’s not improving their lives while mortgaging their future.

In essence, Pakistan is caught in a deadly debt trap which has put every citizen of this country under an insurmountable debt burden.

It is a circle, albeit a vicious one which is bound to collapse onto itself. At some point, even creditors will put up their hands and say ‘sorry’.

This is where the option of default, accompanied by reforms at every level, is the preferable route. Next time, when push comes to shove and there is little inclination for reform, it would be better to default on payments rather than run to the creditors. Spend the saved resources on raising living standards and improving governance, which pays more returns in the long run, instead of resorting to pointless borrowing.

Default is not as scary as it is made out to be. It does not mean the end of a country. If that were so, Spain would have ceased to exist a long time ago because it has defaulted 15 times on its debt. Default simply means non-payment of money on schedule. It’s a preferable option because there are examples of nations (as in South America) emerging stronger after default. Of course, some couldn’t realise the intended benefits but that’s because they continued to operate without reforms.

The simple fact is that we can’t go on like this. It does nothing to improve our lives or propel economic growth. Today, our debt is Rs25tr; it’ll be Rs50tr at some future date given the circumstances. Beyond a certain point, there wouldn’t be anything left to squeeze out of taxpayers.

Default, then, would occur anyway. Moreover, such situations give rise to such socio-economic strains that can put a whole country at risk.

But let me emphasise that reforms are essential in case this option is to be pursued. What good would it be if the additional resources only beget more obligations that in turn beget more expenditure? We’d be back to square one in that case. As the saying goes, either shape up or ship out.

The writer is an economist.
shahid.mohmand@gmail.com
Twitter:@ShahidMohmand79

Published in Dawn, November 26th, 2017