KARACHI: The alternating phases of economic growth and subsequent decline — commonly known as the boom-and-bust cycle — are getting more frequent by the year.

Analysts expect that the signing of the latest $3 billion Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) for nine months will be followed by a longer-term Extended Fund Facility (EFF) for a bigger amount — an indication that the gap between a growth spurt and a subsequent blow-up has gone down from the usual three years to less than a year now.

“It may go further down to six months,” said economic expert Ammar H. Khan while taking part in a policy roundtable titled “Sovereign default: averted or delayed?” organised on Thursday by Tabadlab, an advisory services firm and think tank based in Islamabad.

Mr Khan said Pakistan is in a debt trap as it’s forced to borrow funds to retire the existing loans. “Interest expenses, which are the markup that we pay on both local and international debts, make up 77 per cent of the total taxes we collect every year,” he said.

One consequence of paying more than three-fourths of the total tax collection in debt servicing is that the government is left with little fiscal room to spend on development and social services.

Moreover, the increase in expenditures outpaced revenue growth in the last 10 years by a factor of 1.3, he said. In simpler words, an increase of every 10pc in tax revenue meant a rise of 25-30pc in expenditures.

The ever-widening gap between revenue and spending has led to a fiscal imbalance that’s chronic and systemic. No wonder the share of interest expenses in total taxes has gone up from 50pc four years ago to more than three-quarters now.

It doesn’t help that the latest fiscal blow-up has coincided with a rise in interest rates in the global debt market. Dollar-denominated loans at near-zero rates were “fairly easy to get” until the recent past. But now the cheapest loans attract a rate of 5pc — a global swing that’s sent Islamabad’s fiscal train off the rails.

The markup on foreign debt has increased by more than four times. “Going forward, as interest rates on both local and foreign debt increase, the share of interest expenses in total taxes is going to rise to 85-90pc,” he warned.

Speaking on the occasion, InfraZamin Pakistan CEO Maheen Rahman said the share of debt in GDP is less than 100pc, a manageable level by global standards. However, the real cause of alarm is the economy’s inability to generate tax revenue. Increasing the tax base and making the country attractive for foreign investment can help address pressures arising out of the debt burden, she said.

As for the calls for debt restructuring and relief, she pointed out that almost half of the foreign loans are already long-term and low-priced. The problem is with Chinese commercial loans that have a short tenor and carry a relatively high rate of interest. But demanding any debt restructuring or relief should be preceded by a concerted effort at home to fix the tax system, she said.

Business journalist Khurram Husain and academic Dr Aliya Khan also spoke on the occasion.

Published in Dawn, July 7th, 2023