KARACHI: Pakistan is like a canary in the coal mine in a world where almost 60 countries are drowning in debt while facing significant development spending needs and monumental risks from climate change, writes Murtaza Syed, a former acting governor of the State Bank of Pakistan, in The Financial Times.

It is precisely in cases like this that debt relief — and truth-telling — are needed the most, he wrote.

“Risks to debt sustainability remain acute given very large gross financing needs and the persistent challenges in obtaining external financing, and that real interest rates are projected to become an adverse driver of debt dynamics in the coming years,” said Syed, a former IMF official.

“In Fundspeak, this was an SOS call,” he wrote. adding that yet barely a month and a half later, the Fund and the Pakistan government seem intent on walking back this candour and kicking the can down the road.

According to the IMF, for each of the next five years, Pakistan owes the world an average of $19 billion in principal repayments, or more than half of its export revenues. It will also need at least $6bn every year to finance even minimal current account deficits, bringing total external financing needs to at least $25bn a year between now and 2029. Pakistan has foreign exchange reserves of less than $9.5bn.

“That’s not all. For each of the next five years, the government will need to pay an average of 6.5 per cent of GDP in interest on the debt it already owes to residents and foreigners,” he wrote. Pakistan’s total tax take is barely 10 per cent of GDP.

“The consequences of this “extend and pretend” gamble will probably be tragic. It will impose unbearable austerity on a population already laid low by stagnant per capita income over the past decade, a historic cost of living crisis and an endemic political dysfunction,” wrote Mr Syed.

“As witnessed in Kenya last month, it could spark a major social rebellion in the world’s fifth-largest country,” the former State Bank official warned.

The $7bn that the IMF will lend is less than the amount that Pakistan needs to repay the Fund over the next four years — “a classic case of ever-greening and a worrying sign of a brewing Ponzi scheme”, he wrote.

Nothing left for social spending

As a result of this heavy interest burden, the government has no resources left for social spending, which languishes at the bottom of the world.

This is terrible as social spending is critical to upgrading skills and boosting the quality of jobs, exports and foreign investment in the economy, Murtaza Syed wrote.

In fact, Pakistan’s government spends almost three times more on interest than on education — the second worst ratio in the developing world after Sri Lanka.

Similarly, it spends almost six times more on interest than it does on health, behind only Yemen, Angola and Egypt. The government spends twice as much on interest as on investment, behind only Angola and Lebanon.

Partly as a result, Pakistan invests just 12 per cent of GDP, two-and-a-half times less than what is generally considered as necessary for sustained growth.

Worryingly, these problems are here to stay. Even if the country’s revenues were to increase miraculously by three per cent of GDP over the next three years — as assumed in the forthcoming Fund programme — interest would still consume around half of government revenue.

“All of this demonstrates how Pakistan’s debts are unsustainable,” he wrote.

Published in Dawn, July 24th, 2024