Dealing with debt and liberating the economy
ECONOMISTS insist that ‘debt is central to the functioning of a modern economy’, however, for countries like Pakistan, which is the world’s fourth-largest debtor of the IMF alone, this statement is a cliché. Last year, the IMF assisted us partially, to absorb the shocks of spill-overs from the war in Ukraine and devastating floods. This year too, the economy is dependent on a similar bail out tranche, to avoid a much dreaded ‘sovereign default’, that is rife on media. But many countries have faced this situation before (Russia, Venezuela, Mexico, Greece, Lebanon, Argentina (thrice) and Ukraine and Ecuador (twice each), Sri Lanka) and survived.
Essentially, ‘default’ is a breach of contract with creditors, that includes a missed repayment for 30 plus days; refusing to honour the contract by questioning the legitimacy of obligations, or interim moratorium on repayment — (Mexico, 1982), before debt restructuring. By this definition, we have not defaulted so far, but if we do, we will be unable to access credit markets again and borrowing will be much more expensive, for many years to come. Besides, multiple financiers will have recourse to international courts which can force us to pay up, or pursue claims to our assets abroad. But this may be easier said than done, as this recourse could take years to materialize like it did during 2002 Argentinean default.
Alternatively, creditors may provide us an opportunity to “cure” the default in due course, like the Venezuelan bonds holders did, which preferred to get paid later, even after the government defaulted. Often, creditors and bond holders rarely initiate immediate legal proceedings in such cases, as they have to muster a vote of at least 25% to do so and also because of the time, risks and costs involved. Later, if the debtor makes-up the payment, holders of 50% of the creditors could reverse the process. Likewise, due to tendency of concessional treatment of such lenders (non-IMF or WB) to distressed sovereign debtors, rating agencies generally do not consider a failure to pay debt owed to another government a default.
Official bilateral creditors also restructure frequently—pre- or post-default, formally and informally—either through new financing or restructuring of existing debt. Finally, debt restructuring requests usually do not constitute an end to, or violation of contracts, regardless of creditor losses, even if the government fails to make a scheduled interest payment and the grace period (usually 30-60 days) expires. All this should be a matter of some consolation for us and our leaders rather than the apparent panic that could exacerbate the financial scarcity and uncertainty in the current environment.
To deal with its present predicaments, Pakistan must adopt a menu approach with the following, ten, indispensable measures. First; we must broaden the base of our direct taxation net which includes only 4.2 million tax payers, out of a population of over 232 million. This is an equitable way of raising revenue, balancing income distribution, narrowing inequality gaps and correcting the tilt of our tax structure towards the regressive indirect taxes, where-in 60 per cent of people are charged a fixed tax (on mobile networks, GST etc.) Second; the government must adhere strictly to the existing legislated commitment of keeping public debt limit below 60% of GDP. Third; all loans must be utilized wisely and honestly, on non-political projects, that generate revenue, both for development and debt servicing: Fourth; with debt-to-GDP ratio in a danger zone of nearly 70 per cent, and bulk of the revenue earmarked for interest payments, this year, the government cannot afford any development projects or revenue transfers to provinces which are part of the unsustainable NFC Award.
This Award formula that imperilled the economy, through the 18th Amendment, must therefore be reversed or rationalized on grounds of the current financial emergency in the country. The Centre’s share of financial resources must at least be 60 per cent, instead of the present 42.5 per cent, to cater for debt servicing, defence, counter terrorism, FATA merger, disaster management, sudden spikes in global oil prices and foreign wars, like in Ukraine. Raising additional provincial taxes, surrendering their share willingly by the provinces in the NFC Award, for some time, and particularly enhancing the ridiculously low agriculture tax rates will be a compulsion, to rescue the federation and the country. Fifth; all state owned assets abroad and most lost making state enterprises, must be sold or privatized in a transparent manner, for debt repayment. Sixth; all subsidies must be withdrawn for 3 years, while the poor and needy helped through the Bait Ul Maal, rather than other government funds.
Seventh; drivers of debt distress like mismanagement, bad financial and macroeconomic policymaking or lavish spending must be addressed. Eighth; long maturity and low interest loans from friendly countries (China, Saudi Arabia, UAE) must be picked, to gradually reduce overdependence on the IMF. Ninth; concomitantly, the government should ask for re-profiling (long tenure extension) of its foreign bilateral and commercial creditors (non-IMF), for 3-5 years, instead of short term restructuring, involving small tenure or some interest rate decrease. As explained earlier, some of this may be possible through indulgence with bilateral lenders at the highest levels, to create conditions for restructuring of IMF loans and extension of maturities on our International Bonds.
Finally, as debt is the accumulated sum of previous years outstanding deficits, most past government are answerable for its unrestrained rise. However, voting wisely in future, for candidates and political parties, who declare debt retirement as an essential part of their manifestoes, can liberate us from the shackles of external influences. That done, the adoption of the preferred, Islamic, Riba free economy, will become promising. Together, these initiatives will certainly improve debt sustainability and help the country come out of its financial crisis. Their bold and speedy implementation and support, across the political divide, is also a national imperative to contain social unrest, political instability and other dangers to our security from within.
—The writer is former President of NDU Islamabad.
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