Pakistan Is In Debt Trap – Burning Issues

Table of Contents

The News

The COVID-19 pandemic and its after-effects have worsened Pakistan’s external debt problem.
The nature of the problem is one typical of a country trapped in debt.
- While the burden of legacy debt is large, keeping the economy going requires more borrowing. If that trajectory is followed than foreign exchange required to meet interest and amortisation payments on past debt is large and rising. So more and more additional borrowing will be required.
- The result is a runaway increase in indebtedness until the tap runs dry and a crisis ensues. That has not yet happened, and Pakistan appears to be still afloat.

At the end of Financial Year 2019-20 (July-June).
- Pakistan’s total public debt stood at 87 per cent of the gross domestic product (GDP).
- Its external debts and liabilities stood at 45 per cent of the GDP.

Rising external debt clearly reflects
- Government’s failure to mobilise adequate tax and non-tax revenues
- It can also result from a combination of accumulated foreign currency debt service commitments
- Deficits on the trade account of the balance of payments
- Over stretched public borrowing in domestic currency at home

USA:
- Special treatment by the U.S. has been given to Pakistan.
- Pakistan has been rewarded repeatedly with new loans. Since 1988, the country has been under 13 IMF exceptional financing arrangements.
- London School of Economics paper titled “Pakistan, the United States and the IMF: Great game or a curious case of Dutch Disease without the oil”, highlights that Pakistan was repeatedly supported by new doses of multilateral credit in addition to large volumes of bilateral flows from USA, at “exceptionally favourable conditionality and flexibility in giving waivers”.
- But now things have changed..!!

China:
- China has always been quick to come to Pakistan’s aid.
- During the pandemic, China provided Pakistan with a grant assistance of $4 million, besides material aid in the form of face masks, ventilators and other equipment.
- Pakistan’s close relationship with neighbouring China and its important role in the latter’s Belt and Road Initiative (BRI) has seen $33 billion invested till now.

Pakistan’s debt problem is not solely the result of the government’s fiscal profligacy…!!
- It also has to do with a supply side debt push that results from the competing security ambitions of the world’s leading present-day rivals, the U.S. and China.