Copyright brecorder
EDITORIAL: Prime Minister Shehbaz Sharif while addressing the ninth future investment conference titled ‘Is humanity heading in the right direction?’ argued that Pakistan cannot continue to rely on loans as borrowing weakens the economy. This statement does not reflect an economic principle though it is applicable to Pakistan. When countries, developed and developing alike, borrow from the commercial market and/or from bilaterals/multilaterals the efficacy of a loan largely depends on what the administration decides to spend it on. If the loan is used to: (i) meet the physical and social infrastructure investment needs then the loan can jumpstart productivity that, in turn, would generate higher tax revenue that would enable repayment of interest and the principal as and when due; the European Union’s recent pledge to US President Trump that it would invest 800 billion euros from the capital market to develop its nascent defence industry is being criticised not only for political reasons but also due to the projected exorbitant borrowing costs that would not be backed by higher private sector productivity that has been severely undermined due to banning the purchase of cheap Russian gas energy; or (ii) to enable the debtor to meet its unsustainable debt to Gross Domestic Product (GDP) ratio to forestall a looming threat of default. The actual borrowing costs are determined by the rating given by the three international rating agencies — Moody’s, Fitch and Standard and Poor’s — which includes the capacity of a country to borrow at reasonable rates irrespective of its actual macroeconomic indicators. Greece, for example, with a debt-to-GDP ratio of 250 percent in 2020 had access to funds from the European Union, which were not available to Pakistan with a debt-to-GDP ratio of nearly 87 percent. That the prime minister’s statement does apply to Pakistan cannot be denied, given that without external borrowing the country cannot meet the interest and principal as and when due on previous loans (including loans procured through issuance of Eurobonds, Ijara Sukuk). Domestic loans from the commercial banking sector as well as issuance of Pakistan Investment Bonds are being utilised to meet the budget deficit, mainly the product of the failure of successive governments, including the incumbent, to reduce current expenditure — a policy that not only crowds out private sector borrowing (which government after government declares is the engine of growth) but also increases liquidity that is highly inflationary. The obvious solution is to reduce current expenditure, not by reducing the discount rate, as was budgeted this year, but through reducing the current expenditure by at least 2 trillion rupees in the short term to narrow the deficit. Pakistan’s major lenders are the three friendly countries — China, Saudi Arabia and the UAE — who have historically supported our development efforts. Recent major shifts in the geopolitics of our region may be exploited to set the framework for a bail-out package on the same pattern as in Greece. In this context, it is relevant to note that the three friendly countries insist on Pakistan being on an active International Monetary Fund (IMF) programme to rollover their debt for another year, which indicates their lack of confidence in our economic managers’ capacity to turn the economy around. One would hope that the government proactively engages with them, like the Prime Minister did with the Managing Director of the IMF in 2023 after his finance minister violated the terms of the then ongoing programme leading to the suspension of the ninth review. One way would be to cite the IMF design flaws to the three major lenders and to convince them of the government’s unshakeable resolve to reforms by providing alternate out-of-the-box in-house time-bound measures. Copyright Business Recorder, 2025
