The debt dilemma

It was a privilege to have been invited to, and having attended, albeit left early, the National Debt Conference organised by Business Recorder in collaboration with PRIME in the last week of October, 2014. The collection of speakers was indeed impressive and the arrangements were impeccable; Kudos.
Debt, especially the foreign national kind, is a critical worriment for Pakistan economically and consequently politically, and conferences which aim to create awareness and thereby encourage corrective strategies need to be promoted. Accordingly, it would have been patriotic if the other daily newspapers and the electronic media had given the conference requisite coverage rather than completely ignoring it, probably from a competitor's perspective. Perhaps someday in the near future Pakistan's media will eventually mature.
Notwithstanding, while the length and breadth of the data and analysis presented at the conference was impressive, with due appreciation to the Business Recorder's team for having made available all of the presentations, there are certain aspects which, going forward, perhaps need further deliberations. It is for this reason, coupled with a more humble objective of keeping the debate alive, that a mere layman's confabulations are presented hereinafter.
Learning from history is imperative for any debt management strategy for Pakistan. As a critical first step, the causes behind getting into the debt trap need to be analyzed and understood. While the data presented in the conference extensively covered the quantum of debt, what was quite evidently missing was the utilisation of this enormous amount of debt, which currently is hovering around Pak Rupees 18 trillion. That is a lot of money, and except for a few mega infrastructure projects to tangibly show for this mountain of debt, it is a mystery what successive governments did with it. While Kaiser Bengali did indeed provide a breakdown between project and program loans for a period covering the past five decades, and a bit, that was just the tips of the ice berg.
The key unanswered question, even in the case of project loans, is whether or not such projects were efficiently undertaken and eventually had a positive NPV. One wonders whether the government has a complete schedule of national debt, at least for national foreign debt, outlining the lender, the amount of money borrowed, the amount of principal and interest paid to date, the outstanding balance, the ageing of the debt, the nature and conditions of the debt, and the utilisation of debt. For those who are wondering, a schedule is the first step in debt accountability; after all somewhere in history a lot of mistakes were obviously made in debt management and no one knows why and "who did it"!
Corruption is indeed a huge problem, but so might be negligence.
This debt schedule will also identify who Pakistan is borrowing from and why in the world are these lenders still lending to Pakistan. Rationally, lenders should quickly shy away from a client who has a history of mismanaging debt, in fact more to the point; banks in general do not lend money for current expenditure. So the real mystery is, why have these international financial institutions been lending to Pakistan, and in fact continue to lend heavily even today when the entire body of local and foreign experts is of the view that the country is trapped in debt; the proof of the debt trap, according to conventional wisdom, is borrowing more to pay previous obligations. Sure IMF program was requested to assist the current government in managing debt, although Ashfaque Hasan Khan had a differential view, but why are private institutions still lending heavily to Pakistan when the current state of the economy is international public knowledge.
The above brings to mind a recent article on ISDS, investor-state dispute settlement, in the Economist, and by the way Pakistan featured in that article. In brief this is a condition in the bilateral trade agreements, which can expose the signatories to significant penal costs when laws enacted purportedly marginalize foreign investors. Perhaps it would be useful to investigate how and where exactly is Pakistan exposed in relation to ISDS and going forward can it have a material negative impact on the debt profile that the nation already struggles to manage.
Another aspect, which needed elaboration is the difference between foreign and domestic debt. Foreign national debts carry a different risk and cost profile and ultimately need to be managed with kid gloves. Foreign national debt has a direct link with international trade and if at all the former is to be managed, then as a precondition, the later will need to be monitored. If the trade deficit continues to rise year on year, Pakistan will have to borrow more foreign debt, or at least won't be able to extinguish existing debt, and there is every likelihood that the associated rupee depreciation makes it more expensive YoY.
In this regard, Ali Khizar's presentation had a very ominous last slide, and aptly splashed with red. He attempted to model the net impact of the much-debated USD 52 billion debt from China. According to his findings, after 2018, the related projects will turn extensive cash outflows in dollar terms and such deficit over the next decade could exceed USD 100 billion. If that is true, the question is whether or not workers remittance will continue to balance the outflow or will Pakistan have to borrow more; more pertinently will international lenders continue to keep the taps flowing?
Irrespective of the doomsday scenario sketched above, there can be no denying the simple fact that foreign national debt can only be repaid through dollars earned through a trade surplus. Increasing and continuing trade deficits will only complicate matters further and will continue to force the government in other less desirable options. Somehow, while there were a lot of suggestion for managing debt transactions in the market, and in fact strategies to contract even further debt, the take-away was broadly silent on repayment of foreign debt and the obvious linkage with international trade and the related vagaries.
Although, at one point in the conference, there was a view that the current economic system has actually not worked in the best interest of Pakistan, but then the debate stopped short of actually laying blame and suggesting alternatives.
All in all, to conclude, it was a wonderful experience and one would like Business Recorder to continue with such excellent efforts to bring the real issues to the fore front of public debate. Well done the organisers.
(The writer is a chartered accountant based in Islamabad)