Pakistan and Greece

The catalyst behind a very recent article, since full credits are required for punctilious journalism, is a piece authored by Anil Kashyap of the University Of Chicago Booth School Of Business on the Greece crisis, courtesy @zerohedge on Twitter. The particular primer is in the form of 18 questions and answers on how and why Greece got to where it is today, and behooves an introspective comparison with Pakistan's situation; after all is it not prescient to learn from other people's mistakes compared with a Panglossian outlook of the domestic economy?
Perhaps the brevity of the allotted space for this column, even if the Editor is magnanimous, in any case will restrict a ratiocination of all the 18 questions, and hence cutting of corners to fit in arguments may be condoned. The first question obviously, no rocket science there, related to the causes behind Greece getting in to all this trouble in the first place. For the record, right off CNN, Greece today needs a bailout package of USD 96 billion, astounding! Perhaps by the time this article gets published, the situation might be more pellucid, but this comparison, nonetheless is expected to hold. As regards the causes, the concise and precise answer given was, again two plus two, Greece spending more than it was collecting in tax revenues, and even masking the on ground situation. What is rather strange and endlessly perplexing, and not tackled by Kashyap in the article, is European Union's procrastination while Greece was indulging in this alleged profligate partying?
A cursory review of budgets and actual results for the past few years will explicitly establish that Pakistan is also spending far more than its tax collection, a fact also easily verifiable from the extremely popular ratio, fiscal deficit as a percentage of GDP. However, what needs to be realised is that even at the magical 5%, which might even be a mean achievement by far, the deficit in absolute amount is in excess of Rs 1 trillion; and observe carefully, this is an "illion" preceded by a "Tr" not a "B"! In fact a whooping 1000 billions.
The next similarity is infinitely frightening, Greece borrowed to cover the shortfalls and its debt burden was steadily rising; and this is exactly what Pakistan seems to be doing. Have a look: at the end of financial Year 2008, 61 years after independence, Pakistan's total debt and liabilities stood at Rs 6.69 trillion of which external debt was Rs 3.15 trillion. At the end of March 2015, in less than 7 years, Pakistan's total debt and liabilities now stand at Rs 19.29 trillion of which external debt is Rs 6.38 trillion. For the record, these numbers are from the State Bank of Pakistan's website. And if market sources are to be believed the government is currently in the market to borrow another trillion in this quarter.
The analysis of this obsessive and voracious appetite of democracy to borrow, although easily explicable since easy money is the foundation of a democracy, is ignored for the moment. But clearly, whatever the reason, the nation has been on a borrowing and spending spree, much beyond its means to repay. Restricting borrowing to a maximum of 60% of GDP is a thing of the past and to be honest the basis of that limit itself is debatable. A generic, preconceived borrowing limit for underdeveloped nations can deviate considerably for particular situations, depending on how and for what the borrowing is utilised and the paying capacity of the specific country. But, let's move on.
The second question pertains to Greece having been bailed out once in 2010 and the third question tackles the mystery of why did that particular rescue fail. Apparently, according to the author, the bailout was led by the usual suspect, the International Monetary Fund (IMF), which concluded that, if Greece undertook drastic reforms it could close its deficits and begin growing so that over time the debt would be manageable. The bailout money, the fresh lending, was used to repay the previous debt to avoid a default; by the way, what may come as a surprise for most is that defaulting is nothing new for Greece, they have defaulted 4 times since 1800 AD. And now the cherry on the cake, IMF's analysis itself was later shown to be deeply flawed, the Greeks did actually cut the deficits substantially, but many of the reforms that were supposed to support growth did not occur and the economy contracted substantially!
Surely, all this must be sounding eerily familiar, right out of a horror movie. The bailout for Pakistan is also being orchestrated by IMF and the fresh borrowing was used to pay off current debt obligations; evidenced by the simple fact that the country's overall debt continues to increase. One of the key conditions of IMF's programme for Pakistan is also a reduction in fiscal deficit, which to the credit of this government, is being religiously pursued. As of today, while it might even be conceded that the signs are encouraging, whether or not the government's focus on infrastructure, Keynesian style, will kick start economic growth, remains to be seen. Except that provision of cheap electricity continues to be the biggest hurdle in this particular equation.
Skipping the fourth question, since it is rather conspiratorial, the fifth question points out that Greece was bailed out again in 2012 when in late 2010, it was already apparent that their debt burden might prove to be unsustainable. Apparently the IMF lent additional money with conditions to sell some assets to retire some of the debt, steps to make tax collection more efficient, and to undertake reforms to encourage business expansions.
To digress a bit, reforms to begin growing or to encourage business expansions are rather ambiguous statements since there is apparently no easy answer on exactly how. If achieving growth was a simple formula, the world might never face a recession.
At this stage, not even at the half way mark, the comparison is bloodcurdling. Apparently, in the case of Pakistan, all that the IMF learnt from the Greek experience is that it merged the two bailouts; which means Pakistan has 2 years less! Again the government is making all efforts to sell assets, but unfortunately the debt burden continues to grow even after a bunch of very successful privatisation's. In addition the government is making serious efforts to increase tax collections and appears to be extremely focused on the reform agenda, but at the end of the day, the Greeks tried the IMF formula as well, and guess where they are today!
As envisaged at the beginning, out of space to continue beyond question 5; perhaps in part II. Albeit, a clarification before a hurried conclusion. The objective of this comparison was definitely not idle critique; there is enough of that in political circles. Neither is the intent to in any manner suggest that Pakistan is a Greece in the making, there are numerous dissimilarities between the two countries as well, demographic, geographic and economic. However it is always prudent to be conscious of the curves and slopes when driving on the edge of a cliff; the margin for error is always zero.
On the other hand and rather interestingly, since 1800 to July 2014, roughly 173 nations have defaulted on their sovereign debt, including the likes of, Argentina, Germany, Spain, Russia, Brazil, Turkey and Greece. So what's the big deal!
(The writer is a chartered accountant based in Islamabad)