Talk of $34 billion proposed Chinese investment with government claiming it to be a Foreign Direct Investment (FDI) while others describing it as a loan is a good fodder for TV shows. Interestingly, a large number of politicians in Pakistan too are taking a lot of interest in this subject that requires more clarity. The fact is that the truth needs to be in black and white.
Let me elaborate a bit. An FDI is an investment by an investor in a foreign country. As per OECD classification, it is required by an investor to own 10 percent or above of the voting stock by acquiring shares through a merger or a joint venture. In present times the most popular foreign investments are made in real estate, engineering and technology, information technology, tourism, telecommunications, energy, infrastructure and may be a few others.
Whereas a loan is basically an act of lending that can be divided into three categories: Personal, Commercial and International or sovereign lending. But here we are discussing International borrowings or sovereign lending. I would like to emphasise that unless sovereign loan is denominated in USD, funding in foreign currency has a currency and credit risk for the international lender that are normally transacted through banks and financial institutions. This is always an extremely costly affair for the borrower and a lucrative proposition for the lending financial institution.
The reality is that Pakistan is too dependent on foreign money and this addiction has reached such an extent that it cannot survive without domestic and foreign borrowing. Sadly, if we look at our history, it is because of a lack of planning, vision, commitment and determination due to extreme political interference in monetary and fiscal affairs. Induction of favourites and non-professionals characterises our policymaking processes.
From a monetary perspective, in real sense there is a severe rupee and foreign currency liquidity crunch, which has been artificially managed through money printing for the last 10 years. Using monetary tools is SBP's prerogative, but that has certain limitations, as excessive/frequent central bank intervention shows its desperation. The central bank also frequently manages rupee-dollar parity through open market operations, which is a monetary tool. Regular/frequent buy/sell USD dollar swaps against rupee not only do Foreign Exchange Reserves push higher, they also overcome cash rupee shortages. This is a practice fraught with serious monetary consequences.
It is a sin that currency in circulation, which is comfortably hovering above Rs 2.2 trillion, has never been highlighted at any forum. There may be a lot of drumbeating about better management of non-performing loans (NPLs), but no one has ever questioned a sharp fall in commercial banks advance/deposit ratio soaring by nearly 20 percent to 53 percent in the last 10 years, which confirms a slowdown in real economic activity in the country. Did anyone ever think that if banks were able to maintain their advance/ratio pace, not only would this have created a new business opening, it would also have created jobs and have generated much needed revenue? That is why Tax-to-GDP has fallen to around 9 percent from 13 percent.
Is there anyone really concerned that investments in government securities have reached almost Rs 5.7 trillion. SBP or the IMF does highlight this anomaly but only when energy prices create an upward inflation trend; but has never pointed to the hike in real estate prices, which is one of the major causes. High currency-in-circulation leading to inflation: revenue collection target is missed year after year. Exports have not risen despite Rupee depreciation resulting in inflation and higher external debt servicing.
FDI in retail sector is not the answer to our problems. Metro buses and high speed trains are not a necessity. The immediate need is jobs, affordable food and housing. Hence, it is the agro side of the economy that requires urgent revamping due to supply side constraints and low productivity. There is a massive dearth of storage/silos. Processing and distribution chain require a lot of improvement to meet the international standard. Therefore, agro reform is a prerequisite.
We also have to understand the importance of capital, technology and available raw labour due to poor education standards. Human development is the key to transforming present centralised system into market-based economy. If so-called Chinese investment materialises it could push the country's external debt towards a 3-figure mark in billions of dollars. It is already hovering around USD 66 billion. So far our average cost of foreign borrowing is slightly above 5.5 percent. Pakistan's Credit Default Swap Rate (CDS), (considered as insurance against non-payment) suggests that the Cost of USD 34 billion funding will be far above the present average cost and when it gets translated into Rupee lending, with one-year Kibor @ 10.48 percent and a 3-year offer @ 12.81 and with latest 10-year Pakistan Investment Bond cut off yield @ 13.45 percent. Local currency lending should range between 15-20 percent depending upon lending period/terms.
Presently, Government's domestic debt and liability figure already stands at Rs 11.216 trillion and annual interest payment is roughly around Rs 1.4 trillion. Should we not enter in any such deal it could lead to a sharp collapse of economy as Pakistan will have to pay interest of nearly USD 5 billion annually against USD 100 billion debt. This does not include the principal.