Dept Trap

30 may 2012
It’s a lesson the Mughals learned the hard way: if you cannot raise the revenues to pay for your government, your country won’t be yours to govern for very long.

If you look at the raw numbers alone, the story can be quite alarming. Pakistan’s stock of public debt has doubled since this government came into power, but that number can be misleading. When thinking about debt it’s better to look at the proportions, rather than the raw quantities.

“The debt to GDP ratio is not changing,” says Hafiz Pasha, who is a leading adviser to the government on revenue affairs, and is widely known as a fiscal hawk.

“In fact, over the past decade, the debt to GDP ratio has actually fallen very sharply, from about 80 per cent at the end of the 1990s to just over 60 per cent now.”

That proportion means that Pakistan is in fact much better off, in terms of its indebtedness, than many other countries that are living through a sovereign debt crisis. In Greece, for instance, the same ratio stands at 164 per cent, for Japan it’s at 229 per cent, for Singapore 100 per cent and so on.

But even proportions are not that straightforward. How much debt is appropriate for any given country to be carrying?

The answer to that question depends on the ability of the country in question to pay the costs of servicing the debt. And that is where Pakistan has a problem – in debt servicing payments.

“More than 60 per cent of net revenue receipts of the federal government go towards debt servicing,” says Dr Pasha, “which leaves hardly anything behind for other expenditures like health and education”.

For the other high income countries that are in the midst of a sovereign debt crisis these days, the problem is different from the one we’re facing here, and therefore their situation is not comparable. Those countries have documented economies, and they can raise additional tax revenue quickly by broadening their tax base or cutting their bloated entitlement expenditures.