By Shahid Mehmood
My last article, which was also about debt. I realised from the responses that there are a lot of misconceptions about debt, its dynamics in Pakistanís context and other issues related to it. Above all is the million-dollar question: does Pakistanís debt represent a danger? This article intends to answer some of these vexing queries.
Letís start by clarifying one of the foremost misconceptions: we take on debt because domestic resources are not enough to meet our requirements. This line has been endlessly perpetuated over time by substandard textbooks and policymakers. First of all, we must define what Ďscarceí means in the Pakistani context? Our tax revenues, as we are told, are around Rs3 trillion. Does this sound like a scarce resource? As I will argue later, it is not scarcity, but the unproductive use of this money that gives rise to this scarcity.
Pakistan does not necessarily take on debt because resources are scarce. And, as the finance minister has accepted many times, we are taking on loans mostly to pay off former loans.
Is Pakistanís debt Ďproblemí a problem? Is taking on debt always bad? Other countries also take on debt without all the fuss that we see in Pakistan. So, whatís all the fuss about?
To make sense of all this, let us start with two examples: Amazon and Snapchat. Jeff Bezos, the founder of Amazon, left his job and started the company in 1994 by utilising his parentsí savings. In 1995, he took on a further $8 million in debt. Today, Amazonís valuation stands at a staggering $300 billion and the company has raked in more than $61 billion in annual revenues. Amazon has made more than 44 acquisitions. The net worth of its founder is an estimated $57 billion.
Snapchat, like Amazon, is an internet sensation which started out as a product design at the end of 2011. Evan Spiegel, who was 20 years old at the time, came up with this idea while he was still studying. He later took on a debt. In 2016, Snapchatís income was $367 million and its market valuation currently stands above $20 billion. It has 1,859 employees and countless investors from across the world want to either invest in it or buy the app.
From 1947 to 2007, Pakistanís total debt stock stood at Rs7 trillion. Did we have any asset worth even a billion dollars? No. Within a decade, our debt has soared by another Rs16 trillion to touch a record Rs23 trillion Ė notice that this Ďrecordí is never mentioned. Of this stratospheric increase within a decade, what asset have we managed to create that is worth even a billion dollars? None.
Once we begin to understand the difference between the two scenarios, weíll understand why debt can be good or bad. Between 2007 and 2017, Rs16 trillion of debt could add nothing substantial to the state of Pakistanís inventory. Its behemoths like the Pakistan Steel Mills Ė with thousands of employees and billions in accumulated debt (all state-backed) Ė stand as a vivid testament of the failure of our policymakers and their imagination. Despite their best efforts, not a single buyer is willing to buy it.
Between 2012 and 2016, an idea led to Snapchat, which managed to accumulate a valuation of $20 billion within four years. Between 1994 and 2007, Pakistanís total debt stock jumped from Rs2 trillion to Rs7 trillion. The addition of an extra Rs5 trillion couldnít make much of a difference in terms of added value creation. Within this time, Jeff Bezos used his parentsí savings and a paltry amount of $8 million to create something that now exceeds $300 billion in valuation.
The difference is that we see the same infatuation with infrastructure and accumulating debt for either paying off earlier debts Ė using it for current, non-development expenditures and expending it on building things that have little or no return (in fact, they become a liability after some time). On the other side, we see an investment in ideas that have managed to create spectacular returns and positive implications for the economy and society.
The difference is that in countries like the US, governments at every level incentivise taking on debt so that individuals can invest in an idea and start something of their own. One of the most valuable lessons that governments have learned over time is that if they take on debt themselves, then ultimately most of it will become unproductive in the long run. They do take on debt, as in the aftermath of the Great Recession. But it was taken primarily to avert further catastrophes and help the private sector remain viable and stable. And when governments do take on debt, they usually have a good plan on returning debt.
Pakistanís debt is a problem. It is a problem because there is little or no investment in ideas that could create value. It is a problem because a majority of debt, except for a small amount, is taken on by the government, which will tax its citizens even more to pay it back. Debt is a problem because it is poorly negotiated, not necessarily needed. State institutions lack the capacity to utilise it properly and productively and spend it disproportionately to meet unproductive expenditures. It is usually spent on projects that later turn out to be a liability.
Debt is accumulated mostly by the government, which often ends up misusing it. Debt is often contracted vaguely and dubiously, without any clear roadmap for repayments. It is also devoid of any calculation of expected and marginal returns of earlier and intended investments and is seldom used on things that could usher future growth and value Ė human capital is the most prominent example.
And yet, we are taking on an additional $51 billion under CPEC. How exactly will we pay it off? Around $34 billion of this money is being spent on energy projects Ė which is quiet perplexing since Pakistanís present installed capacity is enough to meet its demands. Power outages in Pakistan are basically a governance issue rather than an issue of the lack of power-generating capacity. The total installed capacity is rarely utilised because it adds to the circular debt. And yet, we are on our way to add even more power plants. This shows that we take on debt for purposes which really donít merit taking it on in the first place?
Taking on debt is not always a necessarily bad thing. In fact, todayís environment Ė characterised by negative real interest rates Ė provides a wonderful opportunity to accumulate debt. As Dr Nadeemul Haque and others keep reminding us, it is not debt that is the problem, but debt management and its utilisation which are the real concerns.