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Wednesday, November 1, 2017

Problem of public debt and its solution

Nawaz Sharif’s Govt. over his four year tenure added 35 billion $ to Pakistan’s debt pile. The maximum number of loans – amounting to $10.1 billion, the highest taken out in any single year during the country’s history – was obtained during the last year of Nawaz’s government.

Starting from July 2013, with every passing year, the external debt pile kept growing due to the government’s inability to implement policies that could have ensured sufficient non-debt creating inflows.

PML(N) Government earlier diluted Fiscal Responsibility And Debt Limitation Act 2005. PPP Govt. was not different either. The external debt, from 2007 to 2012, grew by 20billion $. The lack of necessary oversight led successive Governments to be irresponsible regarding receiving loans and the loan terms. It seems that Governments have no incentive to be concerned about the repayments of these loans. According to World Bank, average grace period, since 2007, of new external debt commitment is 6.6 years. Pakistan has political cycle of 5 years; less than average grace period, therefore elected Governments don’t have sufficient incentive to worry about the repayment of these debts.  

Moreover, another unnoticed fact is that democracy is inherently consumption oriented. Political parties have to face pressure from masses to meet their basic needs. This pressure is severe in countries having huge poverty. Political parties in order to woo these poor masses try to spend as much public money as possible. Resultantly Benazir income support programme, sasti roti scheme and other such schemes are initiated.

Such schemes are funded by using tax money or borrowed money but don’t generate any returns. Successive Governments have to borrow in order to pay these loans. Hence, the country is struck in debt trap.

Moreover, Democratic Governments are elected to rule for a limited time period before next elections. Their short term tenure forces them to borrow long-term funds, which are costly as compared to short-term loans. On the investment side these Government spend on projects which have short gestation periods. These short-run projects generate low returns. Resultantly the debt burden began to accumulate and multiply. The precarious position on exchange rate front further aggravate the matter as the weakening of domestic currency increases the external debt stock in domestic currency. 

To pay back Govt. is left with two option either tax masses, which are its voters, or borrow more to return the previous loans. The elected Government go for the second option.

The solution to the above issue is having strong checks and balances on elected Government. Some of the checks and balances are mentioned below.
1.    Central bank’s freedom should be ensured.
2.    Civil Servants should be given constitutional guarantee (regarding job security, tenure security).
3.    Chancellor for public works should be appointed who would check Govt. from initiating useless public works.
4.    The most important step which may need constitutional amendment is election of deputy prime minister, who would be responsible for economics and finance, from senate.

The above mentioned steps though difficult but can be implemented.  A step by step approach can be adopted. Furthermore the date from which such legislation would be implementable should have necessary time lag so, that Government doesn’t become adversary of its own decision.

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