The Mysterious World of Debt and Interest: Pakistan's Economic Reality
In recent years, Pakistan has faced significant economic challenges, with a considerable portion of public discourse attributing these issues to the debt accumulated by previous governments. However, a closer examination of the debt and interest landscape reveals several intriguing and often misunderstood aspects. This article aims to shed light on these mysteries, providing a clearer understanding of the economic realities faced by Pakistan.
The First Mystery: Debt is Not the Culprit
Politicians and common citizens often believe that debt is the root cause of Pakistan's economic problems. This misconception leads to a flawed understanding of the budget and financial management. In reality, the relationship between the total debt and the budget is much weaker than it is perceived to be. A review of the federal budget reveals that there is no allocation for debt repayment, only for the payment of interest. For the fiscal year 2022-23, 3950 billion rupees were allocated for interest payments, constituting 44 percent of the total budget. This allocation is entirely voluntary and not a compulsion of the government.
Government's Own Choice: The Interest Rate on Loans
The amount of interest to be paid is determined by a government institution, the State Bank of Pakistan (SBP), and it is not dictated by external demands. If the government chooses to, it can significantly reduce the interest amount by setting a lower policy rate, thereby freeing up substantial funds for other important projects. For instance, if the policy rate was lowered to 15 percent, instead of 22 percent, Pakistan could save over 5500 billion rupees in a single year. This saving could then be redirected towards projects like the Diamir Bhasha Dam.
Domestic Debt: A Specific Problem for Pakistan
Another surprising revelation is that domestic debt is a unique problem for Pakistan compared to other nations. Countries like Japan and the United States have much higher debt-to-GDP ratios (around 250% and 150% respectively), yet they are not as concerned about their debt burden. Pakistan's total debt stands at between 70% and 80% of GDP, while the US uses a much higher interest rate, leading to a significantly lower interest payment (5.5% policy rate in the US, resulting in 55 billion on a 1000 billion loan). Meanwhile, in Pakistan, a 1000 billion loan would incur a 220 billion interest payment.
High Interest Rates: A Cost of Inflation Control
High interest rates in Pakistan are not solely a financial burden but also a strategic measure to combat inflation. The inflation rate is one of the key factors influencing the policy rate, thereby impacting interest payments. In the last three years, the SBP's most critical concern has been inflation. The 7300 billion rupees paid in interest annually can thus be seen as the cost of controlling inflation. This gives a different angle to the discussion on public debt and interest payments, as these funds are not merely borrowed but paid as a control measure against inflation.
State Bank of Pakistan's Role and Relevance
The State Bank of Pakistan (SBP) has a constitutional mandate to research the state of the economy. However, the SBP appears to have a blind spot when it comes to its monetary policy. There are no documents on the SBP website that provide evidence of the effectiveness of monetary policy. In fact, the 7300 billion rupees paid each year as interest is not audited for its purposefulness, making it a significant concern of the government and the public.
Economists and the Misunderstanding of Borrowing Mechanisms
Despite the critical role of borrowing mechanisms in the global economy, most economists and students of monetary policy remain unaware of the contemporary practices. Many economic courses still focus on outdated models and policies, such as inflation targeting, which were abandoned decades ago. The modern frameworks used by central banks are not adequately covered in academic programs, leaving a gap in the understanding of current economic practices.
The complexity of the debt and interest payment system, the political autonomy in determining interest rates, and the unique challenges of domestic debt highlight the need for a deeper and more nuanced analysis. These revelations underscore the importance of reevaluating the current economic policies and practices in Pakistan, with the aim of optimizing resources and addressing the nation's economic challenges more effectively.