Debt Payment Bigger Issue for Pakistan Than Defense Expenditure

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ISLAMABAD, Oct 19, 2018: Pakistan’s new government led by cricketer-turned-politician Imran Khan by, which took office in August, has inherited a series of urgent economic challenges. These include plunging foreign reserves, a balance of payments crisis, and water and energy shortages.

The question is, how serious are these economic challenges right now? What is to be made of the government’s initial moves? What still needs to be done? And what are the political challenges that Islamabad will face as it tries to move forward on the economic front?

Last week, RFE/RL and the Wilson Center focused on these questions and more in Washington DC, featuring Dawn business editor Khurram Hussain and Wilson Center senior associate for South Asia Michael Kugelman, and moderated by RFE/RL’s Media manager, Muhammad Tahir.

Responding to the question, how bad the economic challenges is?, Khurram Hussain, Business Editor of Dawn said that the situation is not so bad that people should be worried, however, there are some growing and very steep challenges. “The situation is nowhere near as bad as we saw in 2008, and certainly not as bad as it was in 2013.”

But it’s moving in that direction, Hussain said, adding that at the heart of the problem are two issues: Current account deficit and the other is the fiscal deficit. Both deficits have compounded over the last 10 years.

Pakistan faces a balance of payment crisis and is holding talks with friendly countries as well as with the International Monetary Fund (IMF) over a potential bailout — to service maturing debt, Pakistan has to borrow more.

Listen to the Podcast:

Participating in the “Pakistan Policy” 2-day symposium on Wednesday and Thursday (watch video below), the country’s renowned economist Dr Ishrat Hussain –PM Khan’s Adviser on Institutional Reforms and Austerity stated that the defense expenditure of the country is not much of an issue.

Dr. Hussain said the major challenge is the payment of debt that amounts to US$12 billion (Rs1,500 billion).

Pakistan’s defense budget for the fiscal year July 2018-June 2019 is approx US$8.5 billion.

“Defense expenditure is not the big elephant anymore, it is less than three percent of GDP and it is only 18pc of our public expenditure,” Hussain said while addressing the Pakistan Policy Symposium on Thursday that was organized by the US research institute Wilson Center.

“Rs1,500 billion out of Rs4,500 billion (that) we collect, goes on debt servicing cost that is the big elephant,” he said. The problem can be solved only through reducing the borrowings, both external and internal, he asserted.

Speaking about the power shortage crisis in Pakistan, Hussain revealed that the problem was under control, however, the issues was due to some distribution companies.

“The problem is in the distribution companies. Out of the nine companies, four of them are causing 75pc of the losses, and all the deficit that is being accumulated in circular debt is originating from these four companies.”

The Prime Minister Imran Khan’s Adviser also highlighted the measures to overcome this problem. “They have to find specific solutions: either to privatize those, to give them to management contracts, or bring about new managers,” he suggested.

Some participants said even as Pakistan grapples with the balance of payments crisis, and has approached the IMF, the new civilian government very much has an opportunity to adapt the much needed structural reforms to consecutively transform the economy for the better.

According to Dr. Hussain, one of the greatest risks of the new government’s reform plan is that the next government will undo it all. He called for a broad political consensus around the reform plan.

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