For a highly indebted economy such as Pakistan’s, there exists a narrow range of three options to manage its debt portfolio

THIS is apropos of the news item ‘SBP keeps interest rate unchanged’ (Feb 9), reporting 25.60 per cent increase in domestic debt and simultaneously assuring that ‘the economy has sufficient reserves to meet its debt obligations’.

While many have reason to disagree with such a contention, it is important to consider debt beyond the simple equation of ‘reserve-based paying capacity’. For a highly indebted economy such as Pakistan’s, there exists a narrow range of three options to manage its debt portfolio: a) raising the rate of growth above the rate of interest, b) defaulting on a large proportion of the public debt and going into bankruptcy, c) wiping out of debts via currency depreciation and inflation.

Making a choice out of these involves far-reaching impact on the lives of the people and growth prospects of the state. Policymakers in Pakistan have invariably chosen the third option, employing ‘inflation’ as a ‘political phenomenon’ and, thereby, creating forms of debt that, by design, are being shifted to the next generation of the poor and lower middle class.

The ‘cognitive elite’ that, according to Charles Murray, is congregated in a few ‘super zip codes’ has benefited exponentially, while the poor has incurred inter-generational liabilities.

The ability of monopolistic elite to exploit the system in that way is characteristic of a ‘stationary state’. Adam Smith in ‘The Wealth of Nations’ explained that in such a state ‘(the poor) are liable under the pretence of justice to be pillaged and plundered at any time … the oppression of the poor must establish the monopoly of the rich who, engrossing the whole trade to themselves, will be able to make large profits.’

There were a series of attempts in 1692, 1694, 1696, 1704, 1708, and 1715 to avert such exploitation in England. From 1689, the parliament embarked on wide-range reforms, controlling and improving taxation, auditing royal expenditures, and effectively prohibiting debt default.

As a result, writes Nail Ferguson, ‘the debt was successfully reduced with a combination of sustained growth and primary budget surplus. There was no default, no inflation.’

Douglass C. North, Nobel laureate, argues ‘the real significance of the glorious revolution lay in the credibility that it gave the English state as a sovereign borrower’.

Pakistan’s incoming parliament needs a constitutional solution to the debt problem. A solution with wide-range reforms that reduce the discretion and ensure that the elite’s profligacy is not at the expense of the poor.




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