Pakistan’s debt sustainability projections criticized for unrealistic optimism

August 30, 2024 (MLN): Pakistan’s assessment of debt sustainability is based on an unrealistic projection of a sharp decline in debt over the next five years, relying on an assumed increase in economic growth despite ongoing fiscal austerity and elevated interest rates, according to Murtaza Syed, a former acting governor.

In an article published for The Economist, the former acting governor of the Central Bank of Pakistan in 2022 cautioned that Pakistan’s policymakers and they were flirting with disaster by pretending that the country’s public debt was sustainable.

He emphasized in his writing that for the unrealistic debt reduction to actually happen in Pakistan, the country would need to double its growth rate and run primary surpluses —a feat Pakistan has only ever achieved during the American-led “war on terror”, fuelled by foreign grants—indefinitely. 

The IMF’s DSA framework itself acknowledges that such an adjustment is a Hail Mary pass, with only a one-in-seven chance of success based on international experience, and that the fund’s record of forecasting Pakistan’s public debt is spectacularly poor. 

If only these red lights in its DSAs were taken more seriously in the IMF’s assessment of debt sustainability. It is also surprising that the IMF’s excellent research on debt issues has little bearing on the design of country programmes. 

He further highlighted that last year, a refreshing chapter in IMF’s World Economic Outlook demonstrated the futility of fiscal consolidation and the primacy of restructuring in reducing debt overhangs

Disappointingly, this insight is almost completely ignored in the work of the IMF in the country today. 

The fund has also failed to absorb and apply innovative thinking in an exceptional omnibus on sovereign debt, which it released in 2020, with hands-on guidance for practitioners and economists, he added.

Later on, he emphasized that to preserve social stability and development prospects in poor countries, the broken system of debt restructuring must be fixed. 

For this, debtors must become more powerful advocates for their future generations and the international community must become more receptive to debt relief. 

To do so, it will need to rediscover its global-development orientation, which has been obfuscated by self-centered responses to the global financial crisis and covid, and by damaging geopolitical rivalries, he concluded.

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