What's so bad about Pakistan's foreign debt?

[Sirris]

I have very little knowledge about how the economy works. However with the arrival of the new government I have become aware of the fact that we have about $96 billion foreign debt. Which is a bad thing and the new government wants to work hard to bring the figure down.

Today I wanted to see how Pakistan's foreign debt compares to those of other countries. Wikipedia has a handy list: https://en.m.wikipedia.org/wiki/List_of_countries_by_external_debt

Now looking at the list just made more confused. It seems many of the "top countries" have higher foreign debt than Pakistan. While poor African countries like Burkina Faso are way down the list in regards to foreign debt. Another confusing thing is that Pakistan's "% of GDP" is pretty low to in comparison to countries like France, Germany and Netherlands. From the article I thought the lower the "% of GDP" number the better.

What's going on?

 

[Pakistanian]

They're not making money. Debt as alright as long as you got a steady income. Pakistan needs to drill for Oil and get rich, that's the only solution.

 

[slipcatch]

They're not making money. Debt as alright as long as you got a steady income. Pakistan needs to drill for Oil and get rich, that's the only solution.

many other countries have change their economy without drilling for oil.

 

[ElRaja]

debt is not bad, what you do with it determines its utility.

if you take a loan to start a business that generates an income that helps you pay off the loan, people will line up to lend you more money.

if you take a loan to buy yourself jewelry, fancy clothes and other luxuries, when the time comes to repay your debt you'll realise what you bought is worth a lot less than what you owe.

pakistan spent the money it borrowed on the luxury of artificially maintaining the strength of its currency to control inflation.

now that money is gone and pakistan have reduced means to repay the debt as no one is willing to forward loans again, so they will have to go to the imf who dictates what you can, and cannot spent the money it lends you on.

tl:dr debt is not bad. wasting the money you borrow, is.

 

[Pakistanian]

debt is not bad, what you do with it determines its utility.

if you take a loan to start a business that generates an income that helps you pay off the loan, people will line up to lend you more money.

if you take a loan to buy yourself jewelry, fancy clothes and other luxuries, when the time comes to repay your debt you'll realise what you bought is worth a lot less than what you owe.

pakistan spent the money it borrowed on the luxury of artificially maintaining the strength of its currency to control inflation.

now that money is gone and pakistan have reduced means to repay the debt as no one is willing to forward loans again, so they will have to go to the imf who dictates what you can, and cannot spent the money it lends you on.

tl:dr debt is not bad. wasting the money you borrow, is.

Smart investments too, you could also invest in a bad business idea.

 

[Bhaijaan]

In layman language debt is like a credit card. For as long as you are able to pay back the credit taken at the end of each month everything is good. You don't pay any interest either. The better your ability to pay back on time higher the credit you can take. So you would notice higher income group people get high value credit cards issues to them. Bank is happy to give them more money seeing their ability to return.


When you start getting late in paying back, bank will start charging you interest. The longer you take in returning their money higher the interest you will end up paying. Along with it you will also be rated down by the bank making it difficult for you to avail bigger loans from the same and other banks. Long standing debt and ability of a nation to pay back hurts them the same way unless you have a sugar daddy in US/China/Russia helping you out which is how these nations achieve greater political influence.

And what happens you don't pay your debt at all? Bank comes and makes claim on your assets. Financial institutions have their way of recovering money.

You can read about India's financial reforms in the 1990s to understand better. Great case study.

 

[Savak]

60% of the debt has gone up thanks to the democratic govts in PPP and PML-N, what do the leaders of these parties care because they don't have to pay it off, only the nation and future generations will be held responsible for paying it off

 

[ElRaja]

Smart investments too, you could also invest in a bad business idea.

no doubt, on a personal level you're right, but from a sovereign point of view you could arguably invest it in anything, education, heavy industry, micro finance, trade guarantees, export credit, infrastructure, etc, and it invariably generates a positive return since the backing of the state is usually enough to attract numerous other investors.

the economic effects of misdirected investment at state level usually manifest themselves in the long term, in the short term they are usually positively stimulative.

this is partially the reason why the current situation in Pakistan is so dire, if they had chosen literally anything, other than blowing reserves on currency manipulation, with minimal competence even, the country would have been better off.

 

[Slog]

They're not making money. Debt as alright as long as you got a steady income. Pakistan needs to drill for Oil and get rich, that's the only solution.

lol you never fail to amaze and astound me

 

[proud_pakistani]

If I say it in the simplest of terms, if a household is running and their expenses are more than their income, they will go to the banks for a loan. In case they are not able to pay back their loans their interest rate will increase and if at the end of the loan tenor they are unable to pay off their obligation either they will become bankrupt or they will re-finance. Smart people will try to re-finance their before reaching point of bankruptcy.

Pakistan has fundamentally alarming issues

1 - Pakistan does not generate enough income. We are low in manufacturing, we do not have the liberty of natural resources like oil.

2 - Cost of running Pakistan is high. A lot of money is spent towards our military which is too powerful and can not be stopped. Other issues are we are not proficient in producing basic necessities like electricity and water. Other things which government needs to run - ie its ministries, police, schools, hospitals, insfrastructure etc are all poorly managed.

3 - Interest payments due to debt are very high. Over the years Pakistan has undertaken a lot of debt. The issue with debt is it should only be taken in cases where the money is being utilised for something which is required. If you take a loan without any purpose it will be used on needless things. The major issue is when interest payments balloon you have to take other loans to pay the interest payments and eventually you get stuck in a vicious cycle.

For a country to progress the ideal scenario is Income>Expenses + Interest Payments, if this is not the case the country will continue to go into further debt. This is why Imran Khan is doing a strong austerity drive to bring down the expenses.

The IMF loan will help settle previous loans which is extremely important which will help in re-structuring Pakistans financial payments. The tenor of this loan will be a lengthy one which will help in smaller interest payments. This will give Imran Khans government some breathing space and they will within that time frame have to ensure Pakistan increases its income generating ability and lower its expenses as much as possible without having to worry about exorbitant interest payments.