Greece debt crisis – lessons for Pakistan


Can we afford a similar fate?


The crisis is known to take turns from a localised issue to a regional economic fiasco and it is far from being settled. The Greece crisis has rocked the economic world and its domain cuts across social, diplomatic and other related issues. It had a far reaching impact which needed to be measured not just on economic or social parameters, but across a range of geo political dimensions as well.

Greece’s third government in four years will have no flexibility over its new €86bn bail-out plan and could still face the prospect of a disorderly exit from the Eurozone. The Greece crisis, which may hit the headlines any time again, has not only exposed cracks within the Union, but also raises to serious questions regarding the health of world economy at large. Does the crisis have any repercussions beyond regional boundaries? Are there are any lessons for a less fragile and developed states such as Pakistan? Will our national leaders wake up to the reality that it can happen to Pakistan? Can we see the foot print of a similar crisis in our country or region?

Lesson 1:– Debt in foreign currency

Greeks locked themselves in huge debt all to be paid back in a foreign currency. The revenue stream dies down simply due to one reason or the other, the debt needed to be paid back in the foreign currency it was borrowed in. Greek witnessed a drop in tax collection and revenue, which to some was not entirely in their control. Let us examine the Pakistani perspective. As an agrarian economy Pakistan is dependent upon agriculture boom and exports dependent upon commodity prices in the region. For instance, if Indian rice is available in the international market at a lesser quote, or cotton prices are depressed and other crops do not do well due to one natural calamity or other, these will adversely impact GDP and revenue collection of the government.

Greeks locked themselves in huge debt all to be paid back in a foreign currency

The Pakistani economy is exposed to such risks from three sides, which mean that the economic impact of these risks is more than twofold. One, its income is significantly dependent upon agriculture income. A drop in agriculture income exposes its revenue stream and invariably its ability to repay its debts.

Two, Pakistan’s economic advisors regularly devalue the rupee to help textile and rice exports, which according to some are heavily dependent upon European quotas, US tariff discounts and competition from regional players like India, Bangladesh and so on. As the devalued currency supports and encourages exports from one end, on the other end, Pakistan’s foreign debt increases in Pak rupee terms. In case the tariff regimes undergo change, or currency is not devalued to protect other interests, exports and government’s ability to collect revenue will suffer. Each time the currency is devalued, the foreign debt swells.

Third, government revenue deficits and development projects are constantly plugged through foreign loans, which mean that the foreign loans will invariably grow to dangerous levels some day. This theory is reaching a reality threshold as the rate of government foreign borrowing in last five years has doubled the volume of total foreign debt. The rate of borrowing or in layman terms the hunger for foreign debt to plug government expenditures and finance projects has increased many times.

Lesson 2:- Multilateral donors and their conditionalities

There is a growing demand for foreign loans and almost all come with harsh conditionalities from the donors. The donor is justified in fixing its terms because it wants to ensure that the loan is paid back. IMF for one offers short term loans and that too at exorbitant rates. This is accepted whole heartedly by governments, according to some at the expense of economic growth and amplified inflation. The cost of living and cost of doing business is severely affected by short term steps. There will be a point in time when the level of debt and its size will negatively impact the economy. If that happens the revenue stream of the government will also be reduced and government will suffer just as Greece and the EU have suffered.

Lesson 3:- Borrowing excessively and without realising there is an end

Needless to say there is a limit to how much should be borrowed. Will Pakistan reach its exhaustive levels and is it closing in fast? Unfortunately, the tremors are already being felt as the unprecedented increase in the total debt in the last three years has been cause for serious concern. If such a situation arises, the impact will be felt in the debt servicing charges which will eat into the budget, increasing the deficit, inflating prices and slowing GDP growth. The government will raise indirect taxes, which will adversely impact common businesses and ordinary people. Will the impact be severe enough to halt the economy or jam the cycle? Well Greek banks refused to honour cheques and pay people for their basic needs.

Needless to say there is a limit to how much should be borrowed

Lesson 4:- Ailing economy and taxing the people

Greek tax revenue dropped to record levels, which meant that they were unable to service debt payments. A huge debate has arisen in EU-Greek circles about whether economic growth slowed down and affected people’s ability to pay taxes or whether it was government’s inability to collect taxes from the people. Let us super-impose the Greek situation on the Pakistani context. If Pakistan was to face such a situation, a drop in tax revenues will have a severe impact on government of Pakistan’s ability to repay its debts. Yes, Pakistan is as vulnerable as Greeks or perhaps even more. Likewise, if foreign banks refuse to accept Pakistani letters of credits or financial commitments, very simply we will run out of oil in a matter of two weeks. If that happens, the entire transport and air system will come to halt from Khyber to Karachi. If our currency loses its value businesses may stop operating or work and pay their liabilities including taxes. Our aircrafts will be refused take off or land at international airports.

Of course there are some who may think these are extreme situations and Pakistan can never fall to such an extent, but interestingly, neither did Greeks think that they could face such a crisis while being members of the EU. Pakistan is neither Europe and nor do our neighbours love us enough to bail us out.

Where is it heading?

Greece faced its second general election in just nine months on September 20 after prime minister Alexis Tsipras capitulated to the country’s lenders and lost majority backing from his Syriza party. The crisis has not only shaken the foundations of the European Union pact, but also affected global economies. In Pakistan’s case, our politics, our campaign against extreme forces, our defense forces and economy at large will not sustain such shock; our neighbours will not be as generous and forth coming either. Can we still afford to head that way?