Less reliance on foreign funds suggested as ‘debt bomb’ looms

DAVOSAs developing countries face the threat of a ticking ‘debt bomb’, experts have suggested reducing reliance on foreign-funded mega projects and running primary budget surpluses to stop further accumulation of debt. In a session on the ‘Debt Time Bomb’ held on the second day of annual World Economic Forum meetings, the panellists highlighted risks of growing global debt, estimated at $250 trillion, to the economic growth rates. Eric Cantor, Managing Director of Moelis and Company, USA and former house majority leader, Jin Keyu, professor of economics at the London School of Economics and Mithuli Ncube, Finance Minister of Zimbabwe, addressed the
session. The US would face a trillion-dollar budget deficit this year, said Cantor.The debt-to-gross domestic product (GDP) ratio increased to 72.5% in the last fiscal year ended June 2018, which was far higher than the safe levels for developing countries like Pakistan. Government’s estimates show that in the next four years, over 45% of its budget would be consumed in debt servicing.The economics professor said China had rolled out the Belt and Road Initiative (BRI), which was potentially a good thing, but “of course the risks associated with the accumulation of debt and uncertain returns on infrastructure projects are something that China and some other countries need to consider”. The China-Pakistan Economic Corridor (CPEC) is part of the BRI, under which China has committed investment of $50 billion in Pakistan in the long term.Foreign exchange: SBP reserves drop to critical level of $8.4bPakistan has estimated that against inflows of $26.5 billion by 2023, the country will return $40 billion to the Chinese government and its financial institutions in shape of debt repayment and return on investment. She said everybody was afraid of China’s economic situation and China was afraid of America. “China is slowing down and there is no doubt about that,” said the professor, adding the country was slowing down because the government in the last two years made efforts to deleverage the economy.Jul-Nov 2018: Pakistan receives only $1.7b in foreign loansA few years ago, people believed that China could be a potential ticking bomb, but the Chinese government, through a variety of measures, stabilised the economy, Keyu remarked. Mthuli Ncube, Finance Minister of Zimbabwe and former vice president of African Development Bank, said debts had already reached unsustainable levels in the developing countries. The developing countries must stop borrowing in foreign currency to finance the infrastructure projects, he said. Such projects could either be shifted to the private sector or may be completed under the build-operate-transfer (BOT) mode, suggested Ncube.

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