In a recent turn of events, International Monetary Fund (IMF) decided to release the final tranche of $102 million of the promised $6.6 billion loan.  Pakistan, which is South Asia’s second largest economy, raised this loan in year 2013 under a three-year economic bailout programme. While this is nothing short of an achievement for an ailing economy like Pakistan, the real question is how the government plans to pay the loan off and where the money will come from. I am keeping my fingers crossed and hoping the loan will not eventually be rolled over, leaving the public in lurch.

Voicing satisfaction with the country’s progress on structural reforms, IMF contended that the loan will help the economy grow. This growth is expected to reach 5 percent in FY2016/17 as a result of buoyant activity in construction sector and growth in private sector credit. If IMF is right, the growth itself will pay for the debt. And if everything goes well, we will have a restructured economy, improved business climate, and healthy competition. But if the prevalent fears come true and the economy does not perform as expected, how will the debt be repaid? While no one knows for sure, below is a list of possibilities.

First is printing more money. In the absence of promised growth, the government might want to pay the debt by issuing new money. If the government decides to conjure up new notes out of thin air, you can expect to see a surge in inflation. More money does not equal more wealth. With more money sloshing around and no corresponding economic activity, prices will skyrocket. Increased supply of currency will also devalue Pak Rupee in foreign exchange market.

Second is taxes. If the government decides to pay off the loan by levying more taxes, economy will suffer. Higher taxes hurt economic activity. They have a knock-on effect on business ventures. Higher the taxes, lower the disposable income. Lower the disposable income, lesser the spending. Lesser the spending, lower the production and fewer the jobs. With higher taxes eating into profits, businesses with low margins can disappear altogether. Many businesses will flee to jurisdictions that offer better terms, taking jobs with them. Higher taxes will also prevent newer, innovative start-ups from entering the market.

When IMF wrote to the Pakistani government, it clearly hinted at the need for taking steps to widen the tax bracket. There is evidence that the government dished $40 billion in additional taxes to make up for the shortfall.  According to IMF advisor, Harald Finger, these taxes were introduced as a measure to bridge fiscal deficit.

Third is foreign reserves. Pakistan has foreign reserves that stand at almost $21 billion. Repayment in foreign currency can prove to be a significant blow to these reserves. The repayment will deplete a huge amount of the country’s foreign exchange holdings.

Finance Minister Ishaq Dar says that the approval of the final tranche by IMF is indicative of Pakistan’s commitment towards structural reforms that will turn the ailing economy around. He asserts that the country had to meet a slew of quantitative performance criteria and many structural benchmarks to win the loan. Echoing these sentiments, Prime Minister Nawaz Sharif said that following the release of the final $102 million tranche, the country will now be able to stand on its own feet. Addressing the legislative members of his party after the conclusion of the programme, he said he wants to say goodbye to IMF now.

However, with a loan of this magnitude looming over nation’s head, goodbyes are a long way off.

According to a Bloomberg report, with the addition of $6.2 billion loan, the country has racked up a total of $120 billion in liabilities.

Going forward, the only way to pay off the loan in an honorable way to raise more revenue by strengthening the industry. Educating the masses and increasing their employability should follow suit. The resulting rise in commercial activity coupled with a highly skilled labor will greatly reduce dependency on heavy borrowings.

With elections around the corner, the fate of this country will soon be handed over to a new government. The nation will then be at the mercy of the new government that might well just pay for the maturing loan by taking out another loan, essentially perpetuating the loan.

Before we know it, payback time will be upon us. Believe it or not, all we are doing is taking reckless decisions and leaving our future generations with the task of cleaning up the mess. 

Mounting debts are bound to make life a nightmare for the generations to come. Is this the future we want to bequeath into the hands of our children? Is this the legacy we want to leave?