Consumptive loans

LAHORE: It is not clear that we are borrowing to finance our consumptive expenditure. Consumptive expenditure refers to the spending of money on goods and services that are consumed or used up in the short-term, rather than invested or saved.

It is impossible for households to borrow indefinitely for consumption because a day comes in a short time when they are not only denied loans but are pressed for return of those loans. Ultimately, the debit-ridden households are forced to cut on everything from food, clothing, entertainment, education and healthcare. They learn their lessons early and adjust to live within their means.

But it is not so for governments that could continue to borrow for decades to finance unnecessary consumption before they start feeling the heat. Let us look at what Pakistani governments have been doing for decades by enlarging the budget outlay every year and increasing the foreign and domestic loans.

Lenders in the beginning provide loans to such governments on soft terms. Economic troubles begin when these governments continue to spend these loans more on unproductive affairs and very little real development like building infrastructure, bridges, strengthening communication, education and health services.

After a while the lenders start giving loans on difficult terms as is happening in Pakistan. In the beginning, the government of Pakistan borrowed to use some on consumption and rest on servicing past loans. Now even this has become difficult.

The spending spree has not stopped. Households or private enterprises get rid of some staff to cut expenses. Our government adds more employees every year and takes more loans for their salaries. We are operating in a vicious circle and there is no way out until we double over revenues and curtail consumptive expenditure.

Whether it is right to take loans for consumptive expenditure depends on a country’s financial situation, goals, and the context in which the loan is being considered. Taking a loan for consumptive expenditure can be a viable option in certain cases, such as when there is a temporary cash flow issue, urgent need, or an opportunity that outweighs the cost of borrowing.

However, it is generally advisable to exercise caution when taking loans for consumptive expenditure. Borrowing money for non-essential items or to fund a lifestyle beyond your means can lead to debt accumulation and financial instability.

It is important to carefully consider the terms of the loan, including interest rates, repayment period, and the impact on your overall financial well-being.

Alternatively, capping expenditures until enough revenues are generated to bear them is a prudent financial strategy. This approach promotes responsible financial management by ensuring that expenses are aligned with available resources.

It encourages living within one’s means and avoiding unnecessary debt. By prioritising saving and generating sufficient revenues before increasing expenditures, states can maintain financial stability and work towards long-term financial goals.

For the government of Pakistan, the first priority must be to get rid of state-owned enterprises that post a loss of Rs600 billion annually. A political consensus is needed in this regard.

Politicians must stop playing to the gallery. We cannot afford to bear these losses. Power sector inefficiencies and corruption is another story.

Some two decades back, privatisation of power companies was opposed on the ground that the private sector would increase power rates beyond the payment capacity of the general public. Today, the power tariff is more unbearable and still we are adding to the circular debt.