Balancing austerity demands with better debt relief and SDR support

’Developing nations may need to find as much as $2.5 trillion over five years to meet external debt-service costs as interest rates rise and poorer countries struggle to refinance borrowings, a Finance for Development Lab model shows. …“Current costs of funding make debt service hard to sustain, with an expected peak in 2024-25,” according to the authors of a paper based on the model titled The Coming Debt Crisis. “If such conditions were to hold, a significant liquidity crisis would quickly turn into a widespread solvency crisis.

“ Developing nations, with weaker sources of revenue, have borne the brunt of surging interest rates and increased borrowing, a result of shocks including the Covid-19 pandemic and Russia’s invasion of Ukraine, which has driven up world food and energy prices. A greater proportion of poorer-country debt is now owed to commercial lenders, which offer shorter maturities, and capital markets have largely closed to many governments.’ – An excerpt from a December 7, 2022 Bloomberg published article ‘The developing world is facing a $2.5 trillion debt shock’

Recently, in a Financial Times (FT) editorial ‘Pakistan is on the brink’ correctly highlighted, on one hand, the lack of reform effort by those governing the country over the years, which among other difficult economic consequences had put the country in a difficult debt situation, and, on the other, pointed towards an inadequate global debt restructuring framework.

However, the editorial did not point out that the precarious debt situation and lack of fiscal space with developing countries in general for both making needed development and welfare expenditures for a more resilient and inclusive economy also had to do with a lack of debt relief, inadequate International Monetary Fund’s (IMF’s) special drawing rights allocation, and meager climate finance provided by the rich bilaterals and multilateral institutions, especially knowing very well that even before the pandemic a number of developing countries, including Pakistan, were facing a difficult debt situation, which only got exacerbated since then.

The same problem lies in the analysis of media in general in Pakistan, that by the ‘Chicago-boys’- styled policymakers in the country, and reportedly the IMF itself, which paid little attention to these gaps and instead continues to browbeat the country into adopting more austerity than would have been needed in case there existed a better restructuring framework, greater inclination of providing debt relief, SDR allocation, or climate finance.

Why should the masses continue to pay the price of lack of progressive taxation or energy sector institutional reform by the government, and inadequate spirit of multilateralism and financial support by development partners?

And why should media, policymakers, and development partners in general continue to shy away from putting pressure on both government and international development partners to make the right choices on the lines indicated above, among possible others.

For instance, the international community, including the IMF, had a choice to make as the initial months of the pandemic made it quite clear the apparent longevity of the pandemic as the new variants kept hitting, and that was how to support developing countries against debt distress, and that was to either provide them with meaningful debt relief and adequate provision of easy finance, or to leave them pretty much on their own to both deal with difficult-debt, inflation and overall balance of payments situation and push them take the route of a traditionally pro-cyclical, austerity-based IMF programme. Although an uphill task in many cases, including that of Pakistan, this is not to say that adoption of meaningful non-neoliberal, counter-cyclical policies, even during the last few years, by the governments in these countries would not have significantly reduced their debt default risk, and overall macroeconomic imbalances. It is important to note that with or without the IMF programme, the underlying policy reform will only likely provide needed economic resilience, inclusivity, and sustainability.

Hence, when the developing countries, including Pakistan, in general needed to make counter-cyclical, non-austerity spending for making both needed development, and welfare related expenditures in the wake of climate change crisis – in particular given the deep devastation caused by catastrophic floods last year – and pandemic, both due to lack of reform effort at home but also importantly due to lack of needed financial support. Here, it also needs to be pointed out that reportedly policy rate in the US could reach 6 percent, which as it currently stands at more than 4 percent has already had lot of capital flight and contributed to imported inflation in many developing countries, and needs to be revisited in favour of downward revision given the overall supply-side determinacy of inflation and also the lag in monetary transmission on the real economy of policy rate change.

Hence, the current approach by the government, and bilateral/multilateral development partners, including reflection of such in IMF programme conditionalities/emphasis in terms of far less emphasis on austerity, and adoption of counter-cyclical, and institutional reform policies – like progressive taxation, and filling the loopholes in energy sector performance – while the debt is managed through much due, greater enhanced SDR allocation, debt relief through provision of easy finance with long-term repayments at low interest rate and even outright debt cancellation where possible like done for Germany after the Second World War.

Significant debt-for-nature swaps, a meaningful level of climate-related SDR allocation for climate challenged countries, adopting a ‘Brady Plan’ like easy debt repayment plan, and coming true on the climate finance commitments pledged by rich, advanced countries. A meaningful debt restructuring framework that appropriately engages China and private creditors also needs to be put in place quickly. This is indeed overdue. A February 15, 2022 FT editorial ‘The Covid aftermath requires sovereign debt restructuring’ pointed out in this regard: ‘Unlike in the past, when most were countries grouped in the Paris Club, or a few large international banks forming the London Club, there is now a plethora of private and official lenders. …What is needed is a modern equivalent of the Paris Club and the London Club: a framework where all creditors can get together and share the pain. … Sovereign debt overhangs can weigh on growth for years and even decades. The only way to end them is for all creditors to accept comparable treatment. As the Covid-19 aftermath throws countries into default, they must find ways to do exactly that.’

There are more ways that also need to be seriously looked into as, for instance, pointed towards in a January 20, 2023 letter ‘Debt solutions require more stick, less carrot’ to FT by Tim Jones, who is head of policy, at Debt Justice, United Kingdom. He averred in this regard: ‘Martin Wolf is right to focus on high interest loans from private lenders as the main cause of the debt crisis in lower-income countries (Opinion, January 18). …Private lenders charged high interest rates because they claimed the loans were risky and so they should accept losses when the risk materialises. If they refuse, the G20 and international financial institutions should support debtors to default on any recalcitrant creditors. Further, bonds are governed by either English or New York law. The UK and New York could pass legislation requiring bondholders to take part in internationally agreed debt relief.’

Advice such as these is indeed important and helps move towards bringing balance to overboard policy emphasis on developing countries, including Pakistan, by development partners in general to adopt austerity policies to deal with the current macroeconomic crisis many of them find themselves in where such demands, especially by the IMF, become all the more vociferous for countries like Pakistan, which have also been weak in terms of adopting meaningful institutional reform policy.

Moreover, as President of the World Bank, David Malpass, indicated and as highlighted in a January 2022 FT published article ‘Poorest countries face $11bn surge in debt repayments’, it is important to effectively engage private lenders in debt restructuring/relief effort. The article pointed out in this regard: ‘David Malpass, World Bank president, warned that the “extraction of resources… by creditors” meant that “the risk of disorderly defaults is growing”. “Countries are facing a resumption of debt payments at precisely the time when they don’t have the resources to be making them,“ he said.’

Copyright Business Recorder, 2023