ARTICLE: While the world economy was already experiencing a synchronized downturn to the weakest in a decade - owing to the US-China Trade War, Brexit uncertainty over Europe and beyond, Technology War (5G) and the rising geopolitical tension - the outbreak of the pandemic has added fuel to the fire and totally devastated major economies of the world. The poor countries had to face unprecedented losses to their economies. While economic devastation of the poor countries has caused major set-back to their tax revenues, their expenditures on health and social protection surged beyond imagination. Accordingly, these poor countries have faced serious constraints in honoring their debt service obligations.
Prime Minister Imran Khan was the first leader who appealed to the rich and the powerful countries to provide debt relief to the poor countries. He also invited the United Nations Secretary General to work with him in advancing the case of debt relief for the poor countries. At the same time, Foreign Minister Shah Mahmood Qureshi also talked to many of his counterparts of the rich and powerful countries for launching the debt relief initiative.
The voice of Pakistani leadership was heard by the international community. The heads of the World Bank and the IMF requested the leadership of the G-20 counties in early April 2020 for Debt Standstill for the poorest countries. On April 15, 2020, the G-20 economies announced a debt repayment freeze for 77 IDA eligible countries (mostly African), including Pakistan as well.
The salient features of the debt relief included a time-bound suspension of debt repayment to bilateral creditors starting from May 01 and ending in December 2020; freezing both principal and interest payments; private creditors were also asked to participate on voluntary basis in debt relief because they are not expected to be a "free rider". Debt relief has covered around $ 12 billion in bilateral debt service payments, owed by 76 IDA Countries plus Angola; these countries owed $3 billion to private creditors (hedge funds, commodity traders, banks, bond holders) and that the recipient countries of the debt relief would not contract new non-concessional loans except those allowed by the IMF and the World Bank during the debt suspension period.
Debt relief is nothing but debt restructuring. It has provided temporary relief to recipient countries. The suspended amount of debt servicing will be repaid over four years, with first year of payment holiday. In other words, the deferred amount is converted into a new financing which will be repaid in four years, with first year as a grace period.
Benefits to Pakistan
Pakistan applied to G-20 for a debt relief; it owed $ 20.7 billion to 11 members of the G-20, out of which $1.8 billion (both principal $1.409 billion and interest $0.386 billion) would mature during the suspension period. Was this debt relief reasonable for Pakistan? Should Pakistan needed to apply for a debt relief? Did the Economic team of the Prime Minister brief him properly? The numbers suggest that out of $1.8 billion payable to 11 members of the G-20, Pakistan was to repay $613 million to Saudi Arabia and $309 million to China. Saudi Arabia and China together accounted for $922 million or more than 50 percent of debt payment during the suspension period. The readers would recall that Pakistan has given a written commitment to the IMF that debt maturing of China and Saudi Arabia would not be repaid during the IMF program period. Pakistan, therefore, was not required to repay $922 million out of $1.8 billion anyway. The real benefit of debt relief under the G-20 initiative reduces to $878 million only.
Is this the amount for which the Prime Minister and the Foreign Minister had to appeal to the international community? Was there any reputational loss to Pakistan? In this writer's opinion the answer is in the affirmative. A country of 220 million, with nuclear and missile power, standing in league with Ethopia, Chad and DR Congo, already classified as debt distress countries even before the onslaught of the pandemic. Like Pakistan these three debt distressed countries of Africa also received debt relief. In this writer's opinion, the Prime Minister and foreign minister were not properly briefed by their economic team. Pakistan did not do its homework properly and also did not play its cards well. With top Pakistani leadership (PM & FM) at the forefront, Pakistan would have had done far better than $900 million in debt relief. Let this writer explain this point with the help of a table which presents the structure of Pakistan's external debt and liabilities.
A cursory look at the table is sufficient to see that bilateral debt only accounts for 22 percent (or $24.2 billion) of our total external debt and liabilities. Multilateral debt along with IMF debt, commercial loan, bonds, and foreign exchange liabilities amounting to $60.9 billion or 55.4 percent of the total external debt and liabilities have emerged as a serious challenge for Pakistan. Instead of securing only bilateral debt relief from the international community, the Prime Minister and the Foreign Minister should have underscored the need for a Comprehensive Debt Relief Initiative (CDRI) where all the three major creditors (bilateral, multilateral and private creditors) should have contributed to make the debt relief a meaningful initiative. This writer is fully aware of the fact that the multilateral financial institutions like the IMF, World Bank, ADB are known as "Preferred Creditors" and that their loans are not rescheduled or restructured in normal circumstances. But post-Pandemic situation is an extra-ordinary development which require extra-ordinary measures at the global level.
He is also aware of the fact that seeking debt relief, in general, and seeking it from the private creditor, in particular, would result into downgrading of the sovereign's credit rating with possible exclusion of the country from the international debt credit market. It is for this threat that only 41 out of 77 eligible countries have applied for debt relief so far.
Once again, this is not a normal situation and the world, in general, and the poor countries, in particular, are facing extraordinary resource crunch. The issue of downgrading of credit rating may be taken up with the Institute of International Finance (IIF) who is coordinating the response from private creditors. Seeking debt relief, in general, and from private creditors, in particular, should not be considered as a default and hence should not face a credit downgrade risk. The IIF could have assured the poor countries that seeking debt relief from private creditors would not result in downgrading their credit ratings.
It is a fact that G-20 debt relief has been a major first step towards alleviating liquidity crunch of the poor countries. The relief created fiscal space for the recipient countries which enabled them to spend heavily on improving health facilities and providing social protection. Given the scale of economic devastation caused by the Pandemic to poor countries, the temporary debt standstill would not be sufficient to cater the needs of resources that will be required to revive their economies and ensuring their investment towards the sustainable Development Goals (SDGs). Therefore, a Comprehensive Debt Relief Initiative (CDRI), spanning over 3 to 5 years, is urgently required.
The Prime Minister and the Foreign Minister of Pakistan are therefore urged to take the lead once again. They may like to talk to their counterparts in important capitals and to the UN Secretary General for CDRI. The Prime Minister, will surely get the support of not only the Secretary General of the UN but more than 300 parliamentarians from around the world including Sen. Bernie Sanders, Rep. Ilhan Omar, and Jeremy Corbyn.
Why CDRI?
The G-20 debt relief initiative was an excellent first step in the right direction; it provided temporary relief to the poorest countries, enhanced their fiscal space and enabled them to address acute social, medical and economic challenges caused by the Covid-19. The pandemic has caused economic devastation to the poorest countries and it may take 3 to 5 years to come back to the pre-Covid-19 situation. It is in this background that the international community must work towards a medium-to-long term (3 to 5 years) debt relief programme to ease the pressure of debt servicing of the poor countries. The resources, so saved, will be diverted towards strengthening health facilities, social protection, reviving their economies, preventing more people falling below the poverty line and ensuring investment towards SDGs. If international community do not move toward CDRI, there is a strong likelihood that the pandemic could cause a protracted debt crisis for many developing countries, including Pakistan. Debt risks of developing countries were already high even before the pandemic; these risks are simply materializing now. A full standstill on all debt servicing for developing countries is an absolute necessity to prevent a full-blown debt crisis.
How to Proceed for CDRI?
The current debt relief initiative of the G-20 was restricted to bilateral creditors only and private creditors were asked to voluntarily participate. G-20 did mention that for a relatively better off countries like Pakistan, bilateral debt relief would only cover a fraction of the resources required to fight Covid-19. Under the CDRI, everyone (bilateral, multilaterals and private creditors) will have to contribute. The multilaterals will have to take the lead. In fact, low income and poor countries owe equally to multilaterals. Only by asking bilateral to offer debt relief or even debt forgiveness with private creditors participating voluntarily would not work. Debt of the multilateral Institutions including the IMF and commercial banks should be included in the CDRI along with bilateral.
Blanket debt relief may not work because many countries may take the advantage of the Covid-19 situation to mask their policy weaknesses. A case-by-case approach will be needed to address the problems of the poorest and low income countries. Let this initiative of dealing with individual countries be given to the experts of the IMF, WB and IIF working in tandem with the country experts nominated by the individual country.
It is absolutely clear that a "one shoe fits all" policy, as pursued by the Bretton Woods Institutions, in general, and the IMF, in particular, for the last four decades will not work. The policy instruments like tight monetary policy (raising discount rate), tight fiscal policy, currency devaluation in the name of market determined exchange rate and raising utility prices have lost its charm after the Greece Debt crisis of 2010. Such policies have harmed the economies much more than they benefited. The outcome of such policies has been slowing economic growth, rising unemployment and poverty, and drowning the country into debt. Such dated policies will simply negate the very spirit of CDRI. The three institutions (IMF, WB and IIF) would work closely with country experts nominated by the respective governments.
The three institutions working with country experts may consider for debt swap arrangements as part of the CDRI. Such debt swap arrangement may take the shape of i) debt-for-Covid-19 swap; ii) debt for education and health spending swap; iii) debt-for-SMEs investment swap; iv) debt for SDGs spending swap; v) debt for environment/green swap. Depending upon the amount saved from debt relief, each country can select any or all of the swap arrangements to utilize the money based on their requirements.
Prime Minister Imran Khan and Foreign Minister Shah Mahmood Qureshi may take the lead for the CDRI and talk to their respective counterparts of the important G-20 countries and the UN Secretary General. The CDRI, if implemented, will provide great relief to the poorest and low income countries; it will enable them to spend money on improving health facilities, providing social protection, investing in SDGs and reviving and strengthening economic activities in their respective countries. Boosting the demand of the poorest and the low income countries will benefit the rich and powerful countries in terms of strengthening their economies. This is nothing but a 'win win' for all. The bottom line is that there cannot be economic recovery in developing countries without a comprehensive debt relief. The developing countries cannot be protected from a full blown debt crisis with catastrophic consequences without a comprehensive debt relief.
(The author is Principal and Dean at NUST School of Social Sciences and Humanities, Islamabad. Email: [email protected])
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Structure of Pakistan's External Debt + Liabilities
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2018-19 2019-20 (end March)
Items Billion $ Share (%) Billion $ Share (%)
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A. Public External Debt 83.9 79.0 86.4 78.5
A.1 Govt. External Debt 67.8 63.8 70.1 63.7
A.12 Bilateral Debt 23.9 22.5 24.2 22.0
A.13 Multilateral Debt 28.6 26.9 30.0 27.3
A.14 Commercial Loan & Bonds 14.8 13.9 14.6 13.0
A.15 Others - - 1.3 1.2
A.2 IMF Debt 5.6 5.3 6.4 5.8
A.3 FE Liabilities 10.5 9.9 9.9 9.0
B. Public Sector Enterprises (PSEs) 4.0 3.8 3.5 3.2
C. Banking Sector Debt 4.7 4.4 4.7 4.3
D. Private Sector Debt 10.4 9.8 11.2 10.2
E. Inter-Company Debt 3.3 3.1 4.3 3.9
F. Total External Debt + Liabilities 106.3 100.0 110.0 100.0
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Source: State Bank of Pakistan
Copyright Business Recorder, 2020
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