Floods, debt, and SDRs

Pakistan is facing unprecedented floods of a profoundly catastrophic nature. While 3 million livestock have died in the flood-hit areas, the other mainstay of peoples’ livelihood in the shape of agriculture has also taken a deep damaging blow. Millions of acres of agricultural lands have been inundated by floods, at the back of, for instance, six times more rain in the province of Sindh than on average over the last thirty years, not to mention the faster pace of melting of glaciers.

Hence, rice crop has been badly affected, which will not only mean less supply for the country and the world (Pakistan is the fourth largest exporter of rice), it would also mean a negative effect of this on much-needed export earnings, to overall reduce the big gap between a heavy import bill and exports. Moreover, a significant damage to cotton crop means that imports will have to be made in this regard, to meet the needs of the main exports industry in the shape of textiles.

In addition, another worry has appeared: since water is still standing in most of the flood-affected areas, and it is highly unlikely that wheat could be sowed this year. This would mean, once again, that wheat imports will have to be made in the next few months.

Hence, this winter will see an added import burden in the shape of likely significant level of imports made with regard to cotton and wheat.

That makes it all the more difficult to rein in the high level of import payments that the country is already making, given high energy and commodity prices globally for well over a year since the global commodity supply shock appeared last year and stands accentuated in the wake of the war in Ukraine.

Here, the fallout in the shape of shortage in food and energy supply from this war means that prices of these are likely to rise as the food crisis likely deepen in the coming months, along with the likely rise in prices of LNG, for instance, as Europe competes with developing countries such as Pakistan for scare LNG supplies in the coming winter.

At around $8.3 billion of foreign exchange reserves, Pakistan could have ill-afforded such pressures on import bill, since already the country has only import cover of five to six weeks, which is well below the desired minimum, as per international best practices, of at least 12 weeks (or three months).

Moreover, even before the floods hit, at the back of both sharp weakening of domestic currency (PKR) against the US dollar during the last few months – both as a result of rising value of US dollar in the wake of significant and fast-paced monetary tightening by US Federal Reserve, and also because of rising demand of US dollar to pay for much expensive imports due to global supply shock – external debt, which was already at a burdensome level, increased all the more.

In the wake of the floods, servicing external debt for the current year at, reportedly, around $30 billion has become all the more difficult, if not next to impossible, given even after receiving around $1.2 billion tranche from International Monetary Fund (IMF) under the Extended Fund Facility (EFF) programme, the financing falls well short at reportedly around $8 billion, even after adding inflows from other donors like Asian Development Bank (ADB), etc. Hence, there is a yawning financing gap of $22 billion.

On the other hand, initial flood-caused damage assessment is reportedly at around $30 billion. This puts immense burden on the country to arrange for 33 million people that have been displaced by floods, and are facing mounting threats/challenges of the coming winter, little shelter, scarcity of food that may well become a famine, water-borne diseases, and the onslaught of dengue. And this is all in addition to scores of vulnerable pregnant women living, and children being out of school.

Pakistan, like many other developing countries, could not provide much stimulus during the pandemic, since the world did not care to provide any meaningful debt moratorium/relief. IMF’s enhanced special drawing rights (SDRs) allocation that came well into the pandemic, after around one-and-a-half years since the start of the pandemic, and where too most of the allocations went to already rich countries, and Pakistan received only $2.77 billion out of the total $650 billion allocated in August 2021.

This is not to say though that ‘a no-strings attached’ SDR allocation was not important for Pakistan, which it reportedly used for both fiscal purposes, and in providing some relief from IMF debt burden, yet allocated on the basis of quota meant that the amount received was inadequate.

Seeking international support in terms of both debt relief, and financial assistance from development partners in general for debt relief, including fresh allocation of SDRs as was released in August 2021, is not just a matter of charity, but as a principle of climate justice.

This is because, firstly, while the world, and in particular countries in global South, suffered from Covid pandemic, which had strong roots in climate change crisis, and secondly, in the shape of primarily climate-change induced flood catastrophe, it is a matter of justice that rich countries, and at least came meaningfully true on their $100 billion commitment and provided this climate finance to developing countries, which had little contribution in terms of carbon footprint. For instance, Pakistan only contributes around 0.8 percent to global carbon emissions.

Pakistan, which is facing a serious debt default and flood catastrophe situation, needs urgent attention from the world. Millions of flood-affected people are at risks indicated above, among many others. There is indeed a need for quick debt relief for the country – at least $30 billion owed by the country for 2022 should be cancelled immediately.

Secondly, the IMF should urgently release enhanced allocation of SDRs at $650 billion, for which it just needs a nod of approval from US Treasury, and that allocation to individual countries is made not just on quota but also on foreign exchange reserves needs.

Another way of distribution could also be, as has been offered as a suggestion by a number of people over many months now, is to adopt an 80/20 allocation criterion between developing countries, and countries with high incomes, and have lesser need for such SDR allocation.

Moreover, since the IMF cannot allocate more than $650 billion, it would make sense that IMF should do advocacy to get a Bill in US Congress titled ‘IMF issuance of special drawing rights’ passed.

The Bill has been thrice passed by the US House of Representatives, but has not been passed by US Senate. If passed, the Bill will reportedly permit IMF to enhance its SDR allocation envelope to well beyond the $650 billion ceiling, and to somewhere around more than $2 trillion.

Given the climate catastrophes in Pakistan and in West Africa due to floods once again, in addition to an ongoing pandemic, high debt distress and difficult import bills in the wake global commodity supply shock being faced by developing countries, and as the world is entering strong recessionary trends at the back of high inflation, and tight monetary stance, it is therefore of utmost importance that a meaningful fresh allocation of SDRs is made by the IMF.

In addition, a meaningful debt restructuring/relief effort – with both private creditors, and China included in these meetings – should be provided to developing countries at the earliest. Moreover, given this deep level of crises, the IMF should also immediately cancel its ‘surcharge’ policy, which is implemented on programme countries that are late on their debt repayments.

Copyright Business Recorder, 2022