Implication of G-20 debt relief lacks clarity

Pakistan is reportedly facing lack of clarity on full implication of G-20 debt suspension initiative meant to mitigate the Covid-19 impact, well-informed sources in the Ministry of Economic Affairs told Business Recorder.

On May 20, 2020, Minister for Economic Affairs requested the Chairman, ECC to take up the matter by invoking Rule-18(6) of the Rules of Business, 1973 as the matter was of urgent nature.

Ministry of Economic Affairs noted that the corona pandemic has caused extensive damage to economies worldwide. As domestic revenue mobilization has collapsed, countries are struggling to mobilize necessary fiscal resources to mitigate the COVID-19 impact. Accordingly, the G-20 finance ministers in their meeting held on April 15, 2020, announced debt suspension relief to IDA eligible and highly indebted poor countries (HIPC) under the Debt Service Suspension Initiative (DSSI). Ministry of Economic Affairs placed this matter before the ECC on April 23, 2020, seeking its guidance to avail the G-20 debt relief, and, engagement with the bilateral creditors for debt suspension. The ECC approved the proposal, in principal and directed the EAD to engage on the modality and revert to the ECC for formal approval. This decision was ratified by the Cabinet on April 27, 2020.

Accordingly, the Ministry of Economic Affairs on May 1, 2020, communicated to the Paris Club and individual creditors Pakistan's intention to avail the debt relief initiative. Ministry of Economic Affairs received a draft MoU from Paris Club Headquarters on May 7, 2020. The draft MoU has been endorsed by Finance Division and vetted by Law and Justice Division. Pakistan is required to enter into this MoU with all official bilateral creditors including Paris Club creditors to implement debt relief initiative.

Ministry of Economic Affairs main features of the MoU are: (i) debt suspension period May 1-December 31, 2020;(ii) eligible debt: government loans and guaranteed loans; (iii) both principal and interest; (iv) deferred amount to be converted into new financing facility with one-year grace period and, three-year repayment period. Repayment to start from January, 1 2022; (v) NPV neutral; (vi) bilateral creditors will decide either to reschedule the corresponding payments or refinance debts by placing new funds at the disposal of the government of beneficiary country; (vii) bilateral negotiations after signing of MoU; (viii) The, beneficiary country will not contract non-concessional debt during suspension period, other than agreements under this initiative or in compliance with limits agreed under the IMF Debt Limit Policy (DLP) or WBG policy on non-concessional borrowing.

Ministry of Economic Affairs stated that Moody's in its rating action May 14, 2020 has placed Pakistan's B-3 rating under review for downgrade. The Moody rating report states that suspension of debt service obligations to official creditors would be unlikely to have rating implication. However, G-20 has called on private sector to participate in the initiative on comparable terms. Pakistan's participation in the initiative would likely entail default on private sector debt, notwithstanding the intended voluntary nature of private sector participation.

According to available information out of 77 eligible countries, only 22 countries have so far applied for debt suspension. The beneficiary countries are facing concerns on account of rating impact and also their ability to mobilize non-concessional financing from financial markets, once they avail the G-20 debt relief. Ministry of Economic Affairs has had multiple discussions with the World Bank, the IMF, ADB and Ministry of Finance. There is a broader understanding that Pakistan's access to non concessional financial resources will not be adversely affected as Pakistan is currently under debt sustainability framework of IMF and its future borrowings are envisaged in the IMF Program.

Ministry of Economic Affairs maintains that since Pakistan has no intention to avail private sector debt relief, therefore, its rating will remain unaffected. However, it is highlighted that Pakistan is one of the first movers on debt relief initiative, and there is still lack of clarity on full implication of debt suspension.