In an interview with Associated Press, our prime minister called upon world community to write off debt burden of poor countries so as to help them cope with COVID19 epidemic (Dawn March 17, 2010).
The total debt liabilities of the country amount to Rs19, 299.2 billion (as of March 2015). Every Pakistani now owes a debt of about Rs101, 338 as compared with Rs.90, 772 in 2013, Rs80, 894 in 2012 and Rs37, 170 in early 2008.The debt-to-gross domestic product ratio stands at 66.4 percent, in which foreign debt is Rs. 6.4 trillion and domestic debt is Rs.12 trillion.
In dollar terms, Pakistan’s external debt soared to 95097 USD Million in the second quarter of 2018 from 91761 USD Million in the first quarter of 2018.That’s an all-time high, and well above the average of 54065.23 USD Million for the period 2002-2018. Pakistan recorded a Current Account deficit of 8.20% of its Gross Domestic Product in 2018. That’s an all-time high and well above the -2.60% average for the period 1980-2018.
Pakistan’s debt burden has a political tinge. For joining anti-Soviet-Union alliances (South-East Asian Treaty Organisation and Central Treaty Organisation), the USA rewarded Pakistan by showering grants on Pakistan. The grants evaporated into streams of low-interest loan which ballooned as Pakistan complied with forced devaluations or adopted floating exchange rate.
Soon, the donors forgot Pakistan’s contribution to break-up of the `Soviet Union’. They used coalition support funds and our debt-servicing liability as `do more’ mantra levers.
Successive Pakistan governments treated loans as freebies. They never abided by revised Fiscal Responsibility and Debt Limitation Act. Nor did our State Bank warn them about the dangerous situation.
No formal application for write-off: What a pity! Whenever International Monetary Fund’s delegations visit, Pakistan’s representatives keep mum about politically-motivated odious nature of our debt burden. They lack nerve to tell them point-blank Pakistan’s non-liability to service politically-stringed debts. They government’s dilemma in Pakistan is that defence and anti-terrorism outlays plus debt-service charges leave little in national kitty for welfare. Solution lies in debt forgiveness by donors (James K. Boyce and Madakene O’Donnell (eds.), Peace and the Public Purse.2008. New Delhi. Viva Books, p. 251).
Benefits of Write-Off: Debt forgiveness (or relief) helps stabilise weak democracies, though corrupt, despotic and incompetent. Research shows that debt relief promotes economic growth and boosts foreign investment. Sachs (1989) inferred that debt service costs discourage domestic and foreign investment. Kanbur (2000), also, concluded that debt is a drag on private investment.
In fact, economists have questioned justification of paying debts given to prop up a client regime congenial to a `master’ country. They hold that a nation is not obliged to pay such `odious debts’ (a personal liability) showered upon a praetorian individual (p. 252 ibid.). Legally also, any liability financial or quasi-nonfinancial, contracted under duress, is null and void.
Apparently, all Pakistani debts are odious as they were thrust upon praetorian regimes to bring them within anti-Communist (SEATO, SEATO) or anti-`terrorist’ fold. To avoid embarrassing unilateral refusal of a country to repay odious debts, UN should declare which portion of debts is `odious’ (Jayachandaran and Kremer, 2004). Alternatively, the USA should itself write off our `bad’ debts.
Sovereignty compromised: People barter away some of their naturally-derived freedom with sovereign ruler to get security and welfare (Thomas Hobbes, John Locke et. al.). When a despot fails to deliver the goods, the contract stands broken, and the people have a right to overthrow him. Thomas Jefferson (North American colonies) enshrined this social contract in the 1776 Declaration of Independence: ` when a long train of Abuses and usurpations pursuing invariably the same Object evinces a Design to reduce them under absolute Despotism it is their Right, it is their Duty to throw off such Government and to provide new Guards for their Security’.
But, Pakistani people are too passive to overthrow their despotic unpopular governments.
The successive governments did nothing by way of welfare for the people. They could not even evolve a universal healthcare system akin to Thailand’s (2002).
The government’s dilemma in Pakistan is that defence and anti-terrorism outlays (26 per cent) plus debt-service charges leave little in national kitty for welfare.
A discussion was held at a seminar jointly organised by the Institute for Social and Economic Justice (ISEJ) and the Islamic Relief Pakistan under the campaign ‘Breaking the Chains of Debt’, at Forman Christian College. The crux of discussion was 47 per cent of whatever the government generates in revenue goes to pay off debt against 44 per cent in the previous year. Ideally, this ratio should be less than 30% to allocate more resources to social and poverty-related expenditures.
Speaking on the occasion, ISEJ Executive Director Abdul Khaliq said the debt situation was alarming and the government must review its reckless borrowing behaviour. We must demand an audit of the public debt,” he said. “All new loan contracts should be subjected to a debate in parliament and its approval.”
The government must stop reckless international borrowing and minimise reliance on foreign debt in the future and take measures to get the illegitimate loans cancelled, he said.
Khaliq emphasised the need for synergising efforts for a debt-free Pakistan and making the people of Pakistan the real drivers of the economy.
Three time prime minister Nawaz Sharif during his election campaign made tall claims that on assuming power he will get rid of the ‘cancer of debts’ and promised to break the ‘begging bowl’, however, there is little evidence of measures towards freedom from debt, said political economist Dr Qais Aslam.
The present Pakistan Tehrik-e-Insaf government proved no different from its predecessors and started knocking on the doors of international lenders even more vigorously, he added.
In a country where 60% of the population lives below the poverty line and 58% faces food insecurity, this additional burden means more miseries for the generations to come.
Speakers further said the impact of mounting debt burden on the people is horrific. Fiscal space for social spending has drastically squeezed. Pakistan spends just 2 to 2.6% of its Gross Domestic Product on education and health respectively, making it the lowest in South Asia.
International Monetary Fund’s assessment (Express TribuneMarch 16, 2018):
In its post-programme monitoring report, the IMF assessed risks to Pakistan’s economic outlook had increased. Despite changing goalposts twice, Pakistan’s public debt remained higher than the limit prescribed in the revised Fiscal Responsibility and Debt Limitation Act.
The policy of building foreign currency reserves through expensive loans and ignoring the export performance haunted the policymakers.
The IMF said the elevated current account deficit and rising external debt servicing, in part driven by China-Pakistan Economic Corridor (CPEC)-related outflows, were expected to lead to higher external financing needs.
External financing would surge to around $27 billion by the end of fiscal year 2018-19 (FY19) and would go up to $45 billion by FY23.
At that time, Pakistan’s external financing needs will be equal to 10% of the national output, which is a dangerous level. “Risks to public debt sustainability have increased since the completion of the EFF (Extended Fund Facility) programme. Public and publicly-guaranteed debt is expected to remain elevated at 68% of GDP by FY23.” Gross fiscal financing needs will likely exceed 30% of GDP from 2018-19 onwards, in part reflecting increased debt service obligations.
However, the more alarming part is the growing challenges to arranging foreign loans. It said Pakistan had so far remained successful in contracting external borrowing that softened the impact of rising external imbalances on foreign exchange reserves.
The IMF’s projections showed a bleak path for the next five years. Public and publicly-guaranteed debt is projected to remain close to 70% of GDP by 2023 under the baseline scenario.
In the absence of strong consolidation measures, the fiscal deficit is expected to remain close to 6% of GDP in the medium term, resulting in elevated debt levels.
Adverse shocks, notably to economic growth and the primary balance, could lead to public debt ratios rising well above 70%, said the IMF.
Contingent liabilities from restructuring of loss-making public sector enterprises represent additional fiscal risks. High gross financing needs may also pose potential rollover risks.
The IMF said high levels of public debt and gross financing needs presented significant fiscal risks and needed to be addressed in a timely fashion through fiscal tightening to improve debt sustainability.
Financial sovereignty threatened: Some people question is Pakistan really a sovereign state? The question is based on premise that government has ceded control of the economy to foreign entities. Both the finance minister and the governor of the State Bank of Pakistan are career officers of respectively the World Bank and the International Monetary Fund. Is the primary loyalty of these officers to their Washington-based institutions or to their country of origin? And, should we be outsourcing existential financial decisions to people with possibly divided loyalty?
IMF’s changed role: The IMF and the World Bank are products of the Bretton Woods conference of 1944. Both organizations made good sense in the tattered world economy of the post-War period. The World Bank set about financing the rebuilding of Europe; while the primary purpose of the IMF was to promote international trade, which had collapsed during the war. The IMF’s role was to assist member nations to maintain stable exchange rates by providing short-term credit to support their currencies.
However, the `dinosaurs’ changed their roles. Over time fixed exchange rates gave way to floating rates, multiplying debt burden of recipients manifold. Markets replaced governments as the primary arbiters of the value of national currencies.
The arrangement works as follows: A poor country, due generally to mismanagement and corruption, finds itself in dire need of hard currency. Commercial lenders are unwilling to commit their funds without adequate safeguards. Enter the IMF. It offers to lend some of its own money, provided that the host government agrees to a set of economic ‘reforms’. These understandably seek to enhance the borrower’s ability to repay the money loaned. When a deal is struck, the IMF disburses its own funds. At the same time commercial lenders, now reassured that the borrower can repay, step in with additional funds.
Typically, the IMF’s own funds constitute only a small proportion of the borrower’s total debt. Commercial lenders provide the rest. Yet the IMF’s participation is crucial. If it does not ‘certify’ a country by its participation then that country effectively gets cut off from all other sources of credit.
The question which recipients need to brood over is: Does the IMF serve their national interests? The IMF has a single overriding objective. This is to enhance the borrower’s ability to service its debts. It does not care a fig for recipients’ policies about poverty alleviation, price stability, employment, universal access to health care and education, and affordable rates for basic services.
Hypothetical example of debt black hole: Our external debt is $100 billion. Let’s assume that the average applicable yearly interest rate is five percent and that we decide to pay it back in equal annual installments over a period of 20 years. We would need to pay annual installments of $8 billion per year for a total payback over the 20 year period of $160 billion. Of which $60 billion would be interest and the balance repayment of principal.
We run a trade deficit of $20 billion a year. If we had a trade surplus we could theoretically have had the ability to pay back some of our debt. But, with shattered industry, teetered infrastructure, and COVID19 hangover, we can’t. So the only way to find the $8 billion per year to pay back our existing loans is to take new loans. We thus fall in the financial equivalent of a black hole.
Light at end of the `Hole’: While light cannot escape a black hole, we can extricate ourselves from this crisis. Pakistan needs to make the most of its strategic advantages. If we did not get out loans written off as quid pro quo for Soviet collapse in Afghanistan, we should better negotiate US exit now. We should have an answer if the US asks, by way of quid pro quo, for putting permissive action links on our nuclear bombs. If Pakistanis to be denuclearized than its binary India too should be.
Pakistan government should take prime minister lead further. It should hold negotiations with lenders that are commercial banks and the international finance agencies. We should aim at repudiation of about 50 percent of debt. This should be in addition to interest rate waivers, revisions and extended terms.
Simultaneously, Pakistan should dust off burden of debt models in textbooks. Debts should be so utilised as to be able to pay off interest and principal over agreed time span.
Bad debts: Pakistani debts qualify for write-off as bad debts. Why should poor Pakistanis, lacking basic needs, pay them?
World Bank President David Malpass (Express Tribune February 12, 2020) portrayed a bleak situation of loaning policies worldwide. Like a pot calling kettle black, he chided other development banks for lending too quickly to heavily indebted countries, saying some were helping worsen already-challenging debt situations. Addressing a World Bank-International Monetary Fund (IMF) debt forum, he said Asian Development Bank, the African Development Bank and the European Bank for Reconstruction and Development were contributing to debt problems.
He said the ADB was “pushing billions of dollars” into a fiscally challenging situation in Pakistan. African Development Bank was doing the same in Nigeria and South
Africa. Pakistan was unlikely to meet debt reduction targets. The Manila-based development lender in December approved $1.3 billion in loans for Pakistan, including $1 billion for immediate budget support to shore up the countries
Public finances and $300 million to help reform the country’s energy sector.
The loans came as the country is struggling with billions of dollars in debt to China
from the Belt and Road infrastructure projects, which pushed Pakistan to turn to the IMF for a $6-billion loan programme in 2019.
Malpass said there needed to be more coordination among international financial institutions to coordinate lending and maintain high standards of transparency. “And so we have a very real problem of the IFIs themselves adding to the debt burden and there’s pressure then I think on the IMF to sort through it and look at the best interest for the country,” he stated.
Inference: If Pakistan wants to get its loans written off, it should do more than indulge in rhetoric. `Negotiation’ is a subject taught in all universities as a business course. Pakistan should learn to argue its case and decipher donors’ BATNA (best alternative to negotiated agreement
