SEEKING A 5-YEAR MORATORIUM ON FOREIGN DEBTS
Sep 13 - 26, 2010
Massive borrowing by Pakistan during the last few years has already landed the country into one of the worst debt trap of its history but the disaster is caused by the situation to the extent that default seems imminent. As a result, a countrywide campaign urging the international community to write off its debts amounting to about $55 billion to bail out Pakistan has been started by civil society activists, workers of political and non-political parties and individuals.
According to economic survey 2009-10, Pakistan's external debt stood at $54.2 billion in June, 2010 rising from $40.3 billion in June 2007. In fiscal 2009-10 government spent $3.4 billion on debts servicing. The total debt burden as well as servicing would rise because of post flood borrowing for the rehabilitation of about 20 million people who have lost their every thing to the unprecedented floods.
According to initial estimates, Pakistan needs over $10 billion for a reasonable rehabilitation programme of 20 million people whose about 5 million houses were destroyed by the flood. A total of $4 billion loans have been offered so far by the world Bank, Asian Development Bank and the IMF. This does not solve the country's problems. It would only add to the debt servicing charges.
Launching their campaign simultaneously from Karachi, Lahore and Islamabad, the campaigners insisted that post flood Pakistan is eligible for cancellation of total or a major portion of its loan. The debt crises cannot be solved by rescheduling arrangements as happened in the early years of Mushrraf era when earthquake hit Pakistan. In case it is not done by the lender countries/agencies, Pakistan should stop debt servicing and spend some amount on the rehabilitation of affecttes. Surprising however, the government, which should have been more concerned and worried about these matters, have not indicated how it intended to meet such huge expenditures. It has neither made any request to the lenders for the write off the whole or a part of outstanding loans or giving exemption for a few years for debt servicing without any surcharge or penalty. It is the media, the civil society, public-spirited citizens and professional organisations who are rightly worried to the extent that they have launched a countrywide campaign. They have urged the parliamentarians to come up with resolution demanding the international community, the donors, and the lenders to write off foreign debts against Pakistan keeping in view highly critical situation after devastating floods across the county. Without any such concession, the government cannot fulfill its responsibilities.
Though it is still too early to correctly estimate the full extent of damages but rough estimates for reconstruction and rehabilitation work may reach up to $15 billion. No matter what the cost is, rebuilding and reconstruction of the affected areas is an urgent necessity and the primary responsibility of the government. The government seems unable to find any potential financing for this rebuilding and is therefore appealing to the global community for aid. Development works are being frozen and money earmarked for social uplift programmes is being diverted to flood relief efforts. There are even talks of a possible cut in the defence budget.
But, what no one from the governing circle is talking about is any reduction in the biggest expense of the budget debt servicing.
Pakistan's annual debt servicing eats up about 1/3rd of the budget. Amazingly, the people in the government are deliberating on getting even more foreign loans. The debt burden has nearly crippled the economy. Anymore increase in its current level would bring the country to a precipice.
Pakistan's foreign debt is composed of loans from two main sources: loans from multilateral agencies (World Bank, IMF, ADB etc.) and from the Paris Club. The Paris club is a group of mainly western nations that have given loans to Pakistan. Pakistan's total outstanding foreign loans amount to $55 billion out of which about $14 billion are owed to Paris Club while multilateral agency loans have lent $32 billion. Interestingly, a significant portion of the foreign debt generally consists of money never given to the borrower i.e. interest arrears, interest charged on these arrears and penalties.
When the current government came to power, the economy was in shambles mainly because of the increasing cost of engagement in the war against militancy. The government has resorted to borrow heavily primarily to pay back outstanding debt obligations. The country has been a target of innumerable terrorist attacks that have resulted in thousands of deaths and extensive financial damages. Its image as a war zone has adversely impacted its investment and exports. The economic losses suffered as a result of the nation's support to US led coalition exceeds $30 billion.
Pakistan is the key to US and North Atlantic Treaty Organisation (Nato) forces in landlocked Afghanistan. The bulk of supplies are provided through Pakistan. The country also supplied fuel to the troops at a subsidised rate which is even lower than that charged to the local people. In nutshell, without Pakistani support, the US cannot even smell the scent of success or an honourable withdrawal from Afghanistan.
The IMF loans come with very strict conditions that have a huge impact on the lives of ordinary citizens. Implementation of these conditionalities has already resulted in widespread poverty, social chaos, and shutdown of many businesses.
Now if more funds are borrowed for rehabilitation and rebuilding activities after floodwaters recede, the conditions attached to these would destroy the socioeconomic conditions of the country and would result in complete chaos. Even without any new loans, the current debt burden along with the need for rebuilding will bring the economy to its knees. So, it is imperative that we think about what has been dubbed as unthinkable up till now, an immediate unilateral default on all foreign debt obligations. For some reason many economists in the country, most of whom are somehow linked to foreign lenders, have always opposed the option of default as if it is something unheard of in the global economy. The fact of the matter is that many countries of the world have used default as the way to reduce their national debt burden and several have done it multiple times. In fact, default becomes a necessity when the debt burden becomes agonising for the economy.
A five-year moratorium on debt repayment should be placed by multilateral agencies. This can also be structured as a managed default in consultation with the multilateral agencies. After five years, principal payments on loans may resume but no interest should be deemed to accrue during these five years. Furthermore, negotiations should be held with these agencies to write off as much of loans as possible. We have the precedent of IMF canceling loan obligations owed by Haiti after an earthquake struck that country. The scale of devastation in Pakistan is mush higher and the country's geostrategic importance warrants a similar treatment.