Restructuring of $1.8b debt

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It is time that UN should come forward and rescue the Third World countries by allowing them debt relief

From SHAMIM AHMED RIZVI, Islamabad
Feb 05 - 11, 2001

The Finance Minister, Mr. Shaukat Aziz who headed the Pakistan negotiating team to seek rescheduling from Paris Club announced at a press conference in Paris last week that the Club had agreed to restructuring of its about 1.8 billion dollars debt. The rescheduling will cover maturities and areas upto September 2001.

Disclosing the details of the agreement reached, a spokesman of Ministry of Finance told newsmen in Islamabad that Pakistan, which has successfully rescheduled its US $ 1.752 billion of debt payments, is required to payback this rescheduled portion in 18-20 years. The Paris Club of creditor countries agreed to reschedule the debt payments, consisting of areas of up to Oct 30 and of maturities, falling between December 1 and September 30, 2001. Under the agreement non-official development assistance (NDA) should be repaid within 18 years with a 3-year grace period while official development assistance (ODA) credits are to be paid over in 20 years with a grace period of 10 years.

The total $ 1.752 billion debt include $ 780 million in arrears as of October 30, 2000 and $ 972 million in current maturities. The current maturities include $ 656 million falling between November 1, 2000 and June 30, 2001 and $ 316 million falling between July 1 and September 30, 2001.

The agreement, reached with 18 creditor nations who are members of the so-called Paris Club, founded in 1968, of bilateral and multilateral creditors is second rescheduling by Pakistan since 1998 when it was tipped into a balance of payments crisis because of international sanctions over its nuclear tests. The rescheduled amount is part of Pakistan's $ 32.73 billion debt, out of a total around $38 billion, owed by bilateral and multilateral creditors. The rest of the overall debt is from commercial creditors.

In an interview to BBC, Federal Finance Minister, said the latest rescheduling indicated the confidence of donor countries on the economic policies of the present government which, he claimed, has stopped, as a policy decision haemorrhaging of Pakistan economy. He claimed that the entire debt situation has substantially improved because of the rescheduling "on the terms we asked for."

The debt restructuring was obviously sought by the government under compulsion in view of the country's difficult economic situation. To convince the donor countries about the urgency of rescheduling the debt was, however, not possible without the negotiating team's hard work at the meetings. There is no doubt that this debt restructuring will provide breathing space to Pakistan from brute payment schedule, but it is certainly not the answer to our economic problems, whose accumulative effect is sinking the national economy. The independent economists have consistently maintained that the government should not hesitate to take difficult and innovative decisions to deal with the gloomy economic situation and to recover from the debt trap, which is gradually turning into death trap.

While the new rescheduling arrangements is a timely relief to the country's economy, it is however, no cause for rejoicing as it has not reduced the debt burden but only postponed its repayment — that too with accumulated interest. It should be taken only as another breather which the creditors have provided to enable us to repay the loans. Besides helping us it is their compulsion also. It is also in their interest to save Pakistan from being a defaulter. What we really needed is debt relief rather than debt rescheduling.

The president of the Pakistan Society of Development Economics, Dr. Kamal, in a Seminar in Islamabad last week, said that mere rescheduling will not solve the problems of Pakistan economy. It will remain difficult to overcome uncertainty about the nation's capacity to service debts and encourage investment, as long as heavy debt looms on the country's economic horizon. Dr. Kamal also recounted various causes of the country's economic plight.

There is no doubt that the Third World countries are under severe burden of foreign debts. Their foreign exchange earnings are compulsively diverted to debt servicing, leaving practically nothing for social welfare or development. And as a consequence, the yawning gap between rich and poor countries is increasing unabatedly. Pakistan is also caught up in this vicious circle for the past over a decade, which saw inflow of about 20 billion dollars in foreign debts. Due to bad governance, wrong economic policies and thrust on non-development projects, the foreign loans unfortunately have had no impact whatsoever on the nation's well-being. The country is today faced with a serious economic situation, as a major chunk of its foreign exchange earnings goes in debt servicing. At times the previous governments were compelled to meet their debt servicing commitments by purchasing foreign exchange from the open market or through short-term loans from the banks at high interest rate. Pakistan has been trying to defer the deluge through debt rescheduling. Independent economists have consistently maintained that rescheduling of debts is not the solution to the country's economic difficulties, since the debts will continue to distort its economic imperatives. They fully endorse Dr. Kamal's viewpoint that Pakistan needs debt relief, rather than the debt rescheduling. As a matter of fact all the third world countries are up against the same dilemma and their economic woes also need a similar solution. It is a fact that the World Bank and the International Monetary Fund have played the fundamental role in undermining the economies of the Third World loan recipient countries through imposition of harsher and unrealistic conditionality. It is about time that the United Nations come to their rescue for economic hardships by allowing debt relief. The example set by France recently by giving debt relief to some countries needs to be emulated by other rich nations and the international monetary institutions.