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Rescheduling of loans and debt relief

It is really a rescheduling with a difference


Dec 31, 2001 - Jan 06, 2002

After the approval of the soft loan of $ 1.3 billion for poverty alleviation and growth facility (PRGF) about a fortnight back, rescheduling of bilateral debt in Paris Club meeting was a forgone conclusion, but what Pakistan actually got is something remarkable. It is really a rescheduling with a difference, innovative and not far short of partial debt write off- tailored to the needs of the country.

As a result of the intensive discussions held by Pakistan delegation led by Finance Minister Shaukat Aziz, Paris Club bilateral creditors have agreed to reschedule almost entire debt stock of the country i.e. over 12.5 billion US dollar. The jubilant Finance Minister rightly termed this achievement as "remarkable" pointing out that this makes Pakistan the fourth largest recipient of such an arrangement. The other 3 countries are Egypt, Poland and Yugoslavia. "These are unique terms described as Islamabad term which are twice as better as in the previous arrangement," said the Finance Minister on his return from Paris adding that the arrangement would allow a net cash flow saving of over $2.7 billion during the next 5 years. These savings would be diverted to the urgently needed social sector development and poverty reduction programme.

According to this rescheduling agreement for the restructuring of about $12.5 billion official bilateral debt, Paris Club creditors consented to allow a repayment period of 38 years, including a 15 years grace period, on loans borrowed under the concessional Official Development Assistance (ODA), and 23 years, including a five years grace period, for non-ODA loans. The confessional ODA loans constitute 70 per cent of the total bilateral debt liability of the country. The amounts already rescheduled in 1999 and earlier 2001 under non-concessional Houston Terms were also included in the new agreement.

According to an official press release the Paris Club deal would result in cash flow savings of about $2.7 billion till 2004, which is the period covered under the exceptional financing arrangement with the IMF. The effective reduction in payment for the remaining period would be calculated after the contracts are finalised with individual creditors by September, 2002. However it is expected that in Net Present Value (NPV) terms, Pakistan would save about 30 per cent on ODA loans during the programme period.

To say that a $ 12.5 billion rescheduling is a good news for Pakistan would be an understatement. The Finance Minister, Shaukat Aziz has good reasons to be jubilant. The terms of the deal agreed at Paris deal mean that Pakistan will not have to pay anything in debt servicing during the first 15 years of the 38-year period. Cash flow savings in servicing payments over the next three years alone (that is, during the life of the recently approved 3-year IMF Poverty Reduction and Growth Facility) are estimated at $ 2.7 billion. The deal will also give the country significant savings in servicing payments during the subsequent decade, thereby removing the spike in debt service commitments. This re-profiling of the debt for 38 years will eventually provide the country with a 30 per cent write-off of the total stock of bilateral debt, reducing the current total bilateral debt by $ 3.75 billion.

The agreement reached with Paris Club is unique in many other respect. Contrary to the usual practice, the agreement was not linked to the approval of IMF arrangement. As such, Pakistan would no more be bound to have a Fund Programme to get a bailout package from the Paris Club. Besides, Pakistan is only the fourth country of the world ever, after Egypt, Poland and Yugoslavia, to get such an unprecedented package. A very important feature was, that the Paris Club creditors, numbering 18 in our case, did not follow a particular model like Houston, Naples or Cologne terms. Pakistan almost got relief of a level given to the Highly Indebted Poor Countries (HIPCs) without being labelled as such, which means that unlike HIPCs, the country would remain eligible for fresh borrowings.

Perhaps that was the most favourable deal Pakistan could get under the circumstances although some of optimists were hoping for a total or partial write off. Chances of default that had seemed inevitable, almost imminent since Pakistan came under the nuclear-related sanctions in May 1998 and then the democracy-related sanctions in October 1999, has at least been postponed for at least 30 years. Pakistan no more faces the ignominy of an imminent default. In fact, as the finance minister said this has provided Pakistan with a credible exit from its external debt trap. Until now the Paris Club, in its own self-interest, considering the international fallout of a country going bankrupt, had kept Pakistan on a lifeline for the past three years by providing it two rounds of short-term debt relief. It was prepared to do the same for a third time this year as well for the same reason. But Pakistan's bold decision to throw in its lot with the UN-led war against international terrorism has brought about a qualitative change in the donors' attitude towards Islamabad. Hence the exceptionally generous gesture.

Although the decision of the leadership to help the international community in fighting terrorism was obviously the critical factor in obtaining such a favourable deal, the efforts of the Finance Minister and his team in putting up a convincing case at appropriate levels were also quite important. However, the economic managers need to remember that the task is by no means over and great challenges lie ahead. Experience suggests that government in Pakistan usually become complacent once the pressure is eased and slack their efforts to put the house in order on a long-term basis. Continued commitment to the tough reforms agenda would be the key to real success. Pakistan has always failed to tap the real potential of revenue mobilization and export promotion, which has resulted in structural imbalances in the budget and the external sector. Until these fundamental weaknesses are addressed on a permanent basis, the level of debt is bound to increase and prospects for a sustainable position would continue to be uncertain. In fact, without bold and Imaginative efforts, the country may revert to the same miserable position after a few years.