Aid, aid and only aid

Surprised by the slow response of the donors to the worst flood in 500 years, Information Minister Qamar Zaman Kaira has spoken of the  government's desire for a debt write-off. At the minimum, the government would be happy if a moratorium on external liabilities were allowed. It is a belated desire, to say the least.

Each time our economic crisis coincides with a politico-strategic opportunity to correct its long-term course, the leadership fell for short-term gains to perpetuate itself.  First it was General Ziaul Haq, who accepted peanuts in the form of economic and military assistance, rather than demand a debt write-off. The next opportunity was squandered by General Pervez Musharraf in the wake of 9/11. Trade had a role neither in working for jihad, nor against it. The idea of investment, the next best thing, never occurred to the Amirul Momineen, though it played a part, albeit a small one, under the regime of the enlightened moderator.

More recently, the time for pressing for a write-off was the run up to the Kerry-Lugar Act. The government went all out for the bill, rather than make a case for debt reduction or elimination. Military’s public pronouncement against it also turned out to be a mere posturing exercise. There was no strategy in place to secure markets access, except the vague indications at the end of each presidential sojourn abroad about the approaches made for a trade-not-aid initiative. The fact, however, is that the European Union and Japan have not made any concrete commitments on greater market access. In the case of America, the legislation for reconstruction opportunity zones remains stuck. Agreements or understandings on investment also leave much to be desired.

A large bulk of Pakistan’s external debt of $54.5 billion is due to international financial institutions (IFI) such as the World Bank, ADB and the IMF. Their total share comes to around 58 per cent. These institutions are traditionally loath to write-offs, restructuring or re-profiling their own debt on the plea that they are willing to lend more to enable debt servicing. In the current scenario, they have already pledged additional funding. The exception is a modest initiative for the highly indebted poor countries, which is also faltering. In any case, Pakistan’s key ratios regarding debt sustainability do not yet make it eligible for the facility.

Of course, the IFIs assist in working out debt relief arrangements for Paris Club loans, the so-called bilateral debt. Pakistan has benefited from this a number of times in the past. The largest bilateral creditor of Pakistan is not the United States. We owe only $1.5 billion.  All assistance under the Kerry-Lugar Act is in the form of grants. But the US can throw its weight around to persuade Japan ($6.7 billion), France ($2.2 billion) and Germany ($1.8 billion) — the major bilateral creditors. But will it, beginning with its own $1.5 billion, given our own half-hearted interest. We are also indebted to the Ummah to the tune of $2.6 billion.

Trade leads to a sustainable means of importing goods and services and building up reserves for the nation. Investment provides goods and services without creating debt. Debt write-offs create fiscal space over a longer period for the neglected social sector. Aid is ready cash available immediately for current use.
This is not an unimportant reason for our rulers’
preference for aid.

Published in The Express Tribune, August 27^th, 2010.