ISLAMABAD: Back in 2000 Pakistan was confronted with severe debt crises, yet it sustained through its debt obligations with the help of a $12 billion debt rescheduling from Paris Club for a period of 28 to 38 years. One of the important factors that played a huge role in rescuing Pakistan’s economy was its geographical location.
The War on Terror despite its huge opportunity cost for US and Pakistan, also helped the latter’s deteriorating economy by providing it some space to regain its strength in the short run. But in the long run Pakistan’s economy suffered more (more than $100 billion loss to economy in addition to loss of human life). Pakistan was also hit by natural disasters like the earthquake in 2005 and floods of 2010. These factors have devastated the country’s economy and Pakistan had to borrow heavily to sustain the economy. Unfortunately, borrowed resources were not used wisely due to bad governance, which further weakened the economy.
Over the course of time when there was a greater need for Pakistan to ponder over the better utilisation of the borrowed amounts another issue of political instability and accountability started in 2014. The long period of political protests over the corruption cases took a huge toll on the economy. Resultantly, the government that came in power in 2018 had to pay the price in the form of even greater borrowed amounts and the economic growth fell from 5.6% in 2018 to 3.3% in 2019.
Thus, when Pakistan was still struggling to overcome these problems the Covid-19 crisis put the entire social and economic systems under jeopardy. On the other hand, with its highly indebted status, Pakistan has to deal with the looming threat of defaulting on its debt stocks. The situation encompasses socioeconomic factors such as; ensuring availability of sufficient resources to fulfil the debt obligations which has made the provision of the safety net along with the essential medical and health care facilities for the masses critically significant.
Pakistan has been one of the worst hit countries by Covid-19 whereby the public health crises played havoc over the most critical sectors of the economy, which includes drastic decline in exports that have been stagnant over the last decade and dwindling foreign remittances. Even in the pre-Covid period the economic growth in 2020 was projected to decline further to 2.4%. On top of it, now the country is facing negative economic growth which is estimated for Pakistan at -1.5%.
As an emergency response to the Covid crises and to facilitate the vulnerable segments of the society the government of Pakistan initiated an extensive program of Un-conditional Cash Transfer (UCT). The resultant increase in health and social sector expenditure by the government compelled the executive Board of the IMF to approve disbursement of $1.4 billion for Pakistan under the Rapid Financing Instrument (RFI).
However, the support under RFI raises many questions about the increasing debt burden of Pakistan. A recent report by United Nations Trade conference on Trade and Development (UNTACD) argued that such initiatives prove to be helpful in providing much-needed fiscal breathing space to crises-ridden countries but, they do not entail debt relief of any kind. In fact, concessional lending would ultimately suggest prioritisation of new debt over debt relief. Thus, any loan which entails the element of concession would ultimately mean more debt and hence a resultant debt crisis for a later period of time in the future.
In light of such an argument the trust deficit between the people and government seems to be further widening. Although beggars cannot be choosers but, the debt situation of Pakistan calls for out-of-the-box policy recommendations. As per the UNTACD and European Network on debt and development (Eurodad) proposition that calls for a complete cancellation of the debt for the poor countries mandatory for them able to sustain its debt obligations in the post Covid era.
Moreover, in a widely spread opinion, the complete cancellation of debt seems to be highly unlikely to happen in case of Pakistan. The main reason behind is its pivotal role for the countries involved in the geo-economics competition due to which the economic dependence of Pakistan has always been a significant leverage. However, despite the unlikelihood of the possibility, Pakistan needs to present its case with a rigorous homework on its debt sustainability options to make sure the viability of its own stance hence to protect its economic interests.
The suspension of debt payments proposed by the G20 nations suggests that the space provided by freeing some resources through deferred bilateral payments might end up being paid to other creditors instead of being used as an emergency response for Covid-19.
Thus, there is a greater need to analyse these initiatives in order to avoid another set of problems for the developing countries, which could result in an even greater long-term debt crisis in these countries including Pakistan.
In this regard several independent bodies came forward with new agendas and policy response to give a more practical solution for the global debt crises that has the potential to disrupt the financial systems at larger level. For instance, a growing movement says debt forgiveness for developing nations would “free up resources to tackle urgent health, social and economic crises.”
Argentina’s debt strategy
The debt outlook of Pakistan shows that the over-stocked debt of Pakistan even before the Covid was a huge burden on its GDP. Considering the option and possibilities for Pakistan one of the examples could be the way Argentina dealt with its debt crises. Argentina structured their debt strategy with a focus on the huge creditors to strike a deal feasible for both parties involved. Although, their negotiation with creditors is still in process, however, their extensive debt strategy report could act as a framework for Pakistan to develop its customised debt strategy.
Argentina’s strategy, if successful would be a great example to consider as a base work towards debt sustainability. Although Pakistan would need to customise the strategy keeping in view its geographical significance in the global political arena.
Summing up, given the current circumstances the steps taken by the G20 nations and other international donor institutions seem to be pushing the developing countries further into the abyss of debt crises. Without a full cancellation from all creditors, these countries will face the severe impacts of the Covid-19 on their economies for many years to come. Thus, the situation necessitates striking a deal with these institutions. Similarly, there is a greater need for a customised debt strategy for Pakistan that needs to be devised keeping in view its main stakeholders.
The writer works as a research associate at the Sustainable Development Policy Institute (SDPI), Islamabad
Published in The Express Tribune, June 22nd, 2020.
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