Double penalty for Pakistan drowning in floods and debts

5 September by Abdul Khaliq


Pakistan’s devastating floods have so far, killed over 1200 people, mostly children, since 14 June 22, displaced around 33 million and eroded livelihoods with the loss of an estimated one million livestock. In addition, floods washed away at least a million houses and damaged around 2 million acres of crops or 45% of agricultural land in Sindh, South Punjab and Baluchistan, signalling an impending food shortage. The unprecedented floods have caused a huge loss to the economy approximately US$10 billion [1] as per initial estimates. Overall, a third of Pakistan or an area roughly the size of the UK is inundated. Yet the country’s external debts and payments make it almost impossible for the government to focus on relief and rehabilitation of its people affected by the devastating floods. After the last mega-floods of 2010, the country is once again tottering from the devastation on an unimaginable scale.



Pertinent to mention Pakistan is one of the 52 countries facing a severe debt crisis [2]. The most critical problem faced by the country’s economy is repayment and servicing of its external debt, around $38 billion to the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and other financial institutions, including loans from Chinese banks by the end of the current financial year.

The International Monetary Fund (IMF) has projected Pakistan’s external debt to reach $138.568 billion in 2022-23 up from $129.574 billion in 2021-22 [3]. The country had to pay $15.071 billion as external debt servicing in FY22, compared to $13.424 billion in the previous fiscal year. The breakdown shows that $12.093 billion were paid in principal payments and $2.978 billion in interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. payments. Moreover, Pakistan has already paid around $ 65 million in IMF surcharges from 2018 to 2020 and it is likely to pay $ 392 million further from 2021 to 2030 in addition to its ballooning debt payments. Creditors claiming debt service Debt service The sum of the interests and the amortization of the capital borrowed. of $38 billion this year put millions of lives at stake.

Constrained by limited options, Pakistan is weighing the option to seek an emergency loan once again from the IMF, as preliminary estimates suggest that devastating floods might have caused nearly $10 billion in losses and the economic growth rate could slow down to just 2% in the current fiscal year [4]. Equally important is to mention in April 2020, the IMF had approved $1.4 billion in emergency financing for Pakistan under the Rapid Financing Instrument (RFI) to help the country deal with the aftermath of the Covid-19 pandemic.

While emergency aid is essential in the situation, the point is what is at stake in Pakistan. Last month on August 22, the cash-strapped country was compelled to accept the IMF agreement to revive a bailout loan under the Extended Fund Facility (EFF) Program worth $ 4.2 billion [5] loaded with very strict conditions of a huge increase in oil, gas, electricity prices and drastic cuts in social expenditures etc., crushing the working-class millions. Not to forget in the next 12 months Pakistan needs at least $41 billion to repay a debt when inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. in Pakistan is growing at 26%, the second-highest rate in Asia.

Though the most recent flooding is different in nature compared to the one in 2010-the latter was a flash flood while the current is a riverine flood — in both cases, it can be argued that the damage caused by both disasters is the outcome of climate change as well as ill-advised development policies across Pakistan. Over the past 17 years, Pakistan has witnessed three major crises — before the current one. While the nature and scale of these crises were different, two of them were caused by natural hazards — the 2005 earthquake, which impacted 3.5 million people and the 2010 floods which affected more than 20 million people.

Another vital aspect of this ongoing catastrophe is the horrific impact of climate change on Pakistan. It produces less than 1% of global carbon emissions and yet it is one of the countries that bear the worst consequences of the climate crisis. For the past 20 years, it has consistently ranked in the Global Climate Risk Index as among the top ten most vulnerable countries. The climate catastrophe affecting millions of people in Pakistan is yet to get worse. Today its floods are brought by torrential rains 400-500 per cent more than normal and melting glaciers, in the future, it will be water scarcity posing a greater risk to the survival of millions of people.

The multiple crises of COVID, its economic impacts, exacerbating pre-pandemic hardships and the escalating climate-induced catastrophe are already more than enough reasons for the cancellation of the debts of Pakistan. The devastating floods in the country have rendered it even more urgent. It would be utterly inhumane for lenders - public and private - to fail to respond to this demand.

In such circumstances, an immediate outright cancellation of the debt is a minimum demand since Pakistan is no longer in a position to repay its loans and these floods have worsened the condition of the country’s economy. In the prevailing context, taking into account the UN rule of “state of necessity”, Pakistan must be allowed to utilize the available funds to meet the vital needs of 33 million flood affectees and not to repay its debt, without being sued for defaulting on its commitments.

Last but not the least, wealthy nations must meet their fair share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of global climate actions, to stop catastrophic climate change of which Pakistan is the worst victim. It is high time to remind them of their obligations to deliver Climate Finance – to address loss and damage such as what the people of Pakistan are now experiencing.


Abdul Khaliq

CADTM Pakistan

Translation(s)

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