Foreign debt

Pakistan. The only way out

17 September 2010 by Abdul Khaliq


There are spaces in international laws that can be invoked as legal justification to demand cancellation of debt.

Pakistan is facing the worst-ever natural disaster of its history. About 20 million of its population is displaced due to recent huge devastation caused by the angry floods. Major infrastructure is totally destroyed in major parts of the country. The economic loss is in billion dollars. Foreign minister has put it as not less than $43 billion. This initial estimation may go up and above $50 billion after the final assessment report.

A debt-ridden Pakistan is totally unable to cope with this horrific calamity and its long term impacts on economy. This is the time, instead of seeking moratorium or rescheduling on Pakistan’s debts, Pakistan must stand up and declare unilateral suspension of repayment of foreign debts, owed to IFIs, donor countries and clubs.

The current external debt of Pakistan stands at $55.5 billion. That figure will jump to $73 billion in 2015-16, as debts that were rescheduled after 9/11, in exchange for Pakistan’s co-operation in the “war on terror”, will come back into play. Besides this, Pakistan is paying over $ 3 billion on debt-servicing every year on average. That means Pakistan pays Rs.710 million daily and Rs.30 million every hour to foreign creditors.

As our present foreign debt of $ 55.5 billion will be further increasing after latest loans from 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.

($1 billion) and ADB ($ 2 billion) the ratio of debt servicing will automatically up by the same ratio. Under the prevailing critical circumstances, the government of Pakistan should take radical stance to cope with this severe debt burden.

Various laws, resolutions, precedents and international protocols favour Pakistan if it demands debt cancellation and dares to refuse to pay foreign debts right now, especially under the critical circumstances it is passing through. To refuse payment of debts is not a new thing; many poor countries had already exercised this lawful right in the past.

There are spaces in international laws, resolutions and protocols that can be invoked as legal justification to refuse the external debt and demand cancellation. One of these justifications is called rule of “State of Necessity”. This rule is characterized by a situation that jeopardises the economic or political survival of a country such as the situations which creates the factor of impossibility of fulfilling the very basic needs of the populations (health, education, food, water, housing etc). The “State of Necessity” justifies the repudiating of debt, since it implies the establishing priorities among different obligations of the State.

A natural calamity like the one hitting Pakistan has given birth to the very factor of “State of Necessity”. Besides this the UN Human Rights Commission has adopted numerous resolutions on the issue of debt and structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
. One such resolution was adopted in 1999, asserts that “The exercise of the basic rights of the people of the debtor countries to food, housing, clothing, employment, education, health services and a healthy environment cannot be subordinated to the implementation of the structural adjustment policies, growth programs and economic reforms”.

Then there is resolution of UN commission on International Law 1980, which says, “A state cannot be expected to close its schools, hospitals and universities, abandon public services to point of chaos, simply to have money to repay its foreign debts”.

The rule of moral responsibility is also worthy to be mentioned. It is immoral to demand a calamity-hit poor country devote what available resources it has to repay creditors rather than satisfy fundamental needs of its people in misery. From moral point of view, the rights of creditors are insignificant in comparison with fundamental rights of populations.

Pakistan is bled of resources every year to repay borrowers who extended unjust loans to the dictators of country over decades. It is vital that desperately-needed emergency aid is not effectively swallowed up in debt repayments.
Pakistan is no more able to fulfill fundamental human needs of its 20 million flood-hit population. Therefore, Pakistan is simply unable to repay or service its debt responsibilities. IFIs and the creditors should not expect Pakistan to continue debt repayments, leaving its people hungry, shelterless and close its schools and hospitals, etc, creating chaos and anarchy.

Under the prevailing conditions, Pakistan must be able to mobilise all available resources towards relief and rehabilitation. Instead of sending billions in debt service Debt service The sum of the interests and the amortization of the capital borrowed. out of the country, Pakistan should be able to divert those resources towards rehabilitation of its people. The international community should provide grant support instead of give new loans that will push Pakistan further into debt trap. Early estimates suggest that Pakistan would need 10 years to rebuild and at least 43 billion. So far, only a fraction of the needed assistance is poured in from the international community.

The first and foremost thing in such circumstances is the fulfillments of all fundamental human needs of the population hit by natural calamity. So, this is high time for Pakistan to stand up to its creditors and say a big no. Pakistan had already missed one such opportunity in 2005 when devastating quake hit Kashmir, leaving millions of people in misery. This time, it is a bigger calamity. We have a number of precedents in history when democratically elected governments in debtor countries refuse debt payments on account of “State of Necessity”. Latin American countries, including Argentine, Burkina Faso, Peru, Mexico, Paraguay, and Ecuador took such positions in the past.

In July 1985, the government of Peru decided to limit debt repayments to 10pc of export revenues. This led to severe resentment of 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
and World Bank, calling Peru’s banishment from international community. Just after only three months, the situation become normal and creditors had no choice but to add the Peru’s arrears on 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. ($ 5 billion) to debt stock Debt stock The total amount of debt .

Recently, IMF had to cancel all its debt (US $ 268 million) owed by Haiti, after earthquake-hit Haiti in January 2010. The cancellation is given via the newly established Post-Catastrophe Debt Relief Trust Fund, which was set up for this purpose and which can now be accessed by other indebted countries hit by disaster.

Another example is Argentine. The country went into serious crisis after 2001 economic crisis. Though Argentine leaders had always implemented unpopular policies dictated by IMF, it was the people of Argentine who come on the roads in 2001 to protest debt domination. This popular action succeeded in altering history. As a result, country’s president announced the biggest unilateral suspension of foreign debt in history, a total of more than $80b owed to private creditors, countries and Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

. Thus, Argentine demonstrated that a country could stop debt repayments for a lengthy period of time.

Burkina Faso is another country which stood against IFIs and denounced the debt scandal. In the 1987 conference of the Organization of African Unity, its President Thomas Sankara said: “The debt cannot be repaid, firstly because if we do not pay, the creditors will certainly not die, on the other hand if we pay, we will certainly die. Those who have led us to debt trap have gambled as though in casino. When they were winning there was no debate. But now when they have lost through gambling, they demand that we repay them. No! According to rules of the game we cannot pay and refuse to pay all foreign debts.”

Pakistan’s total debt-to-GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
ratio has crossed 61 percent this fiscal year, breaching the 60 percent limit set under the Fiscal Responsibility and Debt Limitation Act. According to WB, if debt-to-GDP ratio exceeds the limit of 80 percent, default is sure. World Bank’s recent announcement to provide new loan to Pakistan of $900 million and the Asian Development Bank’s announcement for a $2 billion emergency loan is highly condemnable. Pakistan already owed huge amount of about $24 to Asian Development Bank and the World Bank. Further loaning, without any doubt, will lead an already debt-trapped Pakistan to a worst economic wilderness.

Instead of accepting new loan offers, the democratically elected government of Pakistan should request communities for help and grants at the same time demanding total and unconditional cancellation of its foreign debt. Time and again, countries facing tragedies are forced by International Financial Institutions and donor countries to mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
their future as they borrow for relief and recovery efforts. Thus, the tragedy is magnified for years to come.
Such borrowings would simply add to the country’s long term debt burden that could hinder future development. The government of Pakistan must tell the IFIs in clear terms that it is not ready to accept loans but only grants. Extending loans is tantamount to further enslaving the people of Pakistan. We want to tell WB, ADB and IMF to please do not rub salts on the wounds of the calamity-hit, debt-ridden people of Pakistan by extending such loans.

The government of Pakistan must realise that moratoriums and rescheduling would not be helping it much to cope with this extra-ordinary calamity. In view of the magnitude and degree of the devastation, call for a total and unconditional debt cancellation is the only way out.

If Pakistan is to re-build the infrastructure to withstand such appalling disasters in future it must be freed from its debt trap. A debt audit is needed — and those debts found to be unjust and unbeneficial must be cancelled immediately to give the country a fresh start.

Published in the newspaper The News, september 11



Abdul Khaliq

CADTM Pakistan

CADTM

COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85
info@cadtm.org

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