Cancel the debt

23 April 2020 by Mustafa Talpur

Last week, the G20 group of rich countries decided to postpone the debt payment that is due to be paid to G20 governments up to the end of 2020 for developing countries.

This will help Pakistan free up some resources to tackle the pandemic. However, this is still not a matching response to the scale of the crisis we face. The debt owed to rich countries is only a small part of the overall debt; huge sums are owed to private banks and investors. Rich countries and multilateral institutions must push these private lenders to cancel these debts. Large payments are also owed 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.
, World Bank World Bank
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 ADB, and these too must be cancelled for the year.

Earlier last week, Oxfam estimated that developing countries need $2.5 trillion to tackle the pandemic and prevent global economic collapse, proposing $1 trillion debt cancellation, $1trillion issuing Special Drawing Rights and rest $500 billion mobilized by increasing aid. It is a big disappointment that the world’s rich countries did not agree on issuing additional Special Drawing Rights at this critical time.

The IMF is encouraging countries for an upsurge in spending. Increased spending, though important, will further pile on debt if the amount payable Payable A sum of money that one person (debtor) or group of people owes to another (creditor). in this year is not permanently cancelled. Therefore, the G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). must not allow the suspended debt payments to accrue into the future; they must cancel all the 2020 debts of all countries, especially highly indebted ones like Pakistan.

At this unprecedented public health and economic crisis in history, Pakistan is estimated to repay debt about $14.8 billion current fiscal (estimated from the trend of the last two quarters). Debt cancellation for the year 2020 alone will spare Rs2,418 billion. This will provide the much-needed resources to the government of Pakistan at this critical time. The government needs to provide protective equipment to frontline health workers, arrange key medical equipment necessary to save lives, ensure food supplies, provide cash to workers who lost their jobs, and extend support to small businesses to prevent them from collapsing.

These are enormous challenges but they can be tackled with the additional resources. Therefore, debt cancellation is key at this critical moment to free up resources. Lender nations are wealthy and have already introduced large-scale economic stimulus packages to support business and workers, but countries like Pakistan lack that firepower to follow suit.

The government of Pakistan should also use its sovereign power to stop paying debt and work with other like-minded countries to put pressure on lenders, especially G-20 members, the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, and multilateral donors to cancel the debt payment forever rather than rescheduling it.

Fcor the last two years, Pakistan’s economy has been facing low growth. Earlier this year, the IMF projected 2.4 percent economic growth in 2020. However, after the pandemic WB estimates economic growth in Pakistan will be in the negative and it will fall into recession.

The Covid-19 pandemic has exacerbated vulnerabilities to both the health system and economy. With the lockdown and reduced economic activity, tax collection will certainly drop for which the government has already lowered its ambition from Rs5.5 trillion to Rs4.8 trillion but under the current circumstances it seems a daunting challenge to even collect Rs4.8 trillion. In a few weeks millions of people have become jobless, requiring immediate assistance to survive.

On the other hand, the resource requirement for the health system has increased to cope with the pandemic. Pakistan’s investment in health has been very low in the past, affecting its capacity to deal with any large-scale catastrophe. As a result, Pakistan lacks cash, but also the capacity to raise money or use debt to respond, as the rich countries are doing.

Despite all these challenges, the government of Pakistan has announced a Rs1.2 trillion economic package to support its poor people and provide essential support for businesses to survive. But given the scale and longevity of the crisis and its impact, this is not enough.

The emergency and the immediate impacts of Covid-19 are happening now, so it is urgent to have resources available as soon as possible. Using money reserved for debt repayments to fight the Covid-19 pandemic is the smartest thing to do.

If the debt payment for the year 2020 is cancelled, the government of Pakistan will have additional resources of Rs2,418 billion (about half of the revenue collection in the current fiscal year) , twice the amount of the announced relief package (Rs1200 billion).

In 2020 Pakistan’s estimated population is 220 million and per capita debt payment stands at $67.27 which is Rs10,992 @ 163.40/1 USD. If debt is cancelled there will be instantly Rs10,992/- available per capita. Assuming that the bottom fifth quintile 44 million people are poor, there will be Rs54, 961 available for each poor person with only one year’s debt cancellation.

This is a very critical time for the government of Pakistan to support its vulnerable citizens, especially people who have lost their work and were hardly a single medical bill away from slipping into poverty.

The devastating economic consequence of the pandemic on small businesses is also visible when a country enters the fourth week of lockdown. Small businesses were already under severe trouble and the Covid-19 crisis has further shattered them. Small businesses will require targeted government support to survive.

The recent G20 announcement, and IMF, World Bank and ADB support is a welcome step but insufficient and even mere window-dressing given the scale of the crisis. The World Bank painted a very dire picture of economic growth for three years, therefore rescheduling debt or fresh loans will only add to the heavy debt portfolio and push millions into poverty and desperation. The only solution is complete cancellation of debt.

It is incumbent upon the government of Pakistan to ensure that the entire additional money availed through debt cancellation or aid is spent on social protection, boosting health expenditure and supporting small business. The government must put in place a strong, transparent monitoring and accountability mechanism to avoid waste and slipping of resources on anything other than the pandemic response.

Source: The News

Mustafa Talpur

The writer is an Islamabad-based environmental and human rights activist.



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