High time for flood-hit Pakistan to refuse foreign debt repayments

Country must divert amount for relief & rehabilitation of calamity-hit communities

16 August 2010 by Abdul Khaliq

Press Conference at Lahore Press Club on Friday, August 13, 2010, addressed by Abdul Khaliq (CADTM-Pakistan) and Farooq Tariq (LPP)

Pakistan is facing the worst disaster of its history. About 20 million of its population is badly affected by the recent huge devastation caused by angry floods. Major infrastructure is totally destroyed in major parts of the country. Besides continuous human causalities, the economic loss is in billion dollars. The country has suffered a loss of about Rs250 billion only in the agricultural and livestock sectors and the flood recovery costs may run into billions of dollars. Pakistan is in real and worst human and economic crisis. Though international donors are announcing commitments for relief and rehabilitation, but these are pea nuts vis-à-vis the degree of catastrophe.

We think this is the time, instead of begging for much-needed aid for relief and rehabilitation, Pakistan must stand up and announce unilateral suspension of repayment of foreign debts, owed to IFIs, donor countries and clubs. Currently Pakistan is paying about $ 3 billion on debt servicing every year. As our present foreign debt of $ 54 billion is increasing, the debt servicing will be up by the same ratio.

Under the prevailing critical circumstances, we have to think about coping with this severe debt domination. Various laws and international protocols favor if Pakistan refuse to pay its debts right now, especially under the prevailing circumstances, Pakistan is passing through. To refuse payment of debts is not a new thing; many poor countries had exercised this just and lawful right in the past.

There are spaces in international law that can be invoked as legal justification to refuse the external debt. One of these justifications is called “State of Necessity”. This rule is characterized by a situation that jeopardizes the economic or its political survival- 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.

Therefore, a natural calamity-like the one hitting Pakistan creates the very factor of “State of Necessity”. 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”

State of Pakistan is no more able to fulfill fundamental human needs of its 20 million flood-hit population. People are facing worst hardships, have no access to food, clothing, shelter and medicines. 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, shelter less, close its schools, its hospitals, its courts and abandon the public services, creating chaos and anarchy in the communities.

The first and foremost thing in such circumstances is the fulfillments of all fundamental human needs of the populations, hit by natural calamities and disasters. 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 more lethal calamity, and we should no more be silent. We have number of precedents in history when 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. Very recent 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.

had to cancel all its debt (US $ 268 million) owed by Haiti, after devastating earthquake hit Haiti in 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, low income countries hit by disasters. 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 the debt domination. This popular action succeeded in altering the history. As a result country’s president announced the biggest unilateral suspension of foreign debt in history, a total of more than $ 80 billion, 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 refused payment of debts. In 1987, its President Thomas Sankara announced unilateral suspension of foreign debts. What he said. “The debt cannot be repaid, firstly because if we do not pay, the money lenders 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 current external debt liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). stand at $ 54 billion. It spends $ 3 billion at average every year under debt-servicing. With the rising of foreign debt liabilities the ratio of debt servicing is also increasing. 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 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.

if Debt-to-GDP ratio exceeds the limit of 80%, the default is sure. The major portion of Pakistan’s national budget is consumed by two Ds; Debt-servicing and Defense. We have to review allocations against these two Ds. Under the circumstances, there is no denying the fact that Pakistan’s single source of economy vulnerability is debt crisis. We do not have any other option to come out of this economic but to refuse repayment of debts.

Our immediate demands

- This is high time for Pakistan to announce unilateral suspension of the all external debts and divert that amount for the relief and rehabilitation of 20 million flood-hit people
The government should approach the newly created Post-Catastrophe Debt Relief trust Fund to get its foreign debt liabilities cancelled.

- The Government can also invoke the international protocol of “State of Necessity”, introduced by UN Human Rights Commission in 1999, to refuse payment of debts.

- As government is planning to review economic priorities and budget allocations, it must take steps to reduce military budget, cut non-development expenditures and other unnecessary heads. The amount, thus saved should be shifted to social sector.

Abdul Khaliq

CADTM Pakistan

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