Urgent debt relief needed as Pakistan faces perfect debt trap

12 November 2020 by Abdul Khaliq

(By Uzair Younus on Twitter)

The indicators of a severe debt crisis were already present in Pakistan long before the Covid-19 crisis hit. Coordinated efforts by CSOs all round the world are needed to ensure that countries like Pakistan are not left alone dealing with its impact.

The indicators of a severe debt crisis were already present in Pakistan long before the Covid-19 crisis hit. The pandemic has merely served as a detonator of a structural crisis. After years of being under a neo-liberal offensive, Pakistan’s debt burden has soared. Although the International Monetary Fund 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.

(IMF) classifies Pakistan as a country at low risk of debt distress, the reality is that the country already finds itself in a situation of debt distress, according to the Jubilee Debt Campaign’s Debt Data Portal.

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). Debt Service Debt service The sum of the interests and the amortization of the capital borrowed. Suspension Initiative (DSSI) that was announced in April is a positive gesture but can hardly be seen as a step forward. The DSSI simply represents the short-term postponement of payment, instead of the actual cancellation of debt obligations. Furthermore, the DSSI only contemplates the binding involvement of bilateral official debts. Participation of the private sector and multilateral organisations has remained voluntary. In the case of Pakistan, this means that a large 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 the external debt owed by the country is effectively excluded.

For Pakistan, the G20 DSSI provides a temporary debt suspension for eight months, involving up to US$ 1.8 billion in postponed debt payments. This is just a drop in the ocean. During such testing times, nothing is more draconian than forcing a country to contract further loans to finance the emergency response to Covid-19. Pakistan has been forced to do so in significant amounts. The IMF provided the country with a US$ 1.4 billion loan under the Rapid Financing Instrument facility. In addition, a consortium of multilateral institutions, composed of the World Bank (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.

), Asian Development (ADB) and Asian Infrastructure Investment Bank (AIIB) have signed agreements to provide loans to the country of up to US$ 1.75 billion.

 Bullying behaviour from IFIs

In response to these challenges, Pakistan has adopted an outspoken position on the need for debt relief to poor countries. As a result, it has faced pressure from international financial institutions (IFIs) and Credit Rating Agencies Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
(CRAs). CRAs have threatened Pakistan with credit risk downgrades for addressing the issue of debt justice. The debt problems of the country have also become an issue of global geopolitics. In a contradictory position, the US has simultaneously opposed Pakistan’s call for comprehensive debt relief at the United Nations (UN) while it demands that China cancels bilateral loans extended to the country, as they are considered unsustainable and unfair.

In this context, Pakistan is projected to need US$ 27.8 billion to meet external debt service payments between September 2020 and June 2023. This figure includes payments for US$ 19.4 billion to the IMF, WB, ADB and China (CPEC loans). The external debt of the country stands at US$ 111 billion. Of this figure, 48.4 per cent is owed to bilateral official creditors, 38.1 per cent to multilateral creditors and 9.4 per cent and 4.1 per cent to unofficial and private creditors, respectively.

Working classes have been forced to bear the effect of this mounting debt burden through indirect taxation. The economy of Pakistan is currently in intensive care. However, IFIs and CRAs present a rosy picture under the garb of self-serving interpretations of debt sustainability. How can a country like Pakistan – with negative Gross Domestic Product 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.
(GDP) growth (for the first time in 70 years), 45 per cent of the population living below the poverty line, 12 per cent 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. rate and a debt-to-GDP ratio of over 80 per cent – have the ability to pay back over US$ 1 billion per month?

 Pakistan’s economy is heading towards crisis

Pakistan is in a perfect debt trap. Its economy is running purely on debt. Obviously, this will not be sustainable for long. Sooner rather than later it will come to the inevitable – default. Without urgent and significant debt relief from all creditors, coupled with local actions such as a public debt audit and a massive reduction in non-development expenditures, it will be hard for Pakistan to avoid a default.

Going forward, all global creditors need to stop dragging their feet and move towards urgent and comprehensive debt cancellation and relief for Pakistan and all other developing countries in need. Support must come free from the type of institutional bullying that has characterised ‘help’ in the past, including extensive use of policy conditionalities, blackmailing and asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). stripping. A comprehensive solution must include at least three basic components:

  1. Fresh loans even to respond to the Covid-19 crisis must be stopped. All external debt service payments on bilateral, multilateral and private debts owed by Pakistan should be suspended at least until June 2023.
  2. Comprehensive sovereign debt Sovereign debt Government debts or debts guaranteed by the government. relief must follow the initial debt suspension phase. Debt relief should follow the structure of the assistance offered by the global community to Germany in 1953.
  3. Independent debt audits must be considered an integral component of comprehensive sovereign debt relief. Audits should take place at the national level and should be responsible for the assessment of the legality of all the previous loans. The results of the debt audits would then inform the process of cancelling illegitimate and odious debts.

Coordinated efforts by CSOs all round the world are needed to ensure that these measures are adopted and countries like Pakistan are not left alone dealing with the impact of the crisis.

Source: Eurodad

Abdul Khaliq

CADTM Pakistan

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