Writing off Pakistan’s foreign laons

Debt for development

Have we lost the opportunity to get a loan write-off?

By Tahir Ali

The News November 28,2010

Pakistan seems to have wasted another opportunity to get its huge and foreign debt written off in the aftermath of devastating flash floods. The destruction caused by the war on terror and the 2005 earthquake had also provided reason to do just that but the then Musharraf-led regime was not able to get a loan write-off.

Rebuilding the country requires huge funds. Foreign donors say about $10billion are needed for reconstruction of the country but Pakistani authorities speak of over $40 billions for the purpose. If funds desperately needed for reconstruction and poverty alleviation are used for debt repayments, the already precarious poverty situation in the country could become even worse.

Though the UN has made an appeal for funding the reconstruction process, promises of loans are bigger than pledges for grants. While there is little money available locally wit no hope for an increase in revenue in the near future, donor agencies are also giving little in cash, the call for a total and unconditional debt cancellation is the only way out for Pakistan to be able to reconstruct the devastated region.

Debt write-off will provide Pakistan the much needed fiscal space. International aid agencies Oxfam, ONE International, professionals, political parties, left wing activists and foreign dignitaries, therefore, have been calling for cancellation of all of Pakistan’s external loans by international finance institutions (IFIs) and lending countries.

On November 14, addressing the Pakistan Development Forum, interior minister Rehman Malik asked the international community to waive $50 billion loans of Pakistan assuring that the waived foreign debt will be utilised in the fight against terrorism.

He said Pakistan had sustained losses of $140 billion in its war against terror and the world should realise that this war was being fought to protect it from the ravages of terrorism and for global peace. Before him, Oxfam and ONE international urged Pakistan’s $56 billion debt be dropped for the destruction caused by floods and the massive costs of relief and reconstruction.

In its petition to International Monetary Fund’s managing director, ONE International said, “Please help freeze Pakistan’s debt to ensure the country’s poorest people are able to recover from the devastating floods.”

The government has restricted its internal borrowings to 10 percent of the previous year’s revenue collection and provincial borrowings at equivalent of six weeks’ expenditure of the previous year. But nothing of the sort has been done on the front of foreign debts.

France received more than 15 times, Japan more than five times, South Korea four times, and China three times money in debt payments from Pakistan this year as compared to their respective flood donations, Oxfam had calculated before the recent PDF meeting. Oxfam’s head of humanitarian campaigns Consuelo Lopez-Zuriaga had dubbed it madness and absurdity and urged that Pakistan’s debts should be written off so that reconstruction could be started in full swing.

Instead, addressing the PDF on November 15, federal finance minister Dr Abdul Hafeez Shaikh himself rubbished the idea and said that no wise person could demand debt write-off. He disowned the call for writing off over $58 billion Pakistan’s debt made by Rehman Malik, saying that asking for debt write-off was never an option before the government.

“Pakistan doesn’t want to become an international “pariah” by asking for debt write off. It is a grave issue with great consequences. This could negatively affect Pakistan’s sovereign credit rating and make it difficult for the country to raise money from the capital market (in future),” Dr Shaikh was quoted as saying.

He argued that most of the foreign debts were obtained from multilateral agencies like IMF, WB and ADB and Pakistan had made commitments to these institutions while taking the loans and being a sovereign nation Pakistan should fulfil its commitments.

Still, there are several laws, resolutions and international precedents that favour demands for a debt write-off. Natural calamities-like the one hitting Pakistan have given birth to the factor of “state of necessity”. Article 25 of the International Law Commission stipulates that in case of “actual threat or a prospective peril to a state’s essential interests, the state is excused for not performing an international obligation.”

A number of democratically elected governments — Argentine, Burkina Faso, Peru, Mexico, Paraguay, and Ecuador for example — have had refused debt payments on the basis of this rule. Pakistan can also decline to pay back its loans under this principle. According to a 1980 resolution by UN commission on international law, 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 IMF had cancelled all debt (US $ 268 million) of Haiti after the earthquake hit it earlier this year. The cancellation is given through the newly-established Post-Catastrophe Debt Relief Trust Fund, set up for this purpose. Pakistan hit by disaster can also resort to it.

Beginning in 1996, developed countries, under the Heavily Indebted Poor Country Initiative and the Multilateral Debt Relief Initiative, cancelled debt of $110 billion, $93 billion of which was in African countries. The countries agreed to channel their debt savings to poverty reduction. As a result, poverty reducing spending by HIPC-countries increased by the same amount by which their debt-service decreased. Success can be replicated in other countries like Pakistan where expenditure on health and education combined is less than two percent of the GDP.

Another argument that can be put forward is that all the foreign debts incurred by various regimes did not benefit the people of Pakistan. Argentine’ economy was badly hit by economic crisis after 2001. So its president announced the biggest unilateral suspension of foreign debt of more than $80b.

Pakistan’s current debt-to-GDP ratio is around 62 percent, exceeding the 60 percent limit set under the Fiscal Responsibility and Debt Limitation Act. Pakistan is fast approaching to the debt-to-GDP ratio of 80 percent, which according to WB is default stage. Pakistan’s external debt has doubled in the past four years alone and the government is currently spending more than four times as much per person on servicing external debt than on healthcare.

Latest loans from IMF ($7bn) WB ($1bn) and ADB ($2bn) will further increase Pakistan’s present foreign debt of $56bn. Its external debt will go up to $73bn in 2015-16, as debts that were rescheduled after 9/11 in return for Pakistan’s support in the war on terror are effective again. The ratio of debt-servicing will also jump up as a result. This may lead an already debt-trapped Pakistan to a worst economic crisis. It is currently paying on average over $3bn on debt-servicing per annum. It means payment of Rs710 million a day and Rs30mn every hour to lenders.

Pakistan’ inability to increase its direct taxes and improve upon its balance of trade and save money by adopting austerity measures and curtailing the burgeoning current expenditure has left it with no choice but to seek costlier foreign debts or over burden the existing tax-payers. The government has virtually eliminated subsidies that were offered on wheat flour, sugar and edible ghee, power and gas and other services and commodities inflicting heavy burdens on the household budgets countrywide.

The debtor country has also to hire costly consultants and import costlier machinery for the projects and other materials from the lender states, which reduces the net loans. It is said that almost 85 per cent of the US aid goes back to the US. While our governments are also to blame for the ever-increasing foreign debt, the IFIs and lender countries are also equally responsible for the catastrophic situation.

A debt audit commission should be established to make an inquiry into all foreign loans and their use. The government should restart a national self reliance scheme for self-sufficiency and getting rid of the debt burden. Once this debt cancellation or postponement is achieved, the money saved thereby should be used for reconstruction and poverty reduction.



About Tahir Ali Khan (Official)
I am an academic, columnist, and a social worker.

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