Foreign debt accumulation and its implications

The Debt Collection

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Foreign debt accumulation and its implications

By Tahir Ali Khan

The News 16-5-2100

With grave threats to the economy such as terrorism, deteriorating law and order situation and recent floods, the government has resorted to obtain foreign loans that amount to billions of dollars. In such difficult state of affairs, should the government consider to seek a debt waiver from the international community?

Pakistan’s external debt has doubled in the past four years 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 ($7 billion), World Bank ($1 billion) and Asian Development Bank ($2 billion) will further increase the country’s present foreign debt of about $58 billion. Its external debt will go up to about $73 billion in 2015-16, as debts that were rescheduled after 9/11 in return for Pakistan’s support in war on terror are effective again. The ratio of debt servicing will also expand as a result. This may lead to an already debt-trapped country to face even more predicaments in a few years time. The country is currently paying on average over $3 billion on debt-servicing. It means payment of Rs710 million a day and Rs30 million every hour to lenders.

The government’s inability to adopt austerity measures and curtail its burgeoning expenditure has left it with no choice but to seek costlier foreign loans and thus overload the people with more taxes to repay these borrowed funds.

The reconstruction and rehabilitation of militancy and flood-battered areas require billions of dollars. In addition, the ruling leadership has limited finances to run the country’s affairs. If the government’s scarce financial resources are utilised on repaying loans, then what will be left for poverty alleviation and social sector development? These areas have clearly been neglected by successive governments in the past and even today things have barely changed for the better.

Though the UN made a historic appeal to the international community last year (after Pakistan was hit by ravaging floods) to wholeheartedly provide assistance funds to the country for the reconstruction process, promises of loans have so far failed to materialise. Last year international aid agencies, Oxfam and ONE International called upon international finance institutions (IFIs) and lending countries to cancel all of Pakistan’s external loans.

It is an ironic fact that France received more than fifteen times, Japan more than five times, South Korea four times, and China three times money in debt payment from Pakistan last year as compared to their respective flood donations, as calculated by Oxfam. Consuelo Lopez-Zuriaga, Oxfam’s Head of Humanitarian Campaigns had dubbed it madness and absurdity and urged that Pakistan’s debts were written off so that reconstruction was started in full swing. Pakistan, however, could not capitalise on the aforesaid case.

There was contradiction in the narratives of two federal ministers at the Pakistan Development Forum last year. While the Interior Minister Rehman Malik requested for waiver of Pakistan’s external debt, Finance Minister Dr. Abdul Hafeez Shaikh disowned the call made by Rehman Malik, saying that asking for a debt write-off was never an option before the government and that it was a grave issue with serious consequences. This could negatively affect the country’s sovereign credit rating and make it difficult for it to raise money from the capital market in future.

He argued that most of the foreign debts were obtained from multilateral agencies and Pakistan had made commitments to these institutions while seeking loans, therefore being a sovereign nation, Pakistan should/would fulfil its commitments.

The government has announced measures to restrict its internal borrowing to 10 per cent of the previous year’s revenue collection and provincial borrowings at an equivalent of six-week expenditure of the previous year, but nothing of this sort has been done on the front of foreign loans.

It seems that the economic managers of the country are more interested in creating money to repay foreign lenders than to take Pakistan out of its present quagmire. Out of the total loans received from the US, almost 85 per cent of the aid money goes back to Washington.

There are numerous laws and resolutions which support the notion of writing off debts. Article 25 of the International Law Commission stipulates that “in case of an 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 -Argentina, 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.

Pakistan’s current debt-to-GDP ratio is around 62 per cent, exceeding the 60 per cent limit set under the Fiscal Responsibility and Debt Limitation Act. Pakistan is fast approaching the debt-to-GDP ratio of 80 per cent, which according to the World Bank is default stage.

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 the point of chaos, simply to have money to repay its foreign debts.

IMF had cancelled all its debt ($268 million) to Haiti, after a catastrophic earthquake hit it earlier this year. The cancellation was given through a newly established Post-Catastrophe Debt Relief Trust Fund, set up for this purpose. Pakistan, hit by a similar calamity, could have also resorted to the same measure.

Beginning in 1996, developed countries, under the Heavily Indebted Poor Countries and Multilateral Debt Relief Initiative, cancelled debts amounting to $110 billion and $93 billion, which belonged to African countries. The facilitated countries agreed to channel their debt savings to poverty reduction.

The success story of these nations can be replicated in Pakistan where expenditure on health and education combined stands at less than 2 per cent of the GDP. The foreign debts incurred by various regimes did not benefit the people of Pakistan. Therefore, Pakistan should appeal to the international community and the IFIs to cancel these loans, as they did in the case of Haiti.

In long term perspective, foreign loans become a source of poverty, backwardness and economic subjugation. New loans are taken to repay old ones and most debtors in turn have to spend more on debt servicing than they do on health and education combined.

If the rupee is devalued or dollar gets stronger, the rupee cost of the foreign debt goes up. At the moment, the government is buying dollars at almost Rs85 to service foreign loans obtained at Rs9.90 for a dollar or a little more in the 1970s and 1980s.

Foreign loans should be taken only for development projects in the country. A debt audit commission should be established to make an inquiry into all the foreign loans attained thus far and how these funds have been utilised. On a final note, the government needs to restart a national self reliance scheme for self-sufficiency and to get rid of the debt burden.

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About Tahir Ali Khan
I am an academic, freelance columnist, writer and a social worker.

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