IT seems the so-called “silent majority” of Pakistan has only one thing on their mind: debt write-off. Newspapers have been full of how or rather when Pakistan’s debt will be written off, especially after Pakistan’s decision to support the US-led coalition.
Some are even quoting the example of Egypt, which had managed to get some debt cancelled for offering its cooperation during the Gulf War.
President Pervez Musharraf’s recent US visit was very closely watched, as there were expectations that some concrete debt write-off methodology would be announced. Although American President Bush did mention in the joint press conference that “concrete debt relief would be provided” and that an assistance of around $1 billion is being put in place but until now it has been a case of words rather than deeds. For instance, it is not even clear if this $1 billion includes the already announced commitments, which total nearly $800 million, or if this is over and above that. Considering the muted response from the Pakistan side, it is probably the former.
This article is an attempt to put things in perspective and introduce some realism into the debt write-off saga.
As most of us know, it is the bilateral debt, which can be partially written off and not the multilateral debt nor the commercial loans. Since the Paris Club creditors are our largest donors, it seems logical to look into their debt relief methods. Pakistan has sought debt relief from the Paris Club five times; May 1972, June 1974, January 1981, January 1999 and January 2001. For the last two debt treatments, Pakistan was awarded the Houston terms.
Modes for Paris Club: The 19 Paris Club members have the following four terms of debt treatment for which a track record with the IMF is necessary:
Classic terms: These are the standard terms under which debt is rescheduled at the market rate and on a case to case basis. Pakistan’s first ever debt treatment in January 1981 was under these terms.
Houston terms: Introduced in September 1990, countries meeting certain criterion such as low per capita income, a high debt to GDP and debt to exports ratios have their repayment periods extended by 15-20 years with a maximum 10-year grace period. However, no debt write-off is possible here. Debt can be swapped for aid or equity in a local company or local currency for projects, at the discretion of the specific country. Pakistan has been allocated these terms in the last two Paris Club agreements, in January 1998 and January 2001.
Naples terms: Agreed in December 1994, the so-called Naples terms represent an improvement over the earlier Enhanced Toronto Terms in that they include an option to reduce debt or debt service by 67 per cent. They allow for a reduction, on a case-by-case basis, of either 50 per cent or 67 per cent of the amount, or the equivalent net present value of the debt service (interest and principal payments) falling due. In addition a “stock treatment” can be applied, whereby the stock of non-concessional debt owed by the debtor would be cut by 50 per cent or 67 per cent. This is referred to as an “exit” option, as the beneficiary will no longer need to go to the Paris Club for rescheduling.
To be eligible, the countries must show either a per capita GDP of less than $755 and a high ratio of debt to exports. These terms represent good starting point for Pakistan’s negotiations with Western countries. Pakistan’s estimated per capita income in FY01 stood at $429.
Cologne terms; These terms introduced in November 1999, are for Heavily Indebted Poor Countries (HIPC) and allow debt cancellation up to 90 per cent. However, Pakistan is not eligible for debt relief under these terms as at present, it does not qualify as an HIPC.
Furthermore, Toronto terms and London terms have been replaced by Naples terms while Lyon terms have been replaced by Cologne terms at the Paris Club. Egypt’s 1991 write-off:
The example of Egypt is being sighted as precedence to Pakistan’s debt write-off argument. In exchange for Egypt’s support in 1991 to the Gulf war, Arab nations wrote off some US$7 billion in debt obligations. Western nations followed suit under the Paris Club umbrella and agreed to reduce its debt by 50 per cent in net present value (NPV) terms contingent on the completion of an IMF programme.
Just the US alone, wrote off $6.8 billion of military debt in 1990 and later agreed to reschedule the remaining $5.1 billion debt on generous terms. The US debt forgiveness saved Egypt nearly US$1 billion in debt servicing over 4 years while the whole Paris Club debt relief resulted in a reduction of 50 per cent interest payments on external debt. The circumstances leading up to Egypt’s debt write-offs are quite similar to Pakistan’s. However, there are some important differences.
Egypt did not act as the front-line state in the Gulf War as its border is nowhere close to Iraq, while Pakistan faces the very real threat of hostility by a certain portion of Afghan’s as well as their supporters within the country. Also, Egypt was not located in the “war zone”, which Pakistan is and this has led to tangible effects on its trade. Thus, theoretically Pakistan should get a better deal than the Egyptians. However, the world has changed substantially in the decade since and Pakistan might have to contend with a different “package” for its cooperation as indicated by signals coming out of Washington.
A good starting point: Naples terms represent a good starting point for debt relief negotiations although it is believed that a new “package” may be made for Pakistan different from existing terms. Under the Naples terms, debt can be reduced by 50 per cent or 67 per cent. Debt will be repaid at reduced concessional interest rates, over 23 years (including 3 years of grace) under the option of 50 per cent or 67 per cent. Debt will be repaid at reduced concessional interest rates, over 23 years (including 3 years of grace) under the option of 50 per cent reduction, and over 33 years (including 3 years of grace) under the option of 67 per cent reduction.
According to last available estimates of the Finance Ministry, Pakistan’s total foreign debt stands close to $38 billion. Of this amount, around $12.5 billion is bilateral debt, As mentioned earlier it is the bilateral debt (particularly Paris Club one) which stands the best chance of write-off.
Assuming that all of Pakistan’s bilateral foreign debt is reduced by 50 per cent (NPV scenario not considered), that would mean debt relief to the extent of US$6 billion. Over the last five years (FY96 to FY00), Pakistan’s external debt servicing to total external debt has been 15-16 per cent pre-nuclear blast and 9-10 per cent post nuclear blast. Thus, an assumed $6bn debt relief and taking 10 per cent debt servicing will translate into an annual saving of US$600mm through write-off, 12 per cent of total debt servicing to official creditors made in FY01.
This saving (over and above debt rescheduling and other grants if any) will result in an easing of current account as well as balance of payments deficits. The resultant saving can be channelized into development expenditure to stimulate the economy and could result in lower borrowing needs in the future. As the burden of debts servicing reduces, fiscal deficit would also improve and lead to an easing of resource constraints. Furthermore, stability in the exchange rate would also be promoted through greater foreign exchange management capability.
(The writer is a research analyst at Invest Capital & Securities.)
IT seems the so-called “silent majority” of Pakistan has only one thing on their mind: debt write-off. Newspapers have been full of how or rather when Pakistan’s debt will be written off, especially after Pakistan’s decision to support the US-led coalition.
