Imran Khan’s debt repudiation threat

25 Aug 2014


Federal Finance Minister Ishaq Dar holding a meeting with the IMF delegation in Dubai recently.
Federal Finance Minister Ishaq Dar holding a meeting with the IMF delegation in Dubai recently.

WHILE addressing a huge sit-in crowd in Islamabad on August 19, Imran Khan warned the International Monetary Fund and the World Bank not to henceforth grant loans to the sitting government. In the same breath, he threatened these agencies of repudiation of such loans.

The threat rakes up two issues. The first is whether or not the warning is justifiable by a national leader of Imran Khan’s stature. The second is whether or not such a challenge to the international financial system has any legal basis and precedent.

As far as the first issue is concerned, it pertains to the style of governance in Pakistan, particularly over the last decade. There is a near unanimity across the board that governments have managed the economy by relying on public borrowing to finance excessive public expenditure.

The IMF’s stabilisation programmes have led to flight of capital from developing countries, including Pakistan. It is in this context that several developing countries have imposed indirect controls on foreign exchange movements to protect their economies

Callous of its impact on the overall economy and the people of Pakistan at large, no government reversed the trend by putting the brakes on excessive expenditure and raising revenues from domestic sources. The result is that in FY2014-15, gross public expenditure of Rs4.37trn will be financed to the extent of 42.9pc from domestic, foreign and bank borrowing. Foreign loans and grants alone will contribute 19.9pc.

The pernicious effect of the policy of borrowing has resulted in accumulation of an unprecedented level of debt stock of Rs18.3trn by the end of June. The share of foreign debt stood at Rs7.2trn. This level of total debt — at 72.2pc of the GDP — violates the Fiscal Responsibility and Debt Limitation Act 2005’s ceiling of 60pc.

What is amazing is that each year, a statement on fiscal policy and another on debt policy are presented to parliament, but no parliamentarian has stood up against the waywardness of the government in power and the direction in which the country is being pushed to.

The IMF’s stabilisation programme, of which Pakistan has been an ardent supporter, provides, amongst other components, liberalisation of foreign exchange regime, allowing free flow of goods and services and movement of foreign exchange across borders, both on the current and capital accounts. This provision is fraught with serious risks for any economy and created the debt crisis for Latin American countries in the late 1980s, Asian countries in 1997 and all over the globe in 2008.

In each crisis, the IMF came forward with doses of loans to these countries with harder and harder adjustment policies, providing for anti-inflation programmes and cuts in budget and trade deficits. Economist Cheryl Payer has rightly commented that “the IMF encourages developing countries to incur additional debt from international financial institutions, while it blackmails (through threats of loan rejection) them into anti-development stabalisation programmes”.

The programme has led to flight of capital from developing countries, including Pakistan. It is in this context that several developing countries such as India, Indonesia, Malaysia, Thailand, South Korea etc have imposed indirect controls in recent years on foreign exchange movements in the face of the IMF’s stabilisation programmes, in order to protect their economies.

According to the finance minister, Pakistanis hold $200bn — acquired largely through kick-backs, commissions and outright bribes — in safe havens in Swiss banks. Following the passage of the ‘Return of Illicit Asset Act’ by the Swiss parliament in October 2010, several countries, including the US, have recovered ill-gotten wealth from Swiss banks. Why is Pakistan reluctant to initiate action? Perhaps such money belongs to the elite of the state who have a stranglehold on political power.

The second issue of legal basis for repudiation of foreign loans can be traced to the theory of international law on odious debt. The theory holds that just as contracts signed under coercion are unenforceable, sovereign debt owned by an undemocratic government in a manner contrary to the interests of the people should be deemed invalid But such odious debts would represent the personal debts of officials of the regime that incurred them, not debts of the state, which would be the responsibility of the nation’s people. The concept has a long history. It was invoked during the Spanish-American war in 1898 rather implicitly, but was explicitly argued in 1927 in the Cuban War of Inde­pendence by legal scholar Alexander Sack.

Dictatorial regimes in many developing countries have looted substantial public funds while incurring foreign debt. It is in this background that Seema Jayachandran and Michael Kremer have proposed the establishment of an independent international body that will determine which regimes are illegitimate and can be declared ‘legally odious’ for any subsequently incurred sovereign debt. Imran has simply articulated this theory which is on the table today.

The writer is a former Joint Chief Economist of the Planning Commission

Published in Dawn, Economic & Business, August 25th, 2014