Debt woes

Updated 21 May 2020


The writer is a member of staff.
The writer is a member of staff.

HERE’S something interesting. We all know that Pakistan is close to signing a deal for waiver of its external debt service obligations worth around $2 billion. The plan has been made possible by the G20 countries that announced an action plan to fight the Covid-19 pandemic in the early days of May, and followed that up with a more specific plan to permit rescheduling of debt service obligations for the poorest countries in the world.

“We support a time-bound suspension of debt-service payments for the poorest countries that request forbearance,” their statement announcing the deal on April 15, hosted by Saudi Arabia but conducted via digital channels. The “time-bound suspension” of debt service payments would only apply to those tranches falling due between May and December 2020, although the statement also said there would be two reviews along the way and left open the possibility that the period covered by the plan could be extended further to June 2021.

The plan mostly covered bilateral debt, meaning money borrowed by governments from other governments. It did not specifically include money borrowed by governments from private markets or lenders, and certainly not money borrowed by private businesses from private markets or lenders abroad. The statement did, however, call on private creditors to consider extending similar treatment to their borrowers. “We call on private creditors … to participate in the initiative on comparable terms.”

Of course, Pakistan was first in line when this announcement came, and the word now is that the deal is about to clinched in the coming days. Reports in international media say Pakistan and Ethiopia are two countries that are about to get some of the debt repayment obligations rescheduled, while Congo, Mauritania and Cameroon are next in line. Word is Mali, Dominica, Nepal and Grenada will also be applying to avail this initiative.

Billing the future is common practice in most areas of debt management, and this time too the same reflexes are active and well.

Note the company Pakistan finds itself in. The announcement for the initiative clearly said it is for “the poorest countries” in the world, which Pakistan clearly is not, yet there it was, first in line with hat in hand. Pakistan has a GDP in excess of $300bn, while Congo is $47bn, Mauritania $5bn and Cameroon $38bn. Ethiopia has a GDP of $84bn, and is classified along with Pakistan as one of the large countries participating in the initiative.

There is nothing unusual about this though. Time and again it has happened that initiatives are announced for the poorest countries in the world, of which Pakistan is certainly not one, and Pakistan shows up first in line. In 1996, for example, the multilateral bodies announced what they called the Heavily Indebted Poor Countries (HIPC) Initiative to allow some of the poorest countries in the world that had accumulated unsustainable debt burdens to reschedule some of their payments.

Then too Pakistan was the first in line to join the club, and actually had to be told ‘this is not for you’. There were 42 countries included in the initiative eventually, such as Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon and so on. Most likely the largest of these countries had a GDP probably half of what Pakistan has.

Back in the late 1980s, similarly, the IMF had introduced a new lending facility specifically for impoverished countries where Pakistan also showed up as the first customer. If memory serves me right, the country back then also had to be told ‘this is not for you’.

The second problem with these episodes of ‘debt relief’ is that they only postpone the inevitable. Even in this initiative, the offer is not to not pay your debts. The offer is to pay them later. By that point in time, more debts would have been taken on, and Pakistan’s gross external financing requirements would have increased further.

These external financing requirements are projected to be around $20.5bn this fiscal year, according to projections in the April IMF document. By FY2022 they are expected to rise to $21.6bn, a marginal increase because the projection assumes implementation of Fund programme targets and does not include anything from the rescheduling. The country’s gross external debt (as a percentage of total projected exports) is expected to rise from 396.1 per cent to 415.4pc by FY2022, if all things go smoothly and exports grow at a rate of 5.4pc and 6.8pc in the next two years. Those are all big ifs.

But what happens in the future has rarely mattered to the rulers of this country, past and present. Billing the future is common practice in most areas of debt management, and this time too the same reflexes are active and well.

A second interesting thing happening on this front is the fate of private commercial debt. In successive interactions with the country’s creditors in private financial markets abroad, the finance ministry and the State Bank has sent confusing signals as to whether Pakistan will be approaching private creditors to seek similar debt rescheduling as the G20 proposed.

The problem here is that private creditors are under no binding obligation to extend such relief, and in fact frown on the very idea that they might be approached. The G20 statement says only that “[w]e call on” private creditors to extend comparable terms, but stops at that. So when the State Bank and the finance ministry were asked in categorical terms whether they will try to take this road, they gave inconclusive answers. “No plans to approach private creditors as of yet” was the best they could say, in public statements as well as private interactions with creditors.

The result was Pakistan’s credit rating was put under review by Moody’s and a few days later, the credit rating of Pakistan’s banks was also put under review, for a possible downgrade. The day after the second Moody’s announcement, the finance adviser Hafeez Shaikh finally released a statement ruling out an approach to private creditors. If this had come a few days earlier, the country may have been saved some embarrassment.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, May 21st, 2020