Debt relief

May 22, 2020

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PAKISTAN is on the verge of receiving debt relief under the G20 plan and according to an official announcement the total amount is $2bn. There is a possibility that this amount will increase if the period of coverage is extended beyond December 2020. At the moment, the relief is being extended to loans from bilateral creditors, accompanied by a call from the G20 to private creditors to also offer “comparable terms”. Perhaps the same terms can be extended to multilateral creditors too.

It was a wise decision though, on the part of the finance adviser, to make public his government’s resolve to not approach private creditors for comparable relief. All through the period since the plan was announced till today, the financial leadership of the government and State Bank sent confusing signals to private markets regarding their intention to seek debt relief from private creditors. This ambiguity adversely impacted Pakistan’s credit rating, which was put under review by Moody’s, casting a shadow over the future of the country’s B3 rating. The rating agency explicitly said that seeking debt relief on bilateral loans under the G20 initiative contributed to the review, but such action is unlikely to negatively impact the rating since it is under an officially sanctioned initiative and is more likely to free up resources than constrain them further. It was the uncertainty over whether or not Pakistan will approach private creditors that seems to have driven the decision, which it seems forced the hand of the financial adviser who made a clear announcement that the government does not intend to seek relief from private creditors. Now that the relief is imminent, it is important to emphasise that it be utilised in a manner consistent with the rationale under which it has been offered. The G20 moved at the behest of the multilateral creditors, the World Bank and the IMF, and all three have made it very clear that the resources they seek to free up are to be utilised for the fight against the coronavirus. One part of this fight is the management of the economic fallout that the pandemic and its attendant mitigation efforts have created. But in significant measure, resources are required for social protection and ramped-up health investments. It is important that the space created by the debt relief be used to aid the fight against the pandemic first and foremost.

Published in Dawn, May 22nd, 2020