ISLAMABAD: The new coalition government led by Prime Minister Shehbaz Sharif has been advised to seek debt relief from all the domestic and external creditors including the International Monetary Fund (IMF) and create fiscal space for long-pending structural reforms to avoid repeated external account challenges.

The Institute for Policy Reforms (IPR) — a think tank run by PTI leader Humayun Akhtar Khan — in a report titled ‘What to do about Pakistan’s Mountain of Debt’, released on Monday, called for an immediate action to prevent the economy from a Sri Lanka type collapse said that ‘external debt and current account deficit are not just the biggest economic issues, they are a national emergency’, and hence unusual steps.

It supported the government’s aim to revive the IMF programme but said seeking more loans from the IMF was not enough. This way Pakistan will never exit the problem. Between 2015 and 2021, foreign debt grew by over 200pc while payment of interest and principal grew by 250pc. But exports have grown by just 3pc which will not help repay the debt, therefore the need for an item-wise study of what export could increase quickly, possibly with incentives as production of exportable goods has not grown

Think tank suggests unusual steps to avoid a Sri Lanka-like collapse

The report said behind the repeated crises was a breakdown in policymaking. For example, Pakistan has a constant trade deficit. It is because of falling investment and production, but there is no effort to increase them.

The think tank suggested to the government to ask IMF for debt relief and go beyond programme to seek debt relief from all lenders in the shape of reduction in interest rate, reduction in principal amount and extending repayment period (the last could add to indebtedness). To convince them, authorities must go with a sound plan for economic growth and correction of elite privilege.

Saying that Pakistan has a credible cause to make the appeal, the IPR argued that if debt relief is not forthcoming, rescheduling is another option, but from all creditors and no build-up of interest during the rescheduled period. The creditors should be briefed on the amount of external debt incurred by the economy and how much Pakistan has paid back as interest and principal. Net resource transfer in 20 years is negative $5.22bn. Over 70pc of new debt is for the balance of payments (BoP) support.

The report showed that despite large sums paid back, stock of debt had risen greatly by 228pc, even as net transfer to Pakistan was negative in 20 years and most years a small proportion of total disbursed amount. It observed that whether concessional or other creditors, the share of interest in total servicing is high. It ranges from 20pc for multilateral creditors to 51pc for Paris Club lenders.

Published in Dawn, May 17th, 2022

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