Debt swap proposal

Published September 13, 2022

UN Secretary General António Guterres has made an impassioned appeal for substantial debt relief for developing nations.

At the end of his ‘solidarity visit’ to Pakistan, he pledged to strongly advocate ‘debt swaps’ with the IMF and World Bank, as well as at the G-20 meeting, to enable poor and middle-income countries, including Pakistan, to use that money to invest in climate resilience, sustainable infrastructure and green transition of their economies instead of paying back loans to the creditors.

Terming the flood devastation triggered by unprecedented monsoon rains and melting glaciers as “climate carnage”, Mr Guterres repeated that the relief he was talking about was “a matter of justice and not of generosity”. Before his departure for New York, he asserted: “Pakistan has no resources to compensate for the loss of lives, crops and livestock. Those who have created this situation must massively support the country.”

Pakistan’s total external debt and liabilities have already surged to 39.7pc of the GDP or $130.2bn, and its debt servicing jumped to over $15bn during the last fiscal year, hampering growth and development as the country is left with little to spend on the social sector and on disaster management. That’s not all.

Editorial: Looming shortages

The country is virtually in a debt trap as it has to borrow more money every passing year to pay back its debt and support its budget. The IMF has forecast Pakistan’s external financing needs to be just below $31bn for the present financial year, and projected them to increase to $39.1bn by FY27.

The enormous economic losses and food shortages caused by massive flooding mean that the external financing needs to spike significantly in the near to mid-term, forcing the government to borrow more to pay the swelling import bill and stay liquid in the face of declining foreign currency reserves.

Should the multilateral lenders and the wealthy nations agree to the UN secretary general’s proposal, it would provide a chance to many countries like Pakistan to wriggle out of the debt trap, stand on their feet and pull their citizens out of abject poverty.

The Heavily Indebted Poor Countries initiative launched in 1996 by the IMF and World Bank with the aim of ensuring that no poor country faces a debt burden it cannot manage, did not, for several reasons, create the impact it was initially expected to. However, it did help beneficiary nations boost their spending on infrastructure, education, health and other social services.

Indeed, debt relief or forgiveness is not a sustainable solution to our liquidity problem. Yet there is a fair chance a positive response to the call for debt swaps by the UN secretary general would provide countries like Pakistan, facing recurring climate-induced disasters on top of extreme financial difficulties, some room to increase their spending to fight the effects of natural disasters on their citizens and economies.

Published in Dawn, September 13th, 2022

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