Debt trap: What the Pakistan govt can learn from the Jodia Bazar ecosystem

The priority for Pakistan should be to get the best terms from its closest ally. So long as that materialises, other things are likely to fall into place.
Published November 8, 2022

The connective tissue of markets like Jodia Bazaar is a complex, interconnected web of relationships. This web is knitted together through ethnic, clan, and familial ties and it informs how the various actors in the market conduct business with each other. Sub-groups within this web provide access to capital and credit, supporting those they trust and know, and pooling resources to achieve win-win outcomes.

These groups, however, also expose themselves to various risks, and it is quite common for individuals who have borrowed money to default on their payments. This happens for the same reasons companies and individuals default around the world: bad decisions may be made, fraud conducted, or sometimes simply bad luck.

When these outcomes materialise, the creditors must find a path forward to secure their capital and ensure that their debtor survives. This desire is there for two key reasons: firstly, you do not want your debtor to go belly-up because then they cannot pay you back and secondly, because the debtor is also part of your sub-group, and it is highly likely that this sub-group is part of your direct or extended family.

During the negotiations, a group of men (yes, it is almost always men), representing both creditors and family members, will meet. They will try to piece together the entire amount of loans that are payable, and then find a path forward where everyone talks through haircuts and/or a new payment schedule. During these discussions, there are usually a few core principles, key among them being that the defaulter’s family members should both vouch for and contribute the maximum they can in order to secure the financial future of their relative.

In situations where family members are unwilling to do so, the sub-group and its extended members are unlikely to offer generous terms and may even deny access to credit. Should the latter happen, the family jewels, quite literally, must be sold to make the creditors whole. Tough times on the family follow and the impact of the financial disaster can last for years.

On a macro level

The international financial ecosystem has a lot in common with the way Jodia Bazaar works. A country that takes on too much debt and uses it in an imprudent way will eventually have to renegotiate with its creditors. When that happens, the global financial markets — at the institutional and sovereign levels — sit down together to figure out a new path forward. However, the extension of credit depends on the behaviour of the country’s closest friends and allies, and their willingness to bear the greatest burden in terms of restructuring the loans.

Should the closest ally, who also happens to be the largest owner of debt, refuse to offer the most generous terms, the broader network is unlikely to offer generous terms. After all, if those closest to you are unwilling to provide help, why should others who have far less at stake?

The ongoing conversation about Pakistan’s debt and its ability to meet its external payment obligations is proceeding in a similar pattern. When Pakistani policymakers began signalling that they may need to restructure the country’s debt, they communicated these signals in a very confusing way. There was talk of going to the Paris Club, then negotiating with bilateral creditors, and some talk of issuing “replacement paper”.

Not only did the government not signal clearly what exactly its strategy would be, it also refrained from answering the question of what its closest ally, the one with which it has a relationship that is higher than the Himalayas, was offering.

Senior members of the government including Ishaq Dar continued to insist that Pakistan was committed to fair and equitable treatment, and that it did not matter who the country negotiated with at first.

As described above, this approach would fail in both Jodia Bazaar and the international financial ecosystem. And it seems like the government has finally realised the flaw in that strategy.

Finance Minister Dar is saying that another $13 billion is incoming from China and Saudi Arabia. If this does indeed happen, providing a shot in the arm to Pakistan’s external sector position, then other creditors and the international bond market may be willing to give Pakistan additional space.

But if there are delays in the materialisation of these funds and if the government remains confused about its strategy moving forward, the market may not be that kind. For now, the priority for Pakistan should be to get the best terms from its closest ally. So long as that materialises, other things are likely to fall into place.

The Jodia Bazar Diaries is a weekly column by political economist Uzair Younus