Pakistan was at the verge of insolvency in the 90s when it had to contract fresh debts, at exorbitant costs, to service existing debts. Then happened 9/11 leading USA to seek Pakistan’s cooperation. The financial institutions had to queue up to offer financial assistance to Pakistan. IMF was booted out and the lenders, most notably the Paris Club offered moratorium and other concessions on Pakistan’s foreign debts. Pakistan, however, could not assess its position and utility in this war and dictate its terms. It was probably happy for coming out of isolation and being recognized as a state despite being chained in sanctions.
If it had negotiated its price for being a frontline state in advance, it would have been in a much better position today when it has a number of economic issues including war on terror which alone is costing it very dearly. Pakistan has paid an immense price for being a front-line state in this war. The direct and indirect costs of our involvement over the last five years have been more than Rs2 trillion ($30 billion). This was the underlying message of Poverty Reduction Strategy Paper released by the IMF and reported in the Express Tribune. The paper noted that Pakistanis have largely lived in a state of denial for years with notions that “this is not our war” and we are “fighting the war for the US”. The economic cost aside, the cost to our image in the world, confidence in our nation’s capabilities and psychological impact on our people is unquantifiable. Taking cue from the acknowledgment of the IMF, the paper suggests that Pakistan should use this as an opportunity to plead for debt relief.
The paper makes a strange assertion that Pakistan’s foreign debt situation is not as bad as it is made to be believed in certain segments of the media. As of March 2010, total foreign debt stood at $54.5 billion. Out of that, Pakistan owes a group of 18 nations called the Paris Club $14 billion, other bilateral lenders $1.8 billion, multilateral agencies like the IMF, World Bank, Asian Development Bank, Islamic Development Bank, etc, around $32 billion. By demanding a relief initially from bilateral loans that are payable to the nations in the Paris Club, and other countries like China, Saudi Arabia, Kuwait and loans from Germany and Japan taken during the last two and a half years, Pakistan can easily get relief to the tune of $15.8 billion.
With success in due course which will depend on our diplomatic and political canvassing, we can make the same demand to the multilateral lenders as well to seek the debt relief. Pakistan’s demand for debt relief is not unjust. It is our role in standing up to terrorists that gives us the opportunity to seek such relief. First and foremost, despite a difficult macro-economic environment, Pakistan has never defaulted on its obligations. Earlier in January 2010, Pakistan successfully repaid its $500 million Euro-Sukuk. All other obligations to the global debt markets are being met as per schedule.
It is worth noting that Pakistan’s Credit Default Swap (CDS) had widened both after the assassination of former Prime Minister Benazir Bhutto and then in the summer of 2008 when a near run on banks was witnessed after rumors emerged that Pakistan was freezing foreign currency accounts. The result of these two events was a flight of capital from the country, causing a liquidity crunch, increase in interest rates and then the economic crash that began in the West from August to September 2008 made the return of the capital back to Pakistan difficult. To put it into context, Pakistan fulfilled its obligations aptly despite taking expending huge sums of money on the war against terror, despite defaults being the order of the day the world over at the time.
At the time of rumors of a run on banks in June-August 2008 and when the fight against militants was taking place in Swat, Pakistan’s CDS touched as high as 30 per cent. It is only in due course of time and showing the world that Pakistan is capable of handling the terrorism problem, we find that our CDS is back to the point when troubles started. In a nutshell, today we are a less risky place for an investor than we were 24 months earlier.
In October 2009 when Hillary Clinton was in Pakistan, in a meeting with legislators the matter of writing off the debt, standing approximately at $2 billion, Pakistan owed to the US was raised. Clinton had assured that she would raise the matter with the US Treasury as it was a fresh issue. However, nothing much has happened as the media tirade that followed the Kerry-Lugar Bill and echoing support by the opposition and military made the matter of writing off the debt inconsequential. It is high time that we raise the issue again with the US, which leads the world, and if it is willing to write off our debt, we can move from one country to another to seek the same relief.
This initiative has to begin from parliament and the ministry of finance. A suitable course of action in this regard could begin with devising a strategy involving the ministry of finance, ministry of foreign affairs and State Bank of Pakistan to envisage the scenarios and conditions that can be put on the negotiating table. After a thorough homework, all political parties’ heads can be involved to bring them on board on this matter.
At the same time while presenting the benefits of debt relief, the political stakeholders can be presented a plan of action as to what the state will do with the savings made due to the debt relief. After necessary approvals and agreement within the country is achieved, an effectively planned and executed lobbying with concerned quarters in Washington, DC, has to begin. In Washington, Pakistan has to tap necessary support of the US State and Treasury Department, World Bank and the IMF.
Critics of the proposal will talk about the impact on Pakistan’s image and standing in global capital markets. It is important to note that lenders always have scenarios to envisage a write-off which can be coupled with conditions that need to be met in order to seek an advantage. The IMF and World Bank already have a Heavily Indebted Poor Countries (HIPC) Debt Initiative and Multilateral Debt Relief Initiative (MDRI) whereby debts of indebted countries can be written off to provide due relief.