The International Monetary Fund’s Poverty Reduction Strategy Paper (PRSP) for Pakistan was released in the first week of July. The underlying message of the PRSP was the acknowledgment of the fact that Pakistan has paid an immense price for being a front line state in the War on Terror. The direct and indirect costs of our involvement over the last 5 years have been more than PKR 2 trillion or in USD terms of approximately USD 30 billion. We as Pakistanis have largely lived in denial for years with notions that “this is not our war” and we are “fighting the war for 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, I believe that we should use this as an opportunity to plead a debt relief for Pakistan. In order to avail this opportunity, it is most pertinent that all parties in Parliament join hands, discuss the matter thoroughly and strategize ways as to how we can get debt relief from the international community. By debt relief, Pakistan could save on debt servicing costs and more importantly reduce the liabilities on its balance sheet. At the same time, reduction in debt servicing costs can be coupled with a freeze on non-development expenditures of the government to allow for better deployment of the same towards Public Sector Development Program.
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, Pakistan’s total foreign debt stood at USD 54.5 billion. Out of the that Pakistan owes a group of 18 nations called the Paris Club USD 14 billion, other bilateral lenders USD 1.8 billion, Multilateral Agencies like IMF, World Bank, Asian Development Bank, Islamic Development Bank etc approximately USD 32 billion.
By demanding a debt relief initially from the bilateral loans that are payable to the nations in the Paris Club, and other nations like China, Saudi Arabia, Kuwait and loans from Germany and Japan taken during the last 2 and half years, Pakistan can easily get a relief to the tune of USD 15.8 billion. With success in due course which will depend on our diplomatic and political canvasing, we can expand 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 a relief. First and foremost, despite of a difficult macro-economic environment that has plagued Pakistan, Pakistan has never defaulted on its obligations. Earlier in January 2010, Pakistan successfully repaid its USD 500 million Euro-Sukuk. All other obligations to the global debt markets are performing 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 the banks was witnessed after rumors began 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-September 2008 made the return of the capital back to Pakistan difficult. In the context of all this, when defaults were the order of the day the world over, Pakistan has fulfilled its obligations aptly despite of taking on huge costs of war on terror. In the chart below, one can see that at the times of rumors of a run on the banks in June-August 2008 and when the fight against militants in Swat was taking place, Pakistan’s CDS touched as high as 30%. 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 nut shell, today we are a less risky place for an investor than we were 24 months earlier.
Movement of Pakistan's Credit Default Swaps from February 2008 till now
Figure : source data: Reuters
Last year in October 2009 when Mrs. Hilary Clinton was in Pakistan, in a meeting with legislators, the matter of writing off the debt of Pakistan owed to the USA which stands approximately at USD 2 billion was raised. Mrs. Clinton had assured that she would raise the matter with 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 our debt inconsequential. I feel it is high time that we raise the issue again with the US. US leads the world and if it is willing to write off our debt, we can move from one country to another seek the same relief.
This initiative has to begin from the Parliament and ministry of finance. A suitable course of action in this regard could begin with devising a strategy involving Ministry of Finance, Ministry of Foreign Affairs and State Bank of Pakistan to envisage scenarios and conditions that can be put forward on the negotiating table. After thorough homework is done, 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 debt relief. After the necessary approvals and agreement within the country is achieved then an effective 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 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 situation 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. As a Pakistani, I wouldn’t like to be given relief under the initiatives of HIPC or the MDRI which have been received mainly by Sub-Saharan African countries. But by effectively lobbying for the role we are playing in the war on terror and presenting the positives of such debt relief on our economy and society, we can get the necessary initiatives created for Pakistan.
At the end of the day, we as Pakistanis have to safeguard our own interests. Our interests remain in a Pakistan that has the necessary development targets and has the political will to achieve those. Also we have to realize that opportunities such as now do not knock our doors every day. Today the world needs us therefore they will be inclined to listen to our just demands. When we have done our job, no one would care what we want. Timing our initiative is of utmost importance and the right time is now.