Former governor of State Bank of Pakistan (SBP) Dr Murtaza Syed on Thursday urged countries including Pakistan to “overcome their fear of debt restructuring”.
In a series of tweets on Thursday, Dr Syed quoted his oped in The Economist, and argued that countries that believe they don’t need debt restructuring are “only increasing the risk of a default and social strife, while mortgaging the future of their populations”.
“Rescuing these countries from a lost decade hinges on restructuring their debt in order to increase fiscal space for them to invest in education, health, investment and climate resilience,” he added.
Dr Syed, who served as the acting governor of the SBP in 2022, was of the view that in order to achieve this the countries need to break away from three taboos.
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“The first taboo is the unreasonable fear of debt restructuring haunting debtor governments,” he said, adding that this can be overcome by highlighting the role of bad luck i.e. Covid-19 pandemic and past governments in creating the problem.
“Obtaining protection from legal action by creditors (a la Iraq 2003) and realizing that the market penalty for bet restructuring is actually much smaller and more short-lived than commonly feared (a la Ukraine 2015), especially if it improves the country’s growth prospects,” said the economist.
Syed said that governments must not be afraid of restructuring lower-seniority commercial debt, which costs more precisely because of this credit risk. “And, where domestic debt needs to be restructured, Cyprus, Jamaica & Seychelles show how to do it without creating financial risk,” he said.
Dr Syed said the second taboo that needs to be broken is accommodating the interests of new official creditors like China and the Gulf states, and securing relief from Multilateral Development Bank (MDBs).
“New creditors can be cajoled by giving them the same rights to force collective action as those given to the Paris Club.
“While MDBs can at least roll over debt service coming due to them. Where there is political will among their shareholders, they can also provide stronger debt relief,” he said, while citing the HIPC and MDRI initiatives of the late 1990s and early 2000s.
Lastly, Dr Syed said the third taboo is allowing the International Monetary Fund (IMF) to be clearer on whether a country’s debt is sustainable or not by leveraging its impressive debt sustainability assessment machinery and cross-country research.
“Currently, the Fund’s pronouncements on debt are fuzzy and malleable,” he said.
“This blind spot is compounded by credit rating agencies, which ignore fundamentals and draw false comfort from debtor country aversion to debt restructuring.
“This leads to damaging procyclicality in ratings in the form of over-exuberance during the build-up of debt vulnerabilities followed by detrimental downgrades when countries seek to do the right thing by seeking debt restructuring,” he said.
Back in June, Dr Syed had also raised alarm bells on the subject, saying that Pakistan is engulfed in “one of the deadliest debt traps in the world”.
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