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EDITORIAL: UN Secretary General Antonio Guterres during his recent visit to Pakistan called on international creditors to introduce a new debt swap mechanism for those poor nations suffering from climate change.

He added that “instead of paying to the creditors, using that money to invest in climate resilience, investment in sustainable infrastructure, etc…is exactly what Pakistan needs instead of paying debt, using that money for rehabilitation and rebuilding infrastructure.”

Guterres then went on to state that “we will be strongly advocating it with the upcoming meetings with the IMF.”

One would sincerely hope that better sense would prevail with the Fund mission dealing with the ongoing Extended Fund Facility programme whose seventh/eighth review documents were uploaded on its website on 2 September and inexplicably made absolutely no mention of the devastating floods.

And even more unfathomable was the silence of the two Pakistani signatories to the Letter of Intent, notably Miftah Ismail as Finance Minister and the Acting Governor State Bank of Pakistan, which was then submitted to the Fund board of directors for approval — a requisite for the release of the tranche.

The Organisation for Economic Cooperation and Development (OECD), consisting of 37 developed countries with market-based economies that seek to develop policy standards to promote sustainable growth, argues that while debt swap provides opportunities for low income countries to address environmental challenges and other policy challenges to support green growth there a range of risks and management issues that need to be addressed if these swaps are to achieve their objectives. The OECD website warns that “debt-for-environment swaps (DFES) is not an easy task.

It requires the concerted efforts of the whole government and very thorough preparations, including robust pre-feasibility studies, strong fiscal capacity, commitment to transparency and international credibility of the domestic spending and expenditure programme that is attractive to the whole government.

With caution and determination, DFES is a realistic option for some countries and can play a significant role in mainstreaming the environment in government policies and in domestic environmental financing.”

A cursory glance at these requirements, including commitment to transparency and international credibility of domestic spending, makes Pakistan an unlikely candidate for a successful debt for environment swap.

The IMF in its working paper dated August 2022 titled ‘Debt-for-Climate Swaps: Analysis, Design, and Implementation’ noted that “while most present-day debt problems in developing countries are not caused by climate change, this argument is relevant for a set of economies that suffer from unsustainable debt and high climate risks and is likely to gain further relevance in the future, as additional economies feel the impacts of climate change.

In recognition of this fact, the IMF’s new Sovereign Risk and Debt Sustainability Framework includes modules that analyse the impact of climate adaptation and mitigation on debt sustainability and requires IMF staff to apply the adaptation module in all debt restructuring contexts.”

The paper further highlighted lessons learned from experience in designing and implementing such DFES in Georgia and Kyrgyz Republic as well as other mostly Central and East European countries where such swaps were successfully implemented, for example Poland and Bulgaria may interest Pakistan if it intends to consider entering such swaps.

It is, therefore, important to note that the success or failure of DFES rests with governance that must include creating fiscal space not through taxing the low hanging fruit, from indirect taxes whose incidence is greater on the poor than the rich, but the elite, slashing unnecessary and wasteful current expenditure and a commitment to transparency and accountability that still remains a pipedream even though elections are fought and won on such pledges.

Copyright Business Recorder, 2022

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