On February 19, 2023 there was an article on Bloomberg titled China’s Debt Noose Could Strangle Pakistan by Mihir Sharma. This article was the prelude to the first G-20 Finance Ministers and Governors of the Central Bank meeting in Bangalore, India, on February 25, 2018.
It is unfortunate that Sharma has indicated that we should have thrashed out by ourselves before committing something to the IMF (International Monetary Fund) for the revival of our IMF programme when its Mission was in Pakistan last fortnight. Sharma has raised the following relevant points:
“The nuclear-armed South Asian nation is close to default. Whether it’s saved will depend on how willing Beijing is to work with more traditional lenders. Pakistani governments do bear responsibility for bad budgeting.
The economist Murtaza Syed has estimated that Pakistan needs $35 billion a year to pay for its imports and repay its foreign debt. That amounts to 5% of gross domestic product, while the government’s own tax collection is only 10% of GDP….The International Monetary Fund appears close to reviving a $6.5 billion loan program to forestall the immediate crisis.
After that, Pakistan will need to look for a decent debt restructuring package that helps its creditors get some of their money back while politically feasible reforms are implemented that allow for sustainable debt payments and imports in the future…. Unfortunately, Pakistan needs a deal just when the systems that had, for decades, managed such sovereign debt restructurings are breaking down.
How the world addresses this combination of self-inflicted and external challenges will be critical…. In the past, the major creditor countries — mostly Western nations and Japan, who together constitute the Paris Club — were also the major shareholders of the IMF and hosted the private banks that dominated commercial lending to debt-ridden countries…. This made it relatively easy to ensure that official debt relief was compatible with the terms that private capital received, and that the IMF imposed. That’s no longer the case.
At the end of the last financial year, Pakistan’s outstanding bilateral debt to the Paris Club countries was about $10 billion. Meanwhile, it owed China $23 billion.
Two-thirds of the $10 billion it owed “commercial banks” were also to state-owned Chinese lenders operating as official financing arms for China’s Belt and Road Initiative.
Between July 2021 and March 2022, over 80% of Pakistan’s bilateral debt service went to Beijing. In other words, China will have to approve any agreement, and with the same terms as Pakistan’s other creditors.
In fact, China might have to go the extra mile: Much of its lending, especially through its state banks, was at market rates. It might have to accept a bigger haircut than creditors such as Japan that were already lending at concessional rates.
Pakistan thus faces multiple problems if it wants a coherent debt restructuring. First, Western lenders — and the Bretton Woods institutions they dominate — are determined that China does its fair share.
The current G-20 president, India, agrees. Its G-20 sherpa said this week that “it can’t be that the IMF takes a haircut and goes to settle Chinese debt.”
Pakistan, a nuclear-armed nation of 240 million people, is racing down a road that leads to the disruption of default or the chaos of austerity — and, for once, it’s not all Pakistan’s fault. In fact, it is almost as if the $380-billion economy’s looming crisis is designed to reveal the ways in which the world’s sovereign debt restructuring mechanism is severely outdated and needs to be fixed — by the G-20, if nobody else steps up.
Finally, Chinese financial institutions will have to get their act together. Last year, the director-general of the People’s Bank of China’s department of international affairs, Jin Zhingxia, warned that big Chinese lenders with external exposure didn’t have a lot of experience with debt restructuring, and needed to sit down to coordinate with each other and with the Paris Club.
In addition, any actual writing down of principal amounts might require signoff from the State Council. China’s rise as a lender to the Global South, the surge in the prices of food and fuel thanks to the Ukraine war, and the devastations wrought by climate change:
All these are factors that will drive more and more countries to the brink of default in coming years. Few will be as consequential as Pakistan. If Pakistan can be saved through a rationalisation of its debt, then the others have hope.
Later this week, G-20 finance ministers will meet in Bengaluru and will reportedly discuss a proposal for more equitable burden-sharing. Any self-serving objections from China should be overruled. A sovereign debt restructuring system designed for the 20th century can’t be allowed to wreck the 21st.”
The relevant observations by Sharma are:
There is a need for debt restructuring for Pakistan. It is inevitable;
China is the main player in this restructuring process;
China being a part of G20 will have to follow the principles laid down by the international community;
There will be equal haircut for all lenders, if so decided;
Chinese do not have the requisite internal mechanism to deal with that situation and they have to create it;
International system of debt restructuring for sovereigns has become outdated and the sovereign debt restructuring system designed for the 20th century cannot be allowed to wreck the 21st.
The G20 Summit issued the following statement, which incidentally reflected Sharma’s view:
We recognize the urgency to address debt vulnerabilities in low and middle-income countries. Strengthening multilateral coordination by official bilateral and private creditors is needed to address the deteriorating debt situation and facilitate coordinated debt treatment for debt-distressed countries….We task the International Financial Architecture Working Group to develop a G20 Note on the Global Debt Landscape in a fair and comprehensive manner.
We welcome joint efforts by all stakeholders, including private creditors, to continue working towards enhancing debt transparency and look forward to the results of the voluntary stocktaking exercise of data sharing with IFIs.
We welcome the efforts of private sector lenders who have already contributed data to the joint Institute of International Finance (IIF)/OECD Data Repository Portal and continue to encourage others to also contribute on a voluntary basis.
On February 28, 2023 Moody’s further downgraded the credit rating of Pakistan. This rating anticipates default.
Nevertheless, the worst and most depressing aspects of aforesaid development is that politicians, analysts, media and the public at large in Pakistan appear to be totally oblivious of the upcoming difficulties. It is very strange to note that an Indian journalist, Mihir Sharma, has identified our problems and shown empathy whereas we are still living in illusions.
We do not see such research and practically relevant articles in Pakistan.
Why is it so? There can be two answers. Firstly, there can be a view that we as a nation believe that the problems are temporary and even if there are problems some messiah will definitely come to our rescue. Or, we have already reconciled to the end game that there is no solution and disaster is inevitable. In my view, however, both the positions are incorrect. The problem is genuine and real and we are operating in a changed world.
In the light of the aforesaid observations, it is necessary that the Pakistanis, as one nation, should take into account the gravity of the situation and come up with a navigation plan to steer country out of crises.
The space to waste time with an illusion that one or two instalments of IMF will resolve our issues no longer exists. There is a need to correct the following three accounts of Pakistan:
Current Account by restructuring of foreign debt liabilities;
Fiscal Account by increasing the tax collection to around Rs 15,000 billion by 2025;
Restructuring of local debts and revisit of 10th NFC award, if required;
Balancing energy account where, at present, total cost of production of Rs 3,000 billion results in recovery of only Rs 1,500 billion.
Usually, countries do not wind up on account of insolvency; however, the common man suffers which leads to chaos, civil unrest, strife and terrorism. We cannot afford that.
Copyright Business Recorder, 2023