The Managing Director (MD) of the International Monetary Fund (IMF), Kristalina Georgieva, recently made a statement in the meeting G20 finance ministers and central banks governors, in which she highlighted the severe impact of the virus in terms of human cost and economy, and among other things pointed out ‘…many emerging markets and low-income countries face significant challenges.
They are badly affected by outward capital flows, and domestic activity will be severely impacted as countries respond to the epidemic. Investors have already removed US$83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded. We are particularly concerned about low-income countries in debt distress – an issue on which we are working closely with the World Bank.’
In terms of the relief effort to mitigate this situation, the IMF indicated that it would make available all of its US$ 1 trillion lending resources, yet it did not indicate anything on the side of easing debt situation of programme countries of IMF – mostly developing countries – neither in terms of debt repayments, including even considering full or some level of debt write-offs where needed.
Having said, in a welcome and much needed step, the IMF and World Bank in a joint statement to the G20 group of countries (more recent to the statement of the MD above) urged creditor countries to postpone debt repayments from poorer nations to some future point of the after the current pandemic crisis had passed. In this regard, the joint statement pointed out ‘It is imperative at this moment to provide a global sense of relief for developing countries as well as a strong signal to financial markets.’
In an overall environment of global lockdowns of varying degrees in individual countries, many programme countries of IMF, including Pakistan, have gone under large-scale lockdowns, severely limiting their capacities to repay their external debt obligations, especially also when they will be easing fiscal and monetary policies to keep their economies and citizens afloat in these very difficult times.
Unprecedented times, call for unprecedented actions, whereby both multilateral – mainly IMF and World Bank – and bilateral donors should look to at least provide debt moratorium of significant time to these countries. In addition, the MD pointed out that nearly 80 countries had requested emergency finance from IMF, and that the IMF was also providing relief under its ‘Catastrophe Containment and Relief Fund’.
Where economic shocks have pushed countries into debt crisis, the IMF needs to help restructure debt with previous lenders. Otherwise, its loans will just be used to pay off reckless lenders and maintain the debt crises
It is important therefore that while the Bretton Woods institutions called rich countries to postpone debt repayments from poorer nations, it should at least offer the same to its own recipient countries. In this regard, it may be pertinent to point out something the Guardian newspaper recently highlighted ‘According to Jubilee Debt Campaign calculations using World Bank data, developing nations are due to spend $18.1bn (£15.3bn) on debt payments to other governments in 2020, around $12.4bn to multilateral institutions such as the IMF and World Bank, and $10.1bn to private creditors.’
Given the immense challenge at hand, especially of continuing the needed support for the health sector and also the 25 percent people below the poverty line, among others, Pakistan should look to explore these avenues, if it has already not done so, along with seeking debt write-offs – where reportedly a call of general nature to this end has already been made by the PM – and moratoriums from the donor community.
Here, it needs to be pointed out that developing countries in general have seen debt levels rising to riskier heights, as pointed out by a policy paper of the IMF ‘Macroeconomic developments and prospects in low-income developing countries’ released in March 2018, well before the coronavirus crisis hit.
Pakistan also is facing huge external debt burden, especially as percentage of exports earnings and remittances combined, and in the fallout of the crisis is likely to face extremely uphill task to meet debt repayments and meeting the immense economic challenges that are uncovering themselves quickly.
Already, the growth projections of the current fiscal year were roamed around a paltry 2 percent, but with the IMF projecting global economy to go in recession in 2020, whereby the MD in the same statement indicated ‘…the outlook for global growth: for 2020 it is negative – a recession at least as bad as during the global financial crisis or worse’, growth is likely to fall drastically for Pakistan.
In line with the negative fallout of this globally in terms of export earnings of countries, the already low export levels of Pakistan are also likely to feel a strong pinch, leaving in turn all the more country’s capacity to come true on its debt repayments. A moratorium at least by as many donors as possible should be the way forward. Hope Pakistan starts negotiations soon in this regard, if it hasn’t already.
Such a step of providing debt relief will also pull the State Bank of Pakistan away from its insecurity of keeping interest rates upward sticky for quite a long time
In the context of the fast-rising difficulties of countries in the wake of the crisis, in particular the developing countries, the policy head for Jubilee Debt Campaign, Tim Jones recently pointed out ‘Urgent action is needed to support poorer countries being hit by the economic impacts of coronavirus, including a complete moratorium on debt payments for those most affected.
“Where economic shocks have pushed countries into debt crisis, the IMF needs to help restructure debt with previous lenders. Otherwise, its loans will just be used to pay off reckless lenders and maintain the debt crises. And the IMF itself needs to cancel debts owed to it by countries suffering the impact of the pandemic.’
For countries like Pakistan, just coming out of the current account deficit, and only bringing some semblance of normality to their foreign reserves situation, the global pandemic and its likely fallout in terms of exports and remittances, will already take away a lot in terms of build-up of reserves, and if the external debt repayments also go as scheduled, will leave these reserves all the more depleted, putting in turn significant pressure on the local currency of the country.
This in turn, will once again lead the country back to the situation of bankruptcy, where it was virtually standing around a year-and-half ago; and this time the countries that came to help may themselves find it very difficult to do the same for Pakistan in terms of rebuilding reserves, given coronavirus is hitting countries hard at a global scale.
This puts extra-responsibility on Pakistan’s three main multi-lateral sources of borrowing – IMF, World Bank, and Asian Development Bank – to come to Pakistan’s support in terms of both write-offs to the extent possible, and moratoriums. One would expect the rich bilateral countries, like the Paris Club, to offer as much relief in this regard as possible.
Such a step of providing debt relief will also pull the State Bank of Pakistan away from its insecurity of keeping interest rates upward sticky for quite a long time, even after the recent decline of 2.25 percent but still at 11 percent, when other countries have loosened a lot given the huge scale of the impact of the pandemic; notwithstanding such a policy being unjustified given the smallish amount of portfolio investment or very fluid ‘hot money’ attracted, and the high opportunity cost being paid as a result of this policy in terms of greatly jacked-up domestic debt repayment levels for government, and in burdening domestic businesses.
Dr. Omer Javed is an institutional political economist, who previously worked at International Monetary Fund, and holds Ph.D. in Economics from the University of Barcelona. He tweets at @omerjaved7. This article originally appeared at Business Recorder and has been republished with the author’s permission. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.