Pakistan in a perfect debt spiral with the worst impacts of the pandemic

24 November by Abdul Khaliq

Pakistan is one of the 52 countries facing severe debt crisis. The most critical problem faced by the country’s economy is repayment and servicing of external debt. Persistent borrowing creates a spiral with more borrowing generating an impending economic crisis. The empirical evidence overwhelmingly supports the view that a large portion of the government debt has negative impact on economic growth potential, and in many cases the impact gets more pronounced as debt increases.

The high degree of indebtedness has made Pakistan more vulnerable to economic shocks and weakened the country politically vis-a-vis powerful external lenders. It has also greatly reduced Pakistan’s ability to invest in education and healthcare. The picture looks dismal when we take a glance at the human development index where Pakistan’s rank (154) is worse than that of India (131), Bangladesh (133), and Sri Lanka (72).

 Current economic and fiscal situation

With two years of Covid-19 crisis, the Pakistan economy is in the woods, marked with rising debt stock Debt stock The total amount of debt , higher inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. , large scale unemployment.

Under these circumstance Pakistan is projected to allocate $ 27.8 billion to meet external debt service Debt service The sum of the interests and the amortization of the capital borrowed. payments between September 2020 and June 2023. This figure includes payments for $ 19.4 billion to the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
, the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, ADB and China.

 Impacts of the Pandemic

  • Budget cuts: The government is imposing budget cuts, withdrawing subsidies including for food, fertilisers and fuel; wage bill cuts and caps precisely at a time when people are in greater need of public support. The average expenditure contraction in 2021 is projected at 3.3% of GDP.
  • Social Protection: Due to rationalisation and narrow-targeting of social protection program the poorest population receive smaller and smaller benefits, while most people are excluded. Out of 80 million only 1.5 million people have been able to benefit.
  • Public services are likely to be downsized and/or privatised, including health, while labour regulations may be dismantled.
  • Poverty: As many as 10 million Pakistanis have been pushed into poverty. 46% of population (over 80 million) was already below poverty line, which is likely to increase by 5-6% due to adverse impacts of pandemic.
  • Increasing debt burden: The crisis is marked by Pakistan’s increasing debt burden and it is compelled to meet debt service requirements at a great human and social cost. For now, gone are the concerns about how to “pay for” it all. Instead we are seeing wartime levels of spending, driving deficits and public debt — to new highs. Working classes have been forced to bear the effect of this mounting debt burden through indirect taxation, as a result.

 DSSI and the G20 Common Framework

Despite Pakistan PM’s appeals to the international community for a comprehensive debt relief, Pakistan obtained temporary debt relief worth $1.8 billion from the members of G-20 nations. This included $1.47 billion principal loans repayments and $323 million interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. on the loans. This is nothing but a drop in the ocean and a temporary relief. In spite of all the parties - including the G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). -WB-IMF - agreeing that the DSSI is insufficient and inappropriate, the lenders stubbornly persist with it. It is important to remember that the measure is conditional with an agreement with the IMF, which is definitely not worth the trouble. On the other hand, rating agencies Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s :
 have escalated the threat of downgrading the sovereign rating of countries using Debt Service Suspension Initiative.

 Is sovereign debt workout mechanism workable?

Comprehensive sovereign debt Sovereign debt Government debts or debts guaranteed by the government. relief must follow the initial debt suspension phase following the structure of the assistance offered by the international community to Germany in 1953. We demand a suspension of debt repayments and a cancellation of the debt since Pakistan is no longer in a position to repay its loans. This demand has a legitimate legal arguments based on international law, which calls for debt payments suspension on the grounds of necessity and fundamental change of circumstances.

Independent debt audits must be considered as an integral component of comprehensive sovereign debt work out mechanism. Audits should take place at the national level and should be responsible for the assessment of the legality of all the previous loans. The results of the debt audits would then inform the process of cancelling illegitimate and odious debts.

The rich nations should fulfil 0.7% of their Official Development Assistance ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
commitments and mobilise the required $1.5 trillion annual investment in sustainable infrastructure.

Massive illicit financial outflows from developing countries to rich countries, to offshore tax havens should be stopped. Without urgent and significant debt relief from all creditors, coupled with local actions such as a public debt audit and a massive reduction in non-development expenditures, it will be hard for Pakistan to avoid a default.

Abdul Khaliq

CADTM Pakistan




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