Rising sea of debt

Mehtab Haider.
March 30, 2020

Pakistan could get the much desired breathing fiscal space on its external debt front, if the multilateral creditors gave consideration to a moratorium on debt repayments.

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Pakistan could get the much desired breathing fiscal space on its external debt front, if the multilateral creditors gave consideration to a moratorium on debt repayments.

In normal circumstances, the multilateral creditors, such as the World Bank (WB) and Asian Development Bank (ADB) do not have any provisions for moratorium on their outstanding debt. However, in the aftermath of covid-19 outbreak, Pakistani authorities are asking the WB and ADB to explore possibilities. Out of total external debt and liabilities of $111 billion, Pakistan owes almost 70 percent outstanding debts to multilateral creditors.

With immediate effect—and consistent with national laws of the creditor countries, the World Bank Group (WBG) and International Monetary Fund (IMF) have called on all the official bilateral creditors to suspend debt payments from the International Development Association (IDA) countries that request forbearance in the wake of covid-19.

The WBG and IMF stated that the coronavirus outbreak was likely to have severe economic and social consequences for the IDA countries, home to a quarter of the world’s population and two-thirds of the world’s population living in extreme poverty.

“This will help with IDA countries’ immediate liquidity needs to tackle challenges posed by the coronavirus outbreak and allow time for an assessment of the crisis impact and financing needs for each country” the joint statement added.

"We invite G20 leaders to task the WBG and the IMF to make these assessments, including identifying the countries with unsustainable debt situations, and to prepare a proposal for comprehensive action by official ‘bilateral creditors’ to address both the financing and debt relief needs of the IDA countries. We will seek endorsement for the Proposal at the Development Committee during the Spring Meetings (April 16–17).

“The World Bank Group and the IMF believe 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. The international community would welcome G20 support for this call to action,” it concluded.

Pakistan is also among the list of 76 countries that are eligible to receive the IDA resources under concessionary lending. Pakistan owes around $10.9 billion to official bilateral creditors of the Paris Club countries, and Islamabad had once obtained debt relief in 2002-03 for 10 years when the country had decided to stand by the US in its war against terror in the aftermath of 9/11/2001.

Federal Minister for Economic Affairs Hammad Azhar said, “We welcome joint statement of WB and IMF calling upon G20 countries to suspend debt payments of (developing) countries. PM Imran Khan has been urging this since cvoid-19 pandemic. We hope it shall be accepted and we also urge multi-laterals for relief on their debts.”

Pakistan has so far approached the IMF, WB and ADB to secure $3.65 billion loan, as outflow of hot money increased, and foreign exchange depleted rapidly in recent weeks.

Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh made a disclosure that Pakistan was negotiating a $1.4 billion facility from the IMF under its Rapid Financing Instrument (RFI). Pakistan had struck a deal of $6 billion from the IMF under 39 months Extended Fund Facility. So, this additional funding of $1.4 billion would be separate from the existing EFF facility.

Amid the fund mobilisation efforts, it has been learnt that the WB would provide $1 billion, while ADB was going to provide $350 million now, and another $900 million loan by June 2020.

The IMF’s Managing Director Kristalina Georgieva assured Islamabad that the Fund stood ready to extend its support to Pakistan.

The RFI facility provides rapid and low-access financial assistance to member countries facing an urgent balance of payments need, without the need to have a full-fledged programme in place.

It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, conflict and post-conflict situations, and emergencies resulting from fragility. As a single, flexible, mechanism with a broad coverage, the RFI replaced the IMF’s previous policy that covered Emergency Natural Disaster Assistance (ENDA) and Emergency Post-Conflict Assistance (EPCA).

The RFI is available to all member countries, although PRGT-eligible member countries are more likely to use the similar concessional Rapid Credit Facility. The RFI is designed for situations where a full-fledged economic program is either not necessary or feasible. The former situation may arise when the shock is transitory and limited in nature, while the latter may arise when the member’s policy design or implementation capacity is limited, including due to the urgent nature of the balance of payments need or to fragilities.

Access under the RFI is limited to 50 percent of quota per year and 100 percent of quota on a cumulative basis. The annual access limit is raised to 80 percent of quota and the cumulative limit to 133.33 percent of quota if a member faces balance of payments needs arising from a large natural disaster (that is, which causes assessed damage of 20 percent of GDP or more) and the member’s existing and prospective policies are sufficiently strong to address the natural disaster shock.

The level of access in individual cases depends on the country’s balance of payments need, capacity to repay, the member’s outstanding Fund credit and its record of using Fund resources in the past. Financial assistance provided under the RFI is subject to the same financing terms as the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL) and Stand-By Arrangements (SBA), and should be repaid within 3¼ to 5 years.

Financial assistance under the RFI is provided in the form of outright purchases without the need for a full-fledged programme or reviews. A member country requesting RFI assistance is required to cooperate with the IMF to make efforts to solve its balance of payments difficulties and to describe the general economic policies that it proposes to follow. Prior actions may be required where warranted.

While financing under the RFI is often a one-off purchase in the case of an urgent balance of payments need of limited duration, there is scope for repeated use. A repeated use of the RFI within any three-year period is possible if the balance of payments need is caused primarily by an exogenous shock, or the country has established a track record of adequate macroeconomic policies, including through a staff monitored programme, prior to the request.

As under the RCF, in addition to the provision of emergency assistance under the RFI, the Fund may also provide technical assistance to build the country’s capacity to implement comprehensive macroeconomic policies. Areas of focus may include building statistical capacity and establishing and organising fiscal, monetary, and exchange institutions to help build tax and government expenditure capacity, payment, credit, and foreign exchange operations.

The writer is a staff member



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