Tuesday July 23, 2024

Cancel the debt

By Mustafa Talpur
April 22, 2020

Last week, the G20 group of rich countries decided to postpone the debt payment that is due to be paid to G20 governments up to the end of 2020 for developing countries.

This will help Pakistan free up some resources to tackle the pandemic. However, this is still not a matching response to the scale of the crisis we face. The debt owed to rich countries is only a small part of the overall debt; huge sums are owed to private banks and investors. Rich countries and multilateral institutions must push these private lenders to cancel these debts. Large payments are also owed to the IMF, World Bank and ADB, and these too must be cancelled for the year.

Earlier last week, Oxfam estimated that developing countries need $2.5 trillion to tackle the pandemic and prevent global economic collapse, proposing $1 trillion debt cancellation, $1trillion issuing Special Drawing Rights and rest $500 billion mobilized by increasing aid. It is a big disappointment that the world’s rich countries did not agree on issuing additional Special Drawing Rights at this critical time.

The IMF is encouraging countries for an upsurge in spending. Increased spending, though important, will further pile on debt if the amount payable in this year is not permanently cancelled. Therefore, the G20 must not allow the suspended debt payments to accrue into the future; they must cancel all the 2020 debts of all countries, especially highly indebted ones like Pakistan.

At this unprecedented public health and economic crisis in history, Pakistan is estimated to repay debt about $14.8 billion current fiscal (estimated from the trend of the last two quarters). Debt cancellation for the year 2020 alone will spare Rs2,418 billion. This will provide the much-needed resources to the government of Pakistan at this critical time. The government needs to provide protective equipment to frontline health workers, arrange key medical equipment necessary to save lives, ensure food supplies, provide cash to workers who lost their jobs, and extend support to small businesses to prevent them from collapsing.

These are enormous challenges but they can be tackled with the additional resources. Therefore, debt cancellation is key at this critical moment to free up resources. Lender nations are wealthy and have already introduced large-scale economic stimulus packages to support business and workers, but countries like Pakistan lack that firepower to follow suit.

The government of Pakistan should also use its sovereign power to stop paying debt and work with other like-minded countries to put pressure on lenders, especially G-20 members, the Paris Club, and multilateral donors to cancel the debt payment forever rather than rescheduling it.

Fcor the last two years, Pakistan's economy has been facing low growth. Earlier this year, the IMF projected 2.4 percent economic growth in 2020. However, after the pandemic WB estimates economic growth in Pakistan will be in the negative and it will fall into recession.

The Covid-19 pandemic has exacerbated vulnerabilities to both the health system and economy. With the lockdown and reduced economic activity, tax collection will certainly drop for which the government has already lowered its ambition from Rs5.5 trillion to Rs4.8 trillion but under the current circumstances it seems a daunting challenge to even collect Rs4.8 trillion. In a few weeks millions of people have become jobless, requiring immediate assistance to survive.

On the other hand, the resource requirement for the health system has increased to cope with the pandemic. Pakistan’s investment in health has been very low in the past, affecting its capacity to deal with any large-scale catastrophe. As a result, Pakistan lacks cash, but also the capacity to raise money or use debt to respond, as the rich countries are doing.

Despite all these challenges, the government of Pakistan has announced a Rs1.2 trillion economic package to support its poor people and provide essential support for businesses to survive. But given the scale and longevity of the crisis and its impact, this is not enough.

The emergency and the immediate impacts of Covid-19 are happening now, so it is urgent to have resources available as soon as possible. Using money reserved for debt repayments to fight the Covid-19 pandemic is the smartest thing to do.

If the debt payment for the year 2020 is cancelled, the government of Pakistan will have additional resources of Rs2,418 billion (about half of the revenue collection in the current fiscal year) , twice the amount of the announced relief package (Rs1200 billion).

In 2020 Pakistan’s estimated population is 220 million and per capita debt payment stands at $67.27 which is Rs10,992 @ 163.40/1 USD. If debt is cancelled there will be instantly Rs10,992/- available per capita. Assuming that the bottom fifth quintile 44 million people are poor, there will be Rs54, 961 available for each poor person with only one year’s debt cancellation.

This is a very critical time for the government of Pakistan to support its vulnerable citizens, especially people who have lost their work and were hardly a single medical bill away from slipping into poverty.

The devastating economic consequence of the pandemic on small businesses is also visible when a country enters the fourth week of lockdown. Small businesses were already under severe trouble and the Covid-19 crisis has further shattered them. Small businesses will require targeted government support to survive.

The recent G20 announcement, and IMF, World Bank and ADB support is a welcome step but insufficient and even mere window-dressing given the scale of the crisis. The World Bank painted a very dire picture of economic growth for three years, therefore rescheduling debt or fresh loans will only add to the heavy debt portfolio and push millions into poverty and desperation. The only solution is complete cancellation of debt.

It is incumbent upon the government of Pakistan to ensure that the entire additional money availed through debt cancellation or aid is spent on social protection, boosting health expenditure and supporting small business. The government must put in place a strong, transparent monitoring and accountability mechanism to avoid waste and slipping of resources on anything other than the pandemic response.

The writer is an Islamabad-based environmental and human rights activist.