If a country defaults on its loans, it is a big problem for its citizens. In the 1980s, defaults in Latin America led to hyperinflation, riots and political instability in Argentina, Brazil and Peru. Pakistan today also stands in the midst of a debt crisis where the solution perhaps may be quite similar to the one applied back then in Latin America: Convincing creditors to share the pain and accept less than what they are owed. Here, by no means one is trying to suggest that we are not responsible for our actions, but just that lenders in many ways also ignored prudence by failing to call out a country borrowing excessively and leading to an imminent debt-sustainability crisis. In essence, the continuous borrowing means that Pakistan is spending an enormous amount of its budget on servicing debt: Today more than half of government revenue goes towards paying foreign debt and this percentage will increase unless the country gets relief. Sad that all food subsidies have been abolished and of late we have seen that even a small relief, as and when announced, needs to be disbursed with great caution, lest it leads to stampede and the loss of precious lives over distribution, like the one we recently saw during a flour give-out! When countries have to devote such a large chunk of national revenue to debt payments, they don’t have enough left to pay for basic necessities like food and energy needed for an economy to function and for people to thrive in it. Nor do they have enough to invest for the future: In health systems to get ready for unforeseen eventualities (e.g. pandemics, etc) or to undertake responsible growth like for example a transition to green energy.
However, relief, re-structuring, write-offs, haircuts, etc are hard to come by. While we see a lot of lip service by the developed countries, the noble rhetoric does not somehow culminate in tangibly helping the developing nations—all the quantitative easings, bailouts and salvaging buyouts are invariably inward-looking or rather inward-directed. Of late we have again seen a lot of talks at the IMF & World Bank headquarters in Washington and in G7 & G20 meetings about a so-called Common Framework for Debt Treatments (CFFDT) to help low-income countries restructure debt, but so far little outcome to show for against these often-touted lofty ideals. For example, Zambia, which was reclassified recently (last year) as a low-income country, has by now spent nearly three years trying to restructure its debt, albeit with no success. Ironically, all this time it has done its part and implemented all the asked-for reforms. However, now after all this it has been advised that it cannot receive an IMF program without first achieving progress on restructuring its debt—and this new condition knowingly that its creditors continue to squabble over what, if any, relief should be offered. As a result, Zambia has been in debt purgatory, shut out of IMF funds and unable to attract private investment while the talks continue. All the time, Zambia’s debt continues to grow. In fact, this is the very opposite of coming to a rescue, which makes one wonder sometimes about the real intentions of both, the global financial institutions and the CFFDT. Unfortunately, Pakistan also today finds itself in a very similar predicament.
So, what needs to be done? The answer is two-pronged since actions are required on the part of both sides. The international financial institutions and the rich countries who indeed are serious about helping should at least come up with an immediate plan that freezes debt for countries like Zambia and Pakistan while they engage in good-faith negotiations with their creditors. Also, when evolving a solution for the countries who do apply for restructuring with a commitment to pay, the process should in addition see their debt repayments reduced to levels that can allow their economies to grow. Finally, one feels that in order to meaningfully help countries currently drowning in debt, a Covid-era like two years pause in repayment of foreign debt should be reinstated to allow them some breathing room to not only bring their debt under control but to also make investments in a sustainable future. And now for the other side, on their part such countries seeking this sort of relief should tangibly demonstrate that they genuinely intend to put their own house in order. The excessive government footprint accompanied by corruption, mismanagement and inefficient spending will have to be controlled. Good present-day examples of such intent would be the bold steps of late taken by countries like Laos and Ecuador: Laos, which owed $2 billion in debt payments in 2020-21, cut all perks and facilities, other than basic cash pay, to its bureaucracy to send a signal and to help rein in the quantum of its government spend whilst in the event successfully cutting stubborn red tape stalling investment and Ecuador in a similar sort of move told its government employees to work two hours fewer a day to get spending under control as a condition of an emergency IMF loan; on a lighter note, implying that the less they are in office the less damage they can incur!