Unprecedented flooding this month is pushing Pakistan to the brink of collapse. Widespread devastation will require massive external financing to meet the basic needs of six million homeless and 20 million affected overall. However, the response by the World Bank and the IMF threatens to pile new debts on a country where, before the flooding, debt interest payments already consumed about one third of budget revenues. Instead, the international community should provide more grants, not loans, to help Pakistan withstand the disaster. In its turn, the IMF should revisit conditions attached to their current loans to Pakistan which civil society had already warned could exacerbate the economic downturn and poverty.
New IFI loans will push Pakistani debt to unsustainable levels
Even before the flooding, Pakistan’s external debt was a heavy burden for the country. In 2009, the country owed US$ 50 billion, and the government consumed a third of its budget revenues to honour only interest payments in a country where 60% of people live below the poverty line. However, things were only going to get worse for Pakistan.
In June 2010, during the review of the IMF loan for Pakistan, key debt indicators assessed by the IMF were projected to get worse in the coming years. [1] Total external debt was projected to jump from US$ 50 billion in 2009 to $US70 billion in 2015. [2]
More than half of the country’s external debt (US$ 28 billion) is owed to the IMF, the World Bank, and the Asian Development Bank. After the catastrophic flooding, debts owed to the IFIs are set to increase further. The World Bank and Asian Development Bank recently announced loans of $900 million and $2 billion respectively. [3] This is despite the IMF’s recognition that “ public debt is a source of vulnerability and needs to be reduced.”
IMF conditions threaten to further impact on the country’s poor
In November 2008, the IMF approved a new loan for Pakistan (Stand-by Arrangement) to respond to the country’s external financing needs resulting from the impacts of the global economic and financial crisis.
The loan came with the requirement to reduce the government deficit from 7.4% of GDP to 4.2% through large budget cuts, and to raise interest rates to contain inflation. Other loan conditions included reducing energy subsidies through a hike in electricity tariffs of almost 20%, and putting in place a value-added tax (VAT). Although it also called for strengthening social safety nets, the Pakistan newspaper Dawn reported that “the government had been left with no option but to cut development expenditure and take other measures to meet the budget deficit target of 4.2 per cent by the end of June, as agreed with the IMF.”
Hikes in energy prices, fiscal tightening and regressive taxation such as VAT were harshly criticised by civil society as they would hinder, rather than support, the economic recovery and would have harmful effects on the country’s poor .
Even the IMF acknowledged that the “decline in poverty during the pre-crisis period… may have been partly reversed … (due to) the economic slowdown.” However, the Fund continued to pressure Pakistan to implement such controversial conditions, including by withholding a US$1.8 installment of the loan because of a disagreement between the government and the Fund on the imposition of value added tax increases and fiscal tightening for 2010 and 2011.
In its meeting with the IMF this week, the Pakistani government is expected to ask the IMF not to insist on increasing their power tariff or on the implementation of taxation reform, both hotly contested issues in Pakistan. In an interview this week , Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, said that “the budget targets and growth projections that were included in the (IMF) programme (with Pakistan) will need to be revisited.” It is unfortunate that it takes a natural disaster for the IMF to revisit conditions which, from the outset, civil society warned would slump economic recovery and have harmful effects on 60% of the country’s poor.
Aid – not loans – should be given for climate change-related disasters
Grants, and not loans, should be provided to countries facing humanitarian disasters. In addition, international institutions should immediately freeze Pakistan’s debt repayments, to free up resources for assisting the millions affected. “It is nothing short of criminal that a country as poor as Pakistan is bled of resources every year to repay borrowers who extended unjust loans to that country over decades. It is vital that desperately needed emergency aid is not effectively swallowed up in debt repayments and a freeze on such payments must be called immediately,” said Nick Dearden from Eurodad member Jubilee Debt Campaign in a press release issued this week.
In the press release, Jubilee Debt Campaign also called on all bilateral and multilateral creditors to immediately institute at least a two year moratorium with no accrued interest on all debt service payments from Pakistan and to establish up-front funding for climate change-related disaster preparation.
By Nuria Molina
See also:
Press release by Eurodad member Jubilee Debt Campaign, 23rd August.
Jubilee Debt Campaign: Pakistan: Drop the Debt