Since it is more than evident now that promises of ‘billions of dollars of aid’ were a mere pipedream at best, the government’s last hope is hinging on a favourable outcome at the Paris Club talks in the second week of December.

            Though the Finance Ministry has officially placed new aid commitments at 1.2 billion dollars, this will hardly be enough to even make up for the export shortfalls of 1.1 – 1.4 billion dollars for the current year.  The United States offered a paltry 673 million dollars which will largely be consumed by additional border patrols, mobilisation of troops and law and order arrangements in the wake of new security considerations.

            In net terms, Pakistan has emerged as a loser, both in economic and strategic terms. The country’s so-called “strategic depth” value in the west was readily traded away in return for a handful of dollars.  However, Pakistan’s financial spin doctors are still claiming that re-profiling the external debt will permanently heal the wounds of the economy.  Pakistan owes 12 billion dollars to Paris Club creditors, out of a total external debt liability of 37 billion dollars.  Though officials are not sure about the eligibility of the debt that could be treated by creditors, they hope that generous terms will help free resources which could then be spent on development and poverty alleviation.

            The total financing gap in the balance of payments till 2004 has been estimated at eight billion dollars based on different cash flow assumptions and projections.  This amount was determined after factoring in the Saudi Oil Facility (SOF) of about 900 million dollars per annum during the forecast period.  The International Monetary Fund (IMF) is expected to discuss a three-year Poverty Reduction and Growth Facility (PRGF) of about 1.5 billion dollars on December 5, 2001.  The World Bank and the Asian Development Bank will co-finance this overall package to fully cover the funding gap.

            Pakistan experienced a similar phenomenon during the first Afghan jihad of 1979-89, which in fact created our debt trap. The country took on new loans to repay already contracted obligations, ballooning Pakistan’s debt-servicing burden in the ’90s, while the external sector was exposed to new realities soon after the Soviet withdrawal from Afghanistan when the US ditched Pakistan and left it to clear the debris alone.  The country was sanctioned to its eye-balls, the rupee plummeted, exports stagnated and poverty doubled during this period, as the new world order stripped Pakistan of its frontline status.

            After the nuclear tests of 1998, a new dimension was added to Pakistan’s vulnerable economic sovereignty as the fragile balance of payments position and a large debt overhang threatened an outright default. After hectic political efforts, the government was able to get a bailout package from the IMF in January 1999, which also paved the way for Paris Club-I.  As part of this deal, creditors extended debt burden sharing to private creditors for the first time, and the government had to reschedule Euro bonds.  Under similar external sector constraints in January 2000, 1.8 billion dollars was availed from the Paris Club on the basis of a short-term breather .

            However, both these facilities failed to improve the external sector environment, and Pakistan’s foreign exchange earning remained dismal.  Now Pakistan’s total external debt is almost 600 per cent of its total budgetary revenues and 244 per cent of exports.  The total public debt, both external and domestic, is almost 105 per cent of the GDP. All these macro indicators suggest that Pakistan’s debt situation is even worse than those of the Highly Indebted Poor Countries.

            When Pakistan sought similar debt waivers from the United States and Japan to what was offered by the US to Egypt during the Gulf war, both the US and Japan refused, citing unknown legal constraints that do not exist in any piece of legislation.  Japan also declined an official request to restore the Official Development Assistance (ODA) of 500 million dollars per annum, which was the mainstay of external resources for Pakistan before the imposition of nuclear-related sanctions.

            “We were very supportive of the stand that Egypt took in the Gulf War.  They took a very – you know, if – there was a lot of back and forth there in the very early days with the Iraqis trying to convince Egypt and President Mubarak not to come out publicly against what they’d done in Kuwait.  And if you remember that Iraq and Jordan and Egypt had formed something called the Arab Cooperation Council, and I’m not at all sure that they did not expect that Egypt would not come out so forcefully against Iraq and so forcefully in favour of reversing the aggression and would carry that position in the Arab League meetings.  So all of this was involved at the time, and that’s – I suppose that’s a main reason that we supported cancellation of that debt.” This testimony of US Secretary of State, Baker, before the Foreign Operations Subcommittee of the House Appropriations Committee makes clear the ‘requirements’ for qualifying for such a waiver.

            However, Mr. Alan Larson, US Under Secretary of State, being a former debt negotiator himself, offered Pakistan tailor-made terms for its debt at the Paris Club level. This is the last chance the government has of capitalising on its case for debt relief.

            Senior government officials claim that major creditors have indicated their willingness to offer terms similar to those of the Naples terms which could offer a 67 per cent reduction of debt in Net Present Value (NPV) terms, or at least better than those offered under the enhanced Toronto terms that ensure a 50 per cent reduction in NPV terms.  In any case, they would be better than the Houston terms availed on two previous occasions, which were basically non-concessional in nature and provided no relief.  The only benefit that had been gained was a ten-year grace period for ODA and three years for non-ODA loans. ODA loans would be repaid in ten years at an interest rate as favourable as the concessional rate applying to those loans. Non-ODA loans would be repaid in 15 years at the appropriate market rate, implying progressive payments. The principal and interest rates were capitalised in the deal, with an option to seek further debt rescheduling, provided IMF remained on board.

            Another hitch, which may bother policymakers, is the issue of the cutoff date. The agreed date in Pakistan’s case in 1999 was September 1997. All loans borrowed before this cutoff date were eligible for rescheduling in 1999 and 2000.  It is not clear whether creditors will treat the entire stock of debt under the forthcoming deal, or a bifurcation will be made.

            The degree of concessionality of reschedulings (50 per cent or 67 per cent debt relief in NPV terms) depends on the country’s per capita income and the level of overall indebtedness. For example, countries with a per capita income of more than 500 dollars and a ratio of debt to exports in present value terms of less than 350 per cent received a 50 per cent NPV reduction, which is decided on a case-by-case basis.

            Pakistan’s per capita income is also below 500 dollars per annum with a high debt-to-export ratio.  So, its case is eligible for a more concessional debt treatment.

            The real solution to Pakistan’s debt burden is debt forgiveness or reduction in real terms, not just debt rescheduling.  Economic analysts are convinced that if the international community fails to honour its wartime promises of taking care of the economic woes of ‘cooperating’ states, it will result in serious economic and political turmoil that could destabilise the whole region.