Donors mull over debt moratorium for virus-hit countries

ISLAMABAD: Multilateral creditors are mulling over the options of providing debt moratorium to the countries suffering from COVID-19 pandemic, raising hopes that Islamabad will be able to have a certain portion of its foreign debt waived off.

Knowingly, these multilateral institutions are preferred creditors who do not reschedule their debts but an extraordinary situation requires out-of-box solutions.

Pakistan’s outstanding external loans and liabilities peaked to $111 billion out of which a major chunk was owed by the multilateral creditors including the IMF, World Bank, Asian Development Bank and others.

Bilateral loans from the Paris Club stood at $10.9 billion that were already rescheduled till 2036 while other bilateral outstanding loans are lying as SAFE deposits such as from China, Saudi Arabia and UAE.

If the bilateral creditors through Paris Club provide debt relief to 76 IDA eligible countries, then Pakistan will not be among the major beneficiaries because it does not have a major chunk of liabilities owed by Pakistan.

The international creditors such as the IMF, World Bank and Asian Development Bank are considering options to mobilize resources for providing debt relief to low income countries. The pattern of Highly Indebted Poor Countries (HIPC) can be utilized through which substantial relief provided to low income selected 36 countries.

To date, debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing $76 billion in debt-service relief over time. Three additional countries are eligible for HIPC Initiative assistance. However, Pakistan is so far not among HIPC beneficiaries.

When contacted, Special Secretary Finance Omar Hamid Khan said the IMF and World Bank called upon official bilateral creditors to consider debt relief for IDA countries but there was need to consider similar facility by the multilaterals to low income countries that were facing unprecedented situation because of outbreak of COVID-19 Virus.

However, independent economists argued that the multilateral were not going to provide debt relief to countries like Pakistan because it does not fall into definition of low income countries like African countries.

Instead of asking bilateral creditors, they said the multilateral creditors should also come forward and help countries like Pakistan to waive off their debt.

“Pakistan should not get additional funding of $1.4 billion in shape of loan from the IMF,” they added.

On the other hand, the IMF in its announcement from headquarters in Washington D.C on Friday stated that in direct response to the COVID-19 crisis, the International Monetary Fund (IMF) Executive Board had adopted some immediate enhancements to its Catastrophe Containment and Relief Trust (CCRT) to enable the Fund to provide debt service relief for its poorest and most vulnerable members.

The CCRT enables the IMF to deliver grants for debt relief benefiting eligible low-income countries in the wake of catastrophic natural disasters and major, fast-spreading public health emergencies.

The IMF further states that the COVID-19 outbreak and the associated global economic turmoil creates a critical need to support the Fund’s membership, including exceptional balance of payments support for the poorest members especially impacted by the pandemic. Well-targeted support will allow these countries to prioritize medical spending and health-related as well as other immediate needs in the challenging economic environment, characterized by sharp declines in income, lost revenue and higher expenses.

In that context, the IMF Executive Board has approved changes to the CCRT that expand the qualification criteria to better cover the circumstances created by a global pandemic and to focus on delivering support for the most immediate needs.

Specifically, the decision will allow all member countries with per capita income below the World Bank’s operational threshold for concessional support to qualify for debt service relief for up to two years. This would apply when a life-threatening global pandemic is inflicting severe economic disruption across the Fund’s membership and is creating balance of payments needs on such a scale to warrant a concerted international effort to support the poorest and most vulnerable countries. The IMF has also launched a fund-raising exercise that would enable the Trust to provide about $1 billion for the current pandemic.

Ms. Georgieva has called upon the Fund’s economically stronger member countries to help replenish the CCRT, which had only $200 million available for the world’s poorest countries.

The UK has responded with a pledge for £150 million ($183 million). Other donors, including Japan and China, are also coming forward with important contributions.

“The IMF’s revamped Catastrophe Containment and Relief Trust can now provide rapid debt service relief on IMF debt obligations to more of our poorest and most vulnerable members. This will help them to channel more of their scarce financial resources to their vital emergency medical and other relief efforts,” IMF Managing Director Kristalina Georgieva said. “Furthermore, we are calling on donor countries to replenish the Trust’s resources to help boost our ability to provide additional debt service relief to our poorest member countries.”

Background: The CCRT allows the IMF to support international debt relief efforts when poor countries are hit by severe natural disasters or battling public health crises—such as the current coronavirus pandemic—with grants for debt service relief.

An earlier version of the CCRT was used to provide assistance of some $270 million to Haiti in 2010 to respond to the earthquake. It was next updated in 2015 to provide close to $100 million in grants to the three countries most impacted by the Ebola crisis, Guinea, Liberia and Sierra Leone.