Covid-19 poses many urgent challenges to Pakistan’s fragile economy. Following the launch of an international appeal for debt relief, the officials from G-20 countries have announced a suspension of repayments of principal and interest for several countries including Pakistan. The relief will be available from May 1, till December 1, when all debt servicing dues will be packaged into a new loan. The payments on new loans will start after June 2022 and will be completed over the next three years. In its suspension appeal, the government of Pakistan said that the measure would create fiscal space to carry out strenuous relief activities needed in response to Covid-19.

Before the current pandemic, Pakistan’s foreign debt was rescheduled several times between 1970 and 1990. Slow economic growth, a balance of payments deficit, high debt and debt servicing expenditure were the primary reasons behind debt rescheduling, among many other factors. Currently, Pakistan’s total external debt is $107 billion. During the last fiscal year (2018-19), $11.6 billion was paid to service these loans. According to public debt indicators of 2018-19, there has been a sharp deterioration in all pointers due to low revenue collection, high current expenditure and growing interest payments. It is pertinent to mention that interest servicing expenditure alone jumped from 28.7 percent to 42.7 percent as a percentage of total national revenues within a fiscal year.

Measures like debt relief and moratoriums have been used in the past in response to large-scale disasters. After the 2004 tsunami, the Paris Club of creditor nations declared a moratorium on foreign debt in disaster-hit countries including Indonesia, Sri Lanka and the Maldives. Major international credit-rating agencies also declared that they would not regard the deferral as a negative factor in their future assessments and credit ratings. Following Hurricane Mitch in Central America in 1998, a debt moratorium was executed by the IMF and other global lenders to grant relief to affected countries.

However, the impact of such relief measures on reconstruction and economies has been inadequate. Post-tsunami research in Sri Lanka and Indonesia shows that more funds did not necessarily lead to more efficient rehabilitation efforts. Gaps in local governance, lack of coordination between the government and civil society and ethno-political conflicts were some of the key reasons behind slow and inefficient pace of work. Post-Mitch debt relief, which involved postponement of debt payments and supplying more loans, was likened to a “stay of execution” by an Archbishop in Honduras. A study shows that one year after Hurricane Mitch, Nicaragua had spent almost as much on debt service ($170 million) as on reconstruction ($190 million). With the destruction of much of the infrastructure and economy, these nations seemed destined to slip further into the debt unless there was more debt relief.

Given the already high debt servicing expenditure, the economic situation is likely to become increasingly grim in Pakistan after Covid-19. A fall in national revenue collection due to various tax relief measures and a decrease in foreign remittance because of global job cuts, particularly in the Gulf region, are some obvious challenges. Due to significant disruptions in the global value chain, exporters from Pakistan, still waiting for previous payments, might be unable to process their orders at least in the short and medium term. More foreign funds could potentially flow in for relief and economic recovery efforts. However, the exchange rate could appreciate to the detriment of foreign trade in the absence of adequate controls. Indefinite closure of schools, offices and markets will most likely hit small and medium businesses, leading to potential bankruptcies. As the middle and lower-income groups struggle to earn enough income to make both ends meet, the economy could become increasingly strained moving towards hyper-inflation and unemployment.

According to a Pakistan Institute of Development Economics (PIDE) forecast, the loss of jobs will run in the millions, particularly hitting semi-skilled and daily wage earners. And around 2.4 percent of the annual GDP will be lost due to Covid-19. Even this conservative estimate is enough to push the economy into an escalating recession. Inappropriate development priorities and a huge debt burden will add more complications.

Debt moratoriums are only a short-term solution for developing countries like Pakistan. There is an increasing global consensus that a dramatic recovery in the world economy after Covid-19 will be very hard to achieve. Usually the countries that have chosen to accept debt moratoriums in the past have faced larger repayments in the future in addition to reservations on creditworthiness as well as risks associated with bailouts. Debt and structural adjustment programmes have been greatly criticized for extreme reductions in public services like social protection, healthcare and education. It is ironic that the same types of services are needed now to manage the current as well as the impending impacts of significant socio-economic challenges. It remains unclear whether the current moratoriums and new loans will push a different agenda or continue the course we have been on. In a country like Pakistan with an increasing debt burden, debt reduction is needed much more than the debt moratorium and suspensions. Without a significant decline in the level of indebtedness, the economy is not very likely to bounce back and show promising growth over the medium-to-long term. 

The writer is a development practitioner with experience in poverty alleviation and emergency response in Pakistan. She tweets @rafia12361