Skip to main content

Fear of debt restructuring needs to be overcome, says ex-SBP chief

Rescuing countries from disorderly defaults “hinges on increasing fiscal space by restructuring their debt”, Murtaza Syed, a former acting governor of the State Bank of Pakistan (SBP), wrote in The Economist yesterday, recalling his previous article where he said the International Monetary Fund (IMF) and Pakistani policymakers were “flirting with disaster by pretending that the country’s public debt was sustainable”.

Pakistan and the IMF signed a 37-month staff-level agreement in July for $7 billion with the approval of the new loan tied to firm commitments from China, Saudi Arabia, and the UAE that they would roll over their combined debt of $12bn.

Due to foreign exchange difficulties and an inability to repay its loans, Pakistan has been securing one-year extensions. However, it is now seeking rollovers for three to five years to access IMF credit, address uncertainty, and get sufficient time to fix structural flaws and regain its external sector sustainability.

“For this to happen, a taboo must be broken and innovative thinking is needed on dealing with new creditors and how the IMF approaches debt in its country programmes,” he wrote.

In the current article, Syed cited examples of various countries where debt servicing was crowding out development spending needed to improve lives.

He pointed out that in Pakistan, interest payments were almost “three times as high as spending on investment and three and a half times spending on education”.

“These countries are gambling for resurrection by increasing taxes and slashing spending while praying for a growth miracle,” he said.

He, however, added that this increased the chances of default and unravelling of the country’s social fabric.

Regarding the taboo, he said it concerned the government’s “fear of debt restructuring”.

On Wednesday, global credit rating agency Moody’s had upgraded Pakistan’s rating to Caa2, but explained that the rating continued to reflect its “very weak debt affordability, which drives high debt sustainability risk” as it forecasted interest payments to continue absorbing about half of government revenue over the two to three years.

“The Caa2 rating also incorporates the country’s weak governance and high political uncertainty,” it added.

As for debt restructuring, the government feared being “perceived as inept economic managers, possible legal action by creditors, and the consequences for future external funding”, Murtaza Syed wrote in the article.

It is possible, according to Syed, to overcome this fear. He highlighted that cover from legal action in international courts “can be provided by major official creditors, as was done for Iraq, or could be automatically triggered by an IMF assessment that debt is unsustainable”.

As for the market penalty for restructuring, Syed wrote, drawing from international evidence, that the penalty “is much lower and more short-lived than commonly feared especially if the restructuring improves the country’s growth prospects”.

“In this context, governments must not be afraid of restructuring lower-seniority commercial debt, which costs much more precisely because of this credit risk,” he wrote.

Syed also pointed out that “fresh thinking” was needed to accommodate creditors such as China and Gulf states, adding that it needed to be incentivised and IMF should assist debtor countries to bring them to the table.

“One idea is to allow the majority official creditor that offers debt relief the right to force other creditors to agree to a similar dilution of their claims,” he said, citing the example of the Paris Club of creditors where the right to cram down on other creditors already exists.

“To preserve social stability and development prospects in poor countries, the broken system of debt restructuring must be fixed,” he said, adding that for that to happen “debtors must become more powerful advocates for their future generations. And the international community must become more receptive to debt relief”.



from The Dawn News - Home https://ift.tt/089MCWE

Comments

Popular posts from this blog

Ministers rubbish notion that proposed retirement age extension to favour ‘one particular institution’

Information Minister Attaullah Tarar on Tuesday rubbished the notion that a proposed extension in the retirement age was to favour “one particular institution”, adding that the move would be implemented across the board if approved. The rebuttal comes in the wake of media reports claiming that the government was mulling changes to the Constitution to fix the tenure of the chief justice . Currently, judges of the Supreme Court, including the chief justice, retire after attaining the age of superannuation, i.e. 65 years, as stipulated in Article 179 of the Constitution. While giving his opinion recently on the reports of the constitutional amendment, Law Minister Azam Nazeer Tarar had said he “will not vehemently turn down the proposals related to the tenure of the chief justice”. Addressing the issue during a press conference in Islamabad today along since Finance Minister Muhammad Aurangzeb and the law minister, Attaullah said the extension in the retirement age was “a proposal to a...

The Republican primary race for president in 2024

The Republican primary race for president in 2024 is already shaping up to be a competitive one. There are a number of high-profile candidates who have already announced their intention to run, and more are expected to join the field in the coming months. The frontrunner for the nomination is former President Donald Trump. Trump has been teasing a 2024 run for months, and he has a large and loyal following among Republican voters. However, he is also a polarizing figure, and his candidacy could alienate some moderate Republicans. Another potential contender for the nomination is Florida Governor Ron DeSantis. DeSantis has been praised by many conservatives for his handling of the COVID-19 pandemic and his opposition to vaccine mandates. He is also seen as a rising star in the Republican Party. Other potential candidates include former Vice President Mike Pence, former Ambassador Nikki Haley, and Senator Tim Scott. Pence is a more traditional Republican who could appeal to moderate vote...

Islamabad court issues non-bailable warrants for KP CM Gandapur in 2016 weapons and liquor case

An Islamabad district and sessions court on Wednesday issued a non-bailable arrest warrant for Khyber Pakhtunkhwa Chief Minister Ali Amin Gandapur in connection with a 2016 case , in which he was accused of carrying alcohol and unlicensed weapons. On July 29, Civil Judge Shaista Khan Kundi summoned Gandapur for recording his testimony in the case. Judge Shaista had directed Gandapur to ensure his presence on September 4 (today) for recording his statement under section 342 of the criminal procedure code (CrPC), observing that he has already skipped five hearings in the case. In the hearing today, the judge rejected Gandapur’s request for exemption from physical appearance in court on medical grounds. The court ordered Station House Officer (SHO) Bhara Kahu to arrest and produce Gandapur in court tomorrow. Gandpaur’s lawyers Raja Zahoorul Hassan and Fatehullah Burki appeared in court, engaging back and forth on Gandapur’s absence from court. “Where is the accused? The case was ca...