Geven so With his country on the brink of crisis, Pakistani Economy Minister Mohammad Ishaq Dar is eerily calm. His administration depleted a quarter of its dollar reserves in the week to Jan. 20, leaving $3.5 billion for loan repayments and imports, which could be more than double the first quarter of this year. Two days later, ministers switched off the grid to save fuel. Policymakers then abandoned the currency peg. Rupee plummets but Mr Ishaq Dar remains calm. Pakistan’s prosperity is in the hands of God, he said.
form that divinity usually takes International Monetary Fund, has provided 21 bailouts to Pakistani or Western governments since 1960. But the global infrastructure to deal with irresponsible and hapless economies is in crisis. China’s lending has grown for 20 years and has reached a tipping point. Western financiers are at an impasse with a lender too big to ignore but too fractious to participate in a restructuring. Countries that borrowed money from China and have been hit by covid-19 and rising interest rates are in turmoil – and few are as determined as Pakistan.
Before China’s lending spree, Western countries established a framework for restructuring troubled debt. Beginning in 1956, lenders banded together and all lenders would reschedule repayments on the same terms. Eventually, debt relief became a priority. This will work as long as troubled countries owe largely to the West. Now, however, at least half of the 38 countries that the World Bank considers to be in or near default are China’s national creditors.
And China refuses to play by the old rules. To take this into consideration, GA new set has been formulated for 2020. However, the “common framework” has turned into an empty agreement. In theory, signatories agree to similar restructuring terms. In fact, they have too little in common to make the process work smoothly.
Since the pandemic, restructuring has all but disappeared. Four countries, Chad, Ethiopia, Ghana and Zambia, have sought help under the framework. Only Chad struck a deal, which rescheduled rather than canceled the payment. Also, Chad has very little debt ($3 billion) and China’s stake ($264 million, 2% of Chad’s stake) gross domestic product). The World Bank calculated in 2017 that the average amount owed by low-income countries to China is equivalent to 11% of China’s gross domestic productand this number will only rise.
China’s refusal to accept the writedown is the main problem. The reluctance has drawn the ire of the likes of World Bank President David Malpass and U.S. Treasury Secretary Janet Yellen. The ministries in Beijing are simply not set up to forgive. To write off loans, civil servants at policy banks must first obtain permission from the State Council, China’s equivalent of the cabinet. This is a risky move if the borrowing country is not an ally. Being a named voice — effectively acknowledging that bureaucracies make mistakes — is a professional stain that is hard to erase. Rescheduling a payment leaves a mess for another day and for someone else.
Another divide between China and the West reflects different views. In the terms of the common framework, only the loans of the states are the business of the other states. Private creditors and international institutions fared more lightly, rarely being asked to write off a dollar. But China has not separated its political commitment to developing the world’s poorest country from its business activities in the country. One of the government’s two policy banks, the China Development Bank, lends to poor countries at market rates. China insists that exempts its lending from rules that apply to the state. Western banks hold the opposite view.
The last problem is that China would rather go it alone. Working with other lenders involves sharing information. This may sometimes be necessary when a borrower has enough trouble defaulting on a large number of loans at once. But to avoid appearing too weak and encouraging more defaults, China prefers to negotiate in private. According to World Bank researchers, since 2008, the Chinese government has restructured more countries (71) than all Paris Club members (mostly Western) combined (68), but it has done it its own way. It usually requires repayment against the commodity or future proceeds of the commodity. At other times, borrowers surrender their stake in the infrastructure they borrowed to build. Western creditors see the first as little better than extortion and have no option for the second, since most of their loans go directly into the borrower’s budget.
As long as the lenders are in a standoff, International Monetary Fund Paralyzed. The group relies on countries agreeing to lower their debt before risking a bailout. That means officials can only provide small handouts to desperate borrowers. The deal it hopes to strike in Pakistan is worth $1.1 billion, a drop in the ocean of the country’s $275 billion debt.
For years, Pakistan’s friends, many of whom they did not get along with, have provided debt relief and emergency funding to their valued geopolitical ally. As a result, Pakistani politicians have come to expect a last-minute miracle. But this time China is not helping. After presenting the package, Saudi Arabia went quiet.this International Monetary Fund Unable to complete all tasks. Each side wants to leave rescue to the others. With more and more countries on the brink of default, the impasse could spell doom for the rest of the world’s struggling economies. ■
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