Pakistan needs immediate debt restructuring/relief

For about two months, the catastrophic floods have swept through a third of Pakistan, displacing around 33 million people, killing around 1500 people, including a third children, in addition to losses to property, crops and livestock. Initial estimates put the damage from flooding at an alarming rate of around $30 billion.

While the damage caused by flooding could be somewhat contained with better gross investment towards creating better water management infrastructure. That being said, exceedingly heavy torrential rains and accelerating glacier melting are at the back of the rapidly unfolding climate crisis, to which Pakistan’s contribution in terms of global carbon footprint is reported to be about 0.8 percent, but the country ranks in the top ten globally as the most vulnerable in the face of the climate crisis.

To understand the causes and extent of torrential rains, a current financial times (FT) published article “Climate change intensified rains in Pakistan by up to 50%, report points out” pointed out that “Climate change is estimated to increase the rains that have caused devastating floods in Pakistan by up to 50 percent more intense Just days before the issue of environmental reparations is expected to be raised at the UN General Assembly. The conclusions of a rapid study of the Pakistan disaster by 26 scientists from nine countries as part of the World Weather Attribution Group, computer models said rain over a five-day period in southern Pakistan was significantly more intense than without a rise in global temperatures of at least 1.1 degrees °C since pre-industrial times.”

Therefore, it is more than the international community’s responsibility to provide Pakistan with the necessary financial support for climate justice, especially by the rich countries that have a significant carbon footprint. So far, however, little international financial assistance has materialized while waterborne diseases are rampant, with significant numbers of people becoming extremely vulnerable and being pushed below the poverty line. That being said, the lack of international support thus far is compounded by the insignificant level of commitment rich countries have shown in their annual release of $100 billion in climate finance to developing countries.

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In this regard, during his visit to attend the 77thth During the session of the United National General Assembly (UNGA), Prime Minister Shahbaz Sharif gave an interview to Bloomberg, which was highlighted in an article published by Bloomberg, “Pakistan Prime Minister Says ‘All the Hell’ to Break Out Without a Debt Deal”: “Pakistan Prime Minister Shehbaz Sharif urged rich nations to write off debt as catastrophic floods, exacerbated by climate change, displaced millions of people across the South Asian nation. Pakistan has debt obligations over the next two months, he said in an interview with Bloomberg Television in New York, adding that his government has just signed an agreement with the International Monetary Fund with “very strict terms” that includes taxes on oil and electricity . … Noting a “yawning gulf” between what Pakistan is asking for and what is available, he warned the nation faces the imminent threat of epidemics and other dangers. “God forbid that happens, all hell will break,” Sharif said.

The disastrous floods have greatly increased debt sustainability concerns that Pakistan faced before the floods, as the country is reportedly among the most debt-ridden countries in the world. Therefore, there is an urgent need for debt restructuring/alleviation, especially as flooding necessitates greater import needs e.g. in terms of cotton and wheat, adding to the country’s already high financing needs – Pakistan’s reported debt for 2022 stands at around US$30 billion, while even after the latest release from the International Monetary Fund (IMF) and the support of some other donors/creditors only about 8 billion US dollars could be arranged so far.

At this point it must be emphasized that Pakistan had very little to do in relation to the climate crisis there and should therefore not bear the cost of dealing with it in any significant way either out of its own pocket or by taking on additional debt pressure.

In this regard, an article published by FT, citing a recent United Nations strategy paper dated 23. a UN policy memorandum has argued. The draft of the UN Development Program paper, seen by The Financial Timesproposes that Pakistan negotiate debt relief with creditors to “contain the crisis caused by climate change”. The memorandum, which UNDP will share with the Pakistani government this week, argues that creditors should consider debt relief so Islamabad can prioritize funding for its disaster relief efforts over loan repayments.’

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Another article published by Bloomberg, “Pakistan seeks debt relief from bilateral creditors, not bondholders,” pointed out, “Pakistan seeks debt relief from bilateral creditors, not commercial bondholders,” Finance Minister Miftah Ismail said hours after the prime minister’s stirring remarks were his dollar bonds. The South Asian country will repay its $1 billion government bond due in December on time, Ismail said via text message in response to Bloomberg inquiries. A large part of the debt consists of deposits from “friendly countries” that have promised to roll it over, he added. “We are demanding debt relief from the Paris Club bilateral creditor countries, as has been done during the pandemic,” Ismail said. “We do not seek, nor do we need to, seek redemption from our commercial bank debt or from Eurobond debt.” However, it must be emphasized that any restructuring/relief efforts by development partners/donors should include both the private sector and China, as they Reportedly have a significant presence in Pakistan’s debt portfolio.

At this point it must be emphasized that Pakistan had very little to do in relation to the climate crisis there and should therefore not bear the cost of dealing with it in any significant way either out of its own pocket or by taking on additional debt pressure. An FT editorial from early September ‘Pakistan’s perfect storm is an urgent call for action’ pointed out in this regard as follows: “One third of Pakistan is under water. …Leaders in developing countries are angry that rich countries are failing to allocate resources to investment in adaptation. Their stance is understandably that the developed world caused the problem with two centuries of CO2 emissions and they should pay to fix the damage. … In Pakistan, the challenge is made more difficult by the country’s debt crisis. Flooding will only exacerbate Pakistan’s economic woes and create risks that current IMF support will not be sufficient to achieve debt sustainability. Still, it’s important to keep the issues separate: Pakistan should not be denied investment in climate adaptation amid fears that cash will be diverted to shore up its short-term finances. Pakistanis need help now, but they also need a future.”

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There is an urgent need for debt restructuring/alleviation, also because foreign exchange reserves are less than $10 billion – which provides only about four to six weeks of import coverage, while international best practices call for at least three months of import buffers. A recent Bloomberg article, “The rupee nears a record low as Pakistan awaits Middle East aid,” pointed out that “Pakistan’s currency is on the verge of a record low as billions of dollars in promised aid from the Middle East in support of the emergency The South Asian nation’s finances have yet to arrive. The rupee is about 0.4% off 240.375 per dollar, the all-time low it hit earlier this year. The currency was among the worst performers globally in September after falling more than 8%. A weakening currency could increase Pakistan’s price pressures after inflation rose to its highest level in almost five decades. The nation is also grappling with the aftermath of a series of deadly floods and needs additional funds beyond the $1.1 billion International Monetary Fund loan to avert a default.’

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