Why Pakistan’s debt should be cancelled

I’m reposting a position paper on debt retirement that was issued at a press conference in Islamabad today.  In attendance at the press conference were representatives of the Workers Party of Pakistan, the Labor Party of Pakistan, and several others.

For every £1 the rich world gives to the developing world in aid, the developing world still pays back £5 in debt repayments.

Introduction

A summer of unprecedented torrential floods has wreaked havoc on Pakistan. Physical infrastructure worth tens of billions of dollars has been destroyed, countless eco-systems devastated, and entire districts cut off from major communication and transport routes. It is conservatively estimated that 20 million people have been directly affected and the livelihoods of countless more destroyed (17 millions acres of agricultural land). Speaking at the United Nations, the federal minister for foreign affairs claimed that total damages caused by the floods are in excess of US$43 billion, which amounts to no less than 25% of Gross Domestic Product (GDP).

International aid commitments in the aftermath of the flooding have been sluggish. It is said that Pakistan has been in the international spotlight for so many years now that a case of ‘donor fatigue’ has set in. Nevertheless, high-powered missions of the World Bank and Asian Development Bank (ADB) have already come and gone in the wake of the floods and decided to re-direct up to US$3 billion of their existing assistance packages towards the flood relief effort.

A number of high-ranking UN functionaries have said that more money needs to come in. In fact, the reality is that the amount of money leaving Pakistan has consistently exceeded that coming into the country, notwithstanding the numerous ‘assistance’ packages that are designed and executed by bilateral and multilateral donors. The economic policies of successive governments since the 1980s have facilitated the easy entry and exit of ‘hot’ capital to the detriment of the needs of the country’s people. Even when remittances have been high – as was the case in the years following the September 11 attacks – a large amount of money has flowed out of the country as investors look for windfall gains in the stock and real estate markets before shipping out.

However, the resource drain has a much longer history than 10 years – Pakistan’s dependency on private commercial banks and the international financial institutions is written into the global capitalist structure. During the colonial period the political economy of the territory that is present-day Pakistan was engineered in such a way as to ensure a permanent state of productive backwardness and financial dependence on the industrialized economies of western Europe and north America. Following the departure of the British in 1947, Pakistan’s economic dependence grew even more acute due to its insecurity complex vis a vis India which led to the establishment of a national security state and the under-nourishment of democratic processes.

In its initial years the state secured some bilateral grants which eventually gave way to loans and increasingly harsh interest obligations. However the real debt curse was to be inflicted by the multilateral aid agencies. While various governments throughout the 1950s, 60s and 70s did take loans from the WB, ADB and International Monetary Fund (IMF), the policy-based lending that began with so-called ‘structural adjustment’ programmes in the 1980s has exponentially increased the debt burden. In 1970 Pakistan’s total debt servicing burden as a proportion of export revenues was 7.45%, a figure which went up to 35.40% by 1997.[1] While in 1980, 62% of all foreign assistance was in the form of grants, by 2000, grants constituted only 21% of the total.[2]

Needless to say this debt burden has been borne by the working masses in the form of subsidy cuts, regressive indirect taxes, and a general shift towards jobless growth. While worker’s remittances have partially offset the huge outflow of resources since the 1970s, the debt burden has risen exponentially over the past two decades. In 1990 total external debt was US$21.4 billion, a figure which had risen by 2010 to a staggering US$55 billion, an increase of 157%. As a result of this growing burden, which has been exacerbated by numerous adverse factors such as un unsustainable oil import bill, the spread of imperialist war into Pakistan, and the continuing stranglehold of anti-people neo-liberal policies, the Pakistani people have been plunged into economic and social freefall. If the debt burden continues to grow more onerous after the devastation of this summer’s floods, the country and its people could face descent into a never-ending abyss.

The Political Context of Debt

Debt never functions as a ‘neutral’ policy tool, and particularly not in Pakistan. The vast majority of the country’s debt has been contracted during the illegitimate rule of military dictators. The trend was established during the Ayub Martial Law regime. Prior to 1954 (when Ayub Khan became Defence Minister), Pakistan had received virtually no foreign aid, despite its desperate appeals to the western countries. By 1968 Ayub had been in power for 10 years and was the blue-eyed boys of the western countries for his participation in anti-communist pacts; his reward was foreign aid totaling US$4.7 billion, which was equivalent to 50% of total imports and 34% of total development expenditure.[3] The rosy predictions of Pakistan being a model of third world development notwithstanding, it was already apparent by this time that Pakistan was paying for the ‘aid’ it was receiving: foreign sources accounted for 3.24% of total capital receipts in 1955-60 and 52.57% by 1966-7.[4]

Through the 1970s foreign aid packages were sparse. However the heavens opened again following the coming to power of General Zia-ul-Haq in 1977. Geo-political considerations mandated that Zia’s brutal regime be showered with dollars, even while democratic norms were subverted and a large amount of money wasted on the country’s covert nuclear programme. Bilateral aid during the Zia years from the US alone totaled US$4.2 billion. While this aid and large remittance incomes ensured some modicum of economic stability for the regime, the structural crisis of the Pakistani economy was impossible to ignore: net aid flows decreased substantially between 1977 and 1988 and with the signing of the Geneva Accords the western countries turned off the supply line of dollars. From this point onwards the suffocating conditionality-based lending of the IFIs was to rear its ugly head.

Throughout the 1990s the WB, ADB and IMF were exacting in their treatment of Pakistan. However when yet another military General deposed an elected government in 1999, the international aid brigade yet again descended on the country. More specifically it was the events following the September 11, 2001 attacks that precipitated a new wave of loans. Pakistan’s role as frontline state in the so-called ‘war on terror’ garnered Pervez Musharraf’s regime huge benefits. The IMF, WB and ADB together issued ‘assistance packages’ worth more than US$10 billion to the Musharraf dictatorship, while the US alone doled out US$12 billion of economic and military aid. Throughout this period the regime was lauded for ‘reviving Pakistan’s economy’ and ‘good governance’. However, by 2008 inflation (including food inflation) was above 20% and foreign exchange reserves virtually depleted. The so-called ‘economic revival’ was based on a massive financial bubble. Meanwhile external debt, which stood at approximately US$35 billion when Musharraf took power, had ballooned to US$49 billion.

There can be no denying the direct correlation between Pakistan’s debt crisis and military rule. The complicity of international donors and power-hungry generals must be accounted for; the Pakistani people cannot be held responsible for the decisions of generals and bank executives. But this is precisely what has happened throughout Pakistan’s history: the burden of paying back illegitimate debt has fallen on working people. And this burden will intensify dramatically in the wake of the floods if the illegitimate debt acquired over the past five decades is not written-off.

The legal case

We think it is important to proceed into a discussion about the international law based justifications for debt relief with the caution expressed by Wade Mansell that ‘since the 1960’s, Western institutions of law have been able indirectly o perform the miracle which colonialism scarcely permitted’: The miracle of enabling ‘rich, developed and often ex-colonial states…to continue extracting wealth from the poorest countries’.  He suggests that relations between ‘debtor’ and ‘creditor’ are aligned to systems of rules that allow a simultaneous erasure of the social context in which loan agreements are drawn in the first place.

International Treaty Law:

We start with the report of the UN’s Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights.

The following Conventions and articles are particularly relevant:

UN Charter: Article 1(3) “The purposes of the United Nations are: . . . To achieve international co-operation in solving international problems of an economic, social, cultural, or humanitarian character, and in promoting and encouraging respect for human rights and for fundamental freedoms for all without distinction as to race, sex, language, or religion”

International Covenant on Economic, Social and Cultural Rights: Article 2(1) “Each State Party to the present Covenant undertakes to take steps, individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means, including particularly the adoption of legislative measures.”

Additionally, the Convention on the Rights of the Child as well as the Convention on the Rights of Persons with Disabilities contain language which stresses the particular duties imposed upon states to ensure and provide for the “economic, social and cultural rights” of children and the disabled: “States Parties shall undertake such measures to the maximum extent of their available resources and, where needed, within the framework of international co-operation.”

A situation wherein there is a continued drain of resources from poor to rich regions of the world violates the principles of cooperation imposed upon all states in the international system as outlined in the above articles. Furthermore, various Declarations and Political Commitments articulated by the General Assembly as well as subsidiary and specialized bodies of the UN make specific reference to relations between the debt burden and the non-realization of basic human rights within low income countries. In 1978 the UNCTAD Trade and Development board agreed on a resolution stating :  ‘developed donor countries will seek to adopt measures for an adjustment of terms of past and bilateral development assistance’.  However, since then, there has been only haphazard advance towards instantiation of processes for the achievement of the same.

Continuing advocacy efforts towards debt reduction or cancellation therefore are reliant upon relations drawn between the ‘right to development’ as articulated in the 1986 Vienna Declaration and Programme for Action and the possibilities of relieving poorer nations of their debt burdens. Article 12 of the Vienna Declaration states:

“12. The World Conference on Human Rights calls upon the international community to make all efforts to help alleviate the external debt burden of developing countries, in order to supplement the efforts of the Governments of such countries to attain the full realization of the economic, social and cultural rights of their people.”

In 2002, under the auspices of the UN and with the participation of over 200 nations as well as the heads of the IMF, WB and WTO, the Monterrey Consensus on Financing for Development was articulated.  The statement obliges both creditors and debtors to ‘share the responsibility for preventing and resolving unsustainable debt situations’. The Doha statement recognized that “existing international debt resolution mechanisms are creditor-driven” and that further steps need to be taken to ensure equitable treatment of creditors and debtors in crisis situations.  Furthermore, it recommended that states and multilateral agencies “consider fundamental changes in debt scenarios, in the face of large exogenous shocks, including those caused by natural catastrophes, severe terms-of-trade shocks or conflict.”

Change of Circumstances and International Obligations:

Certain commentators on debt restructuring have suggested that in circumstances analogous to Pakistan’s at this time “the first line of argument in favour of a right to stop debt repayment might draw on the doctrine of clausula rebus sic stantibus”.  The concept which underlays this doctrine is that “obligations can, as a result of supervening developments, be subject to changes”.  This principle is also incorporated within article 62 of the Vienna Convention on the Law of Treaties (1969) as ‘Fundamental Change of Circumstance’ for suspension of treaty obligations by state parties.  Relatedly, it has been noted that a ‘state of necessity defence is enshrined in Article 25 of the International Law Commission’s Articles on State Responsibility”.  A necessary condition for application of this principle to overcome an international obligation on the part of state is that there must be a situation of grave and imminent peril that the state party is facing.

Customary international law also enables us to look at the conditions of exclusion and suspension of international obligations as provided under other treaty based systems such as of the WTO.  Under the GATT Article XX are listed conditions which provide for general exceptions from the enforcement of WTO obligations which include those ‘necessary to protect human, animal or plant life or health;…’.  It is beyond question that the situation currently faced requires a redirection of all available assets towards maintaining the lives and health of a substantial proportion of the country’s population, rehabilitating livelihoods and shelter as well as in rebuilding of essential infrastructure, including the recultivation of devastated agricultural lands towards these ends.  Additionally, a natural disaster of this magnitude could not have been reasonably foreseen at the time of the completion of such loan agreements and the state cannot be held responsible for its unfolding.

Odious Debts:

As already noted, Pakistan’s current debt burden incorporates a significant proportion which was negotiated for and handed over to non-elected military regimes.  The legal precedents vis a vis ‘odious debts’ are therefore applicable in our specific case. A broad description of the Odious Debt doctrine is as follows: ‘those obligations contracted by a predecessor, contrary to the interests of its population, which are later taken over by a successor state, are odious.. those obligations are non-transferable to the successor state’.  The odious debt doctrine has been successfully invoked by the US after completion of the Spanish-American in which the former ceded Cuba to the US and the latter argued that debts incurred by Cuba had been used to suppress a rebellion against its former colonial overlord.  Similarly, after the Boer War, the UK suggested that the debts incurred by the Boer Republics were used in aid of repelling the British and were therefore of an odious nature and to be considered extinguished.  In the case of the US’s seminal use of this exemption it specifically argued that the debt incurred by Cuba had been imposed upon the people of that country ‘without their consent’ and therefore ‘the creditors, from the beginning, took the chances of the investment’.

In 1923, the US Supreme Court decided in the Tinoco Case (after the overthrow of the Costa Rican dictator Frederico Tinoco) that funds lent not for legitimate governmental purpose, within the knowledge of the creditors, could not to be extracted from the nation as a whole.  Similarly, in formalizing the scope of the odious debt doctrine, Alexander Sack suggested that if a despotic regime has accrued debt to strengthen itself against the people of the nation then the creditors who have supplied this sum are to be considered to have committed a ‘hostile act with regards to the people’.

The United States was at the forefront of negotiating for a full-scale write-off of loans undertaken by foreign creditors to the Saddam Hussein regime after its overthrow.  It was explicitly argued that the people of the nation should not be saddled ‘with those debts incurred through the regime of dictator who is now gone’.  The total sum of debts was therefore written off.

Contemporary debtors

In 1996 the IFIs launched the Heavily Indebted Poor Countries (HIPC) debt forgiveness initiative through which a substantial portion of the poorest countries’ debt was to be written-off/substantially restructured. Haiti qualifies under the HIPC initiative for debt relief: in the wake of the devastating earthquake in Haiti at the turn of the year, almost all of the country’s multilateral debt was written-off, totaling close to US$2.5 billion. While Pakistan does qualify as a low-income country, it does not qualify under the HIPC initiative due to relatively high export earnings.

However it is important to bear in mind that much of the impetus for a writing-off of Haiti’s external debt in the wake of the earthquake was generated by political leaders in the First World; British prime minister Gordon Brown acknowledged: “It must be right that a nation buried in rubble must not also be buried in debt”. In short, Haiti offers a precedent of a country that qualified for debt write-offs following a devastating natural calamity on account of the fact that it simply could not meet the burden of existing debt repayments.

The political case for cancellation of Foreign Debt

Given the blatant support of international aid agencies alongwith western governments for military rulers in the past, a cancellation of a substantial portion of Pakistan’s debt at this particular juncture could go a long way towards rehabilitating the image of western governments and international aid agencies in the eyes of the Pakistani public. If working people in this country often express common cause with anti-American and anti-western protests it is because of the blatant hypocrisy and double standards on the part of these governments and agencies towards Pakistan (and other poor countries as well).

In the post 9/11 period, a wave of Islamophobia has swept through large parts of the western world. Pakistanis resent the fact that their society has become a staging ground for the US-led ‘war on terror’ and yet the vilification of Pakistanis (and Muslims more generally) continues unabated around the world. Indeed, it appear as if the proverbial ‘clash of civilizations’ thesis could well become a self-fulfilling prophecy.

This is particularly true because right-wing religio-political organizations are at the forefront of the flood relief effort and are likely to win the sympathies of at least some of the millions who have been devastated over the past few weeks. A similar situation existed after the October 2005 earthquake; if the international community is serious about countering radicalization in Pakistani society, the failed policies of employing military force against innocent populations and indebting the long-suffering people of Pakistan should be repealed at once.

More generally Pakistan’s fledgling democracy would benefit greatly from the cancellation of a portion of the country’s overwhelming external debt. The military establishment continues to wield power in the country and the elected government – for all of its failings, which are many – stands to be further weakened, economically and politically, by the floods. Engaging in flood relief efforts has provided an opportunity to the military to enhance its public image – through the explicit support of the media – while politicians and political parties have been subjected to a public battering. Given the dire economic fallout of the floods, the elected government could well be weakened further if it does not garner fiscal space through debt cancellation.[5]

Cancellation is the only option

It is argued that it is overly ambitious to call for debt cancellation and a more realistic demand is to push for rescheduling of debts. Crucially there have been numerous occasions in the past when Pakistan has been offered options to reschedule debt. Between 1999 and 2003 the so-called Paris Club of donors re-scheduled a reasonable amount of Pakistan’s debt. The ADB claimed that the various debt re-scheduling exercises reduced Pakistan’s debt servicing burden in the period 2002-04 by US$2.9 billion, while the Ministry of Finance projected a subsequent reduction of US$8-11 billion over the following 15 years.[6]

As is underlined by the spectacular increase in the total external debt burden through the course of the Musharraf years, debt re-scheduling simply delays the inevitable, and in many cases, makes debt repayments more onerous due to the accruing of interest over time. Upon coming to power following the February 2008 election, the Pakistan People’s Party (PPP) faced an untenable fiscal crisis. The ‘successful’ policies of the Musharraf regime left the country on the verge of economic ruin. As a result, the elected government acquiesced to a new bail-out package from the IMF worth US$11.2 billion. The conditionalities accompanying this package have been expectedly harsh, the result of which is major price hikes in basic amenities, imposition of an even more regressive taxation regime, and an increase in debt repayments.

In fiscal year 2009-2010 alone Pakistan paid up to US$3.4 billion to its external debtors, the vast majority of which is interest being paid on long-standing loans. In less than three years since the demise of the Musharraf dictatorship, total external debt has increased from US$49 billion to US$55 billion. The re-scheduling of debt in the wake of 9/11, which was described as a major economic heist of the Musharraf regime, will actually result in a dramatic increase in debt repayments in years to come: by 2015-16, Pakistan’s external debt is projected to be US$73 billion. And this figure does not account for the prospects of new multi-billion dollar loans in the wake of the floods.

As such we believe that neither debt re-scheduling nor other similar piecemeal arrangements constitute a meaningful solution to Pakistan’s debt crisis. There is only one option: debt write-offs, the precedents for which have been outlined above. In the final analysis, the political will to demand a debt write-off is arguably what this country lacks. If it can be generated in the days, weeks and months to come, the IFIs and private commercial creditors can be forced onto the back foot, and the people of this country given some much needed respite.


[1] QAZI MASOOD AHMED, MOHAMMAD SABIHUDDIN BUTT, and SHAISTA ALAM, 2000, “Economic Growth, Export, and External Debt Causality: The Case of Asian Countries,” Pakistan Development Review 39(4): 591-608.

[2] Asian Development Bank, 2002, “Escaping the Debt Trap: An Assessment of Pakistan’s External Debt Sustainability,” Working Paper No. 1, Islamabad: Pakistan Resident Mission Working Paper Series

[3] Irving Brecher and S.A. Abbas, 1972, Foreign aid and industrial development in Pakistan. London: Cambridge University Press

[4] Mohammad Waseem, 1994, Politics and State in Pakistan, Islamabad: National Institute of Historical and Cultural Research.

[5] This threat has been underlined by Altaf Hussain’s recent statement calling for ‘patriotic generals’ to save the country from ‘corrupt politicians’.

[6] Asian Development Bank, 2002, “Escaping the Debt Trap: An Assessment of Pakistan’s External Debt Sustainability,” Working Paper No. 1, Islamabad: Pakistan Resident Mission Working Paper Series

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