Floods, debt and SDRs – Opinion

Pakistan is facing unprecedented floods of a deeply catastrophic nature. While 3 million head of cattle died in flood-affected areas, the other mainstay of people’s livelihoods, namely agriculture, also suffered a severe blow. Millions of hectares of agricultural land have been inundated by floods, following, for example, six times more rain in the province of Sindh than on average over the past thirty years, not to mention the acceleration of melting glaciers.

Therefore, the rice harvest has been badly affected, which will not only mean a drop in supply for the country and the world (Pakistan is the fourth largest rice exporter), it would also mean a negative effect of that on much-needed export earnings, to broadly reduce the large gap between a heavy import bill and exports. In addition, significant damage to the cotton crop means that imports will have to be made in this regard, to meet the needs of the main export industry in the form of textiles.

In addition, another concern has arisen: as the water is stagnant in most flooded areas, it is very unlikely that wheat can be sown this year. This would mean, once again, that wheat imports will have to be made in the coming months.

Therefore, this winter will see an additional burden on imports in the form of a likely large level of realized imports in cotton and wheat.

This makes it all the more difficult to rein in the high level of import payments the country is already making, given high global energy and commodity prices for more than a year since the global commodity supply shock emerged last year and deepened in its wake. of the war in Ukraine.

Here, the fallout in the form of food and energy shortages from this war means that prices for these are likely to rise as the food crisis is likely to worsen in the months to come, alongside the likely rise in LNG prices, for example, as Europe competes with developing countries such as Pakistan for scarce LNG supplies over the coming winter.

With around $8.3 billion in foreign exchange reserves, Pakistan could have ill afforded such strain on the import bill, since the country already only has five to six weeks’ import cover. which is well below the desired minimum, according to international best practice, of at least 12 weeks (or three months).

Moreover, even before the floods hit, following the sharp weakening of the national currency (PKR) against the US dollar in recent months – both due to the rise in the value of the US dollar in the wake of a significant decline and rapid monetary tightening by the US Federal Reserve, and also due to the growing demand for US dollars to pay for very expensive imports due to the global supply shock – the external debt, which was already at an expensive level, has increased all the more.

Following the floods, servicing the external debt for the current year at around $30 billion has become all the more difficult, if not impossible, even after receiving a tranche of around $1.2 billion. from the International Monetary Fund (IMF) under the Extended Financing Facility (EFF) program, funding is well below about $8 billion, even after adding inflows from other donors like the Bank Asian Development Bank (AfDB), etc. So there is a gaping funding gap of $22 billion.

On the other hand, the initial assessment of the damage caused by the floods would be around 30 billion dollars. This places an immense burden on the country to organize the 33 million people who have been displaced by the floods and are facing increasing threats/challenges from the coming winter, little shelter, food shortages which may well become famine, water-borne diseases, and the onslaught of dengue fever. And all of this is on top of the dozens of vulnerable pregnant women living and children out of school.

Pakistan, like many other developing countries, could not provide much stimulus during the pandemic because the world did not care to grant a moratorium or meaningful debt relief. The enhanced allocation of special drawing rights (SDRs) from the IMF which entered the pandemic well, about a year and a half after the start of the pandemic, and where most of the allocations also went to already rich countries, and Pakistan received only $2.77 billion out of the total $650 billion allocated in August 2021.

This is not to say, however, that an “unconditional” allocation of SDRs was not important to Pakistan, which it would have used both for fiscal purposes and to provide some debt burden relief from the IMF. , but allocated on the basis of a quota meant that the amount received was insufficient.

The search for international support in terms of debt relief and financial assistance from development partners in general for debt relief, including a new allocation of SDRs as published in August 2021, is not just a matter of charity, but a principle of climate justice.

Indeed, firstly, as the world, and in particular the countries of the South, suffered from the Covid pandemic, which had strong roots in the climate change crisis, and secondly, in the form of floods mainly induced by climate change is a matter of justice that rich countries, and at least have meaningfully met their $100 billion pledge and provided that climate finance to developing countries, which had little contribution in terms of ‘carbon footprint. For example, Pakistan only contributes about 0.8% of global carbon emissions.

Pakistan, which is facing a serious debt default and a catastrophic flooding situation, needs urgent attention from the world. Millions of flood-affected people are exposed to the risks listed above, among many others. There is indeed a need for rapid debt relief from the country – at least $30 billion owed by the country for 2022 should be canceled immediately.

Second, the IMF should urgently release a boosted allocation of SDRs to $650 billion, for which it just needs a nod of approval from the US Treasury, and this allocation to individual countries is done not only on quotas but also on foreign exchange reserve requirements.

Another way to distribute could also be, as has been suggested by a number of people for many months now, to adopt an 80/20 allocation criterion between developing countries and high income countries, and who need less such DTS allocation.

Also, since the IMF cannot allocate more than $650 billion, it would make sense for the IMF to advocate for the passage of a bill in the US Congress titled “IMF Issuance of Special Drawing Rights”. .

The bill passed the US House of Representatives three times, but failed to pass the US Senate. If passed, the bill would allow the IMF to increase its SDR allocation envelope well beyond the $650 billion cap, and to approximately more than $2 trillion.

Given the climatic disasters in Pakistan and West Africa due again to flooding, in addition to an ongoing pandemic, high debt overhang and difficult import bills in the wake of the global shock of the supply of raw materials faced by developing countries, and as the world enters a period of strong recessionary tendencies as a result of high inflation and tight monetary policy, it is therefore of utmost importance that a significant new allocation of SDRs be made by the IMF.

In addition, a significant debt restructuring/relief effort – with both private creditors and China included in these meetings – should be provided to developing countries as soon as possible. Moreover, given this deep level of crisis, the IMF should also immediately cancel its “surcharge” policy, which is implemented on program countries that are behind in their debt repayments.

Copyright Business Recorder, 2022

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