The Moral Case For A Debt Write-Off For Pakistan

The Moral Case For A Debt Write-Off For Pakistan
History can be a good teacher.

In 1953, Europe was rebuilding its way out of World War II. Germany, vanquished and divided, was struggling under crippling debt. At this critical juncture the lenders, mainly Europeans and the Americans, decided to write-off a large portion of the debt to allow the German regeneration. The write off was 50% of total external debt, which was also more than 10% of German GDP at the time. Today, a reunified Germany is the largest economy in Europe and the 4th largest in the world. The largesse of lending nations, known as the London Debt Agreement, propelled Germany to decades of rapid economic growth

It is a little known fact that Pakistan (a lender to Germany) was one of the signatories of the London Agreement.

Following the last Global Financial Crises, Greece has gone through protracted negotiations to reduce its debt (which at times exceeded 180% of its GDP). As part of this process, some lenders wrote-off around 50% of the amounts owed to them. And Greece is still not fully out of trouble.

Burundi and Iraq, too, have gone through similar support measures.

I am not an economist or a financial guru, but the basic data is compelling. Roughly, Pakistan’s GDP is around US$280 billion. Post-COVID our debt will be around 90% of GDP (~US$250 billion). As per the IMF, Pakistan has public sector loan repayments jump from US$7 billion in 2018/19 to US$16.5 billion and then US$18.7 billion in the next two years. Our tax revenues are 12% of GDP and we pay 6.5% of GDP as interest. What room does this leave for any development expenditure? We simply keep borrowing to repay old debt. To put this in context, our exports are a paltry US$25 billion and falling.

Pakistan is a poor country with lamentable health and wealth standards. This debt burden, now made worse by COVID-19, is unsustainable. Unlike larger economies, we cannot print money to make our way out of the financial crisis. The current path only leads back to lenders for debt renegotiations every few years, crisis or no crisis. This movie has been played all too often, and the plot keeps getting worse.

The intention of the lenders may have been noble. The tragedy is that these funds have been squandered through mismanagement and outright corruption in the past. They have never reached the intended recipient: the common man. The funds syphoned-off typically end up in the west in the form of properties in London, Paris or New York. The owners of landmark properties in Central London would be a who’s who list of Russian oligarchs, African despots, Middle Eastern dictators and politicians from the Subcontinent. One would question the integrity of anti-money laundering checks and balances being applied. But that is a separate topic.

I appreciate the US$2 billion support to Pakistan, from the multilateral agencies, to fight the economic impact of COVID-19. But this is only a temporary solution, akin to applying a band-aid to treat cancer. This loan, too, will have to be repaid at some point along with its interest.

This argument applies to most underdeveloped countries. My priority is however to protect Pakistan.
I propose a program to write-down the total debt of Pakistan to less than 50% of GDP. The first port of call should be the multilateral agencies and friendly countries. This will also include tough discussions with local banks who have benefited from a benign rent-seeking business model without contributing to the economy. Ideally, the private foreign investors (EG: Bond investors) should not be impacted.

Just to be clear, debt write-off is a permanent cancellation of financial obligations not a deferment of interest or loan repayments for a later date.

If this sounds extreme, then it is – by design. Extreme measures are needed to address this vicious cycle of extreme poverty and extreme deprivation. If this sounds simplistic then, after decades wasted in complexities, it is high time we get our head out of the woods and look at the big picture.

If mechanisms are required to ensure that resulting benefits are properly spent on development measures and tax collection is improved, then these should be welcomed.

Lastly, fingers will be pointed at our defence spending. Let us also address the elephant in the room and face facts. We are in a tough neighbourhood and it is not by choice. Afghanistan, to our west, has been unstable since 1979. India, on the east, is run by an aggressive right-wing government with sinister designs. If it were not for a robust military deterrence, we would not be far from becoming another Iraq, Syria or Libya. Despite this, our military leadership has accepted cuts to support the economic agenda. We can only play with the cards we are dealt.

COVID-19 and 9/11 have amply demonstrated that no nation is an island to itself. Travails of one country travel easily across its borders and vice versa. A stable Pakistan, with a population of 210 million earning US$5,000 per capita (nominal, less than South Africa today) will contribute over US$ 1Trillion to the world GDP. It has the potential to be a growth engine for the world.

The world has come together to take extreme measures to fight COVID-19. Why can’t such coordination be achieved to rid of poverty, disease and deprivation?

Reducing crippling debt is the first step. It is the right thing to do.


Shamsa Ali is an MPA for PTI in the Punjab Assembly. She was a Fulbright Scholar and has been practising law for over 35 years. She can be contacted at