Global economic experts increasingly acknowledge that the global debt situation, particularly the load borne by low income nations, has gotten worse. It burdens the nations that have borrowed a lot from external sources of funding to the extent that there is little left over after servicing the debt, which includes paying interest on the borrowed funds and reimbursing the lenders, to meet domestic needs for development and offer social services to the populace. debt has been a significant issue in world economic history, as I noted in the piece that ran in this space last week. One such occasion was the scenario that developed after the Second World War. Britain was a significant winner in A solution was chosen by the winners gathered in the American resort town of Bretton Woods in the U.S. state of New Hampshire. By the winners and were known as the Bretton Woods institutions. The latter evolved into the World Bank Group as it is today. The wealthy nations of the globe pledged to provide these institutions with large sums of funds. ‘Paid in’ and ‘call up’ were the two components of the promised funds.
Although just a little amount was put in, the callable capital was available in case the lending institutions needed to cover the borrowers’ defaults. The international agencies were able to access the financial markets at relatively cheap interest rates for the money they need thanks to the call up capital.
This strategy was used again in the 1980s when nations in East Asia and Latin America had to fork over enormous sums of cash to finance their purchases of oil and gas from the Middle East. Exports by a factor of several. This led to the energy-importing nations incurring significant debt, which They offered backup capital that the deeply indebted nations might utilise to pay off the debt they were struggling under.
The globe is confronted with a same circumstance once more. This time, a number of nations turned to foreign borrowing to help them cope with the Covid-19 outbreak and the harm it caused to their economy. The IMF estimates that 60% of the world’s low-income nations are either in serious financial crisis or on the verge of it. Another is Pakistan. Their economies will collapse without a strategy to handle debt payments, sapping global growth. The United States Treasury Secretary, Janet Yellen, increased pressure on China when the global debt crisis hit, saying, “The impacts of debt crises do not respect boundaries; they can have cascading effects on the global economy.”
International action is required once more. Could this approach be used once more to assist the highly indebted nations in maintaining their financial stability? Yes, but China will need to take the initiative this time around rather than the US. China is the main creditor, having given low-income nations in Asia and Africa billions of dollars in loans. Pakistan is one of the nations that has taken on significant debt from Beijing to fund the projects that are a part of the China-Pakistan Economic Corridor (CPEC) investment plan. China charges twice as much interest on its international loans—on average, 4%—as IMF-funded projects do.
The search for a solution to the global debt issue is now under process. In November 2020, international leaders convened under the auspices of the Group of 20, which is presently led by India, and formed a debt relief procedure intended to help a number of the world’s poorest countries. The procedure was referred to as the “Common Framework,” although it has not advanced much. Beijing has prevented an agreement by demanding that the IMF and the World Bank suffer losses on their loans, much like private sector banks and government lenders. However, it is not how the global system is set up. The supply of “callable capital” that is a component of the way these organisations are funded means that any losses experienced by the institutions would fall on the shoulders of wealthy nations.
Countries that qualify for the Common Framework must pay back around $55 billion in debt service in 2023. However, they were only able to generate $6 billion this year through the sale of their bonds, which was a significant decrease from the $17 billion raised in 2021. A return that is 12 percentage points more than what lenders may receive by investing on US Treasuries is required of some very dangerous near-defaulters, such Pakistan. This is 8 percentage points greater than it was before to the pandemic’s outbreak.
China’s dissatisfaction with not having a significant say in the management of organisations like the IMF and the World Bank is the major reason it is delaying activating the Common Framework. These institutions are taking into account the fact that China is now a significant financial power. Global Development in Washington, Scott Morros asserts that “whether you’re head of the World Bank or the United States Treasury Department, you’re stuck with the reality that China is a much bigger bilateral creditor than anyone else, certainly bigger than the United States.” Pakistan, which has close ties to China, is currently on the right side of the balance of world power.
Washington is exerting pressure on Islamabad to break away from China and take a more independent stance on international matters. If Islamabad gives in to that pressure and separates itself from Beijing, it would be a grave error. With that strategy, it would not only be impossible to repay the huge loans it has obtained from Chinese institutions, but it would also lose its current advantage in fostering land-based trade with the landlocked nations to its north. CPEC is a strategy for using Pakistan’s location.