Till Debt Do Us Apart
The man with “a nice smile but with an iron teeth” became TIME’s Man of the Year for 1987. Gromyko’s description of Gorbachev may have done him justice but the prized nomination should have gone to the unnamed whizkid in the Bank of Boston who convinced his superiors that they should simply write-off US$ 200 million owed to them by Latin American countries. Being a portion of the Bank’s outstanding credit (only 25%),writing-off on instalments will make no real dent in the annual profits of the shareholders and is a realistic way of calling a spade a shovel. For debt-ridden Latin Americanos it was a heaven-sent boon of long-term effect even though the accounting procedure has not changed the legal status of the debt which remains repayable, with the Bank having every right to keep asking. The fact remains that the Bank of Boston realistically recognized that the indebted countries did not (and would not) have the wherewithal to pay the interest alone, what to talk of the Principal sum and decided to correct an anomaly while keeping a potential Sword of Damocles hanging over the debtor’s heads. It was a welcome precedent and one that should be adopted by all the western creditor-banks so that billions of US dollars of accrued debt in the name of Third World countries are written off in stages which are not so painful to the creditor banks or their respected shareholders. The catch would be that the banks could not justify giving further loans to the defaulting countries once the debt is written off since their shareholders would not accept it unless the debt had been repaid in part at least. Our premise is that since the countries involved will not have to ask for more loans to pay the interests due and the instalments on the Principal Sum, the vicious cycle should come to a stop — or at least the effects would be minimised. They would hardly be masochist enough to want to go deeper in debt which is the only other alternative. One supposes that one could live with such a situation where all one’s debts are written off.
In any case loan packages will be that much more difficult to put together in the future according to analysts. So be it! Dr Mahbubul Haq tells us now, US$ 12 billion in debt and 25 years later, that Pakistan does exceedingly well everytime AID is stopped. Despite Islamic strictures we are a gambling nation and I am willing to bet that the Born Again ex-High Apostle of External Aid is right this time around. If not then we will be in real trouble for the next quarter century and owe all to the good doctor’s gift of the gab and our gullibility. The silver lining in all of this is that by end of the next 25 years we should get used to being in deep monetary trouble. But in defence of the Federal Minister for Planning and Commerce one can quote Edward N Westcott, “the only man who can change his mind is a man that’s got one”.
All commercial banks must loan money to exist and big money borrowers exist mostly among the Third World countries. The trend in recent new business has shown that some countries which have geo-political clout can get away demanding long maturities and low interest loans. India’s recent financial track record consists of zero growth and double digit inflation, anathemas to potential creditors yet it has recently acquired a $300 million loan on more than attractive terms. On the other hand, Algeria has had to accept higher borrowing costs. In the same manner, trade-related business is a tremendous weapon in the hand of western creditor-banks and Third World countries cannot afford that the banks should cease to grant trade credits to them which in the absence of hard currency reserves, would deny much needed machinery to them.
If Dr. Ravi Batra is to be believed, the world is only two years away from economic disaster. Casting the unnecessary preamble of basic Hindu philosophy anunciated a la Sarkar aside, his book, “The Great Depression of 1990” makes compelling arguments that Economic Apocalypse is around the corner and like a good economic physician he has prescribed a worthwhile survival kit. According to him he desperately desires that his predictions should not come true but his scientific analysis shows that the world is really at the end of one cycle and poised to go onto the next with economic upheaval manifest as a potential happening. In the context of Third World indebtness to commercial banks, a situation arises where they could be a run on the banks if there is a concerted default by a large number of countries. More than anything else this would spell economic disaster for the world with businesses in the first world failing by the thousands, unemployment rising to the 20% figure spelling a Depression and the resultant anarchy complicating the whole pot further. Dr Batra’s logically defined scenario is horrendous to contemplate but at the same time economic cures have been prescribed, primarily incumbent upon the US Administration. Everyone agrees that after 1929 and the traumatic 30s the US economy is better equipped to handle flash emergencies and all portents point towards an awakening of fears in relevant political quarters. A case in point was the concerted intervention by the Central Banks of major western countries to stop the slide of the US dollar with massive purchases catching money speculators in a classic and successful bear squeeze. The US dollar has started to climb on the long road back. Analysts were impressed by the strength of the intervention and predicted relative stability in the weeks ahead in the exchange market. However, Third World countries will still feel the effect of the deepening Recession even if the Depression is avoided in the first world. The problems may not be confined to the poor, debt-ridden countries only because the Drag Effect in a Catch-22 situation will spill over into trade-related business of the first world which depends upon the Third World to purchase a fair amount of its goods and commodities.
A deep need arises to come to grips with Third World debt so that their economic machinery does not break down completely to the detriment of the whole world. Some sort of moratorium on debts is required and what better than to write off in stages, the entire debt of the Third World as it is owed to the western creditor banks. The threat of stoppage of further credits is well taken but future loans should be soft and available to very needy debtor only from the funded developmental agencies like World Bank, IMF, ADB, etc. It is extremely necessary for the western creditor banks to clear the decks for economic battle if they are to survive and put a stop to the chain reaction which would occur if they do not, when loans (and interest) are unrepayable as they are at the present time. It is better for the shareholders to feel some pain now rather than the total destruction that beckons in the future when they will not even get back one cent on the dollar of worthless paper.
Pakistan is rapidly approaching an extremely precarious and untenable position with respect to bad debts. A significant portion of new foreign loans goes into debt servicing, compounding our economic problems. With our expatriate workers on the way back from the Middle East in droves, our balance of payment situation is being further eroded on almost a daily basis. From a high remittance figure of US$ 2.8 billion we are on the way down to the US$ 2.0 billion mark by the end of 1990 instead of the optimistically projected US$ 4.0 billion. The State Bank has issued a very lucid warning on the whole gamut of economic inadequacies with specific notations for large trade and budget deficits, non-developmental expenditures, etc. That Mr. V.A. Jafarey decided on this all important candid presentation speaks volumes of the current thinking in State Bank circles and augers well for the future as well as being a sound indication of its independence of the executive branch. Lacking executive authority over fiscal policies, it can only implement and/or indicate deviations or possible pitfalls. The political process must decide on the lessons learnt and the actions to be taken. While the action to be taken are mostly on the domestic scene this should not stop us from asking for a debt moratorium in the same manner that some other Third World countries have managed to get. Why not despatch some of our economic heroes to distant lands to convince our creditors to write off our debts? Someone may be itching to tell us about financial complications beyond our comprehension and international economic commitments difficult for laymen like us to understand. Basically the creditor-debtor relationship except for a few nuances has not changed since history started recording debts and credits. It remains a simple process understood by laymen. The current requirement is only a little bit of salesmanship — adventurism (and lack of shyness) on the part of our erstwhile financial geniuses to convince our various creditors that it is in their interest to forgive us and let debt bygones be bygones.
We should also promise, hat in hand, to remain friends till debt do us apart!
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Leave a comment