Pakistan’s economy is on the precipice. Inflation is at 32 per cent; forex reserves at just over $3 billion can barely cover a month’s imports; external debt is over a third of the GDP at about $125 billion amidst rising interest rates; and the country needs to service an estimated $7 billion of debt in a few months for which there is no money. Amidst this chaos in India’s neighbourhood and the larger debt crisis in poor and developing countries, it is a bit surprising that the recent G-20 talks have merely skimmed the surface on creating new debt resolution methods.

Food shortage, political turmoil and rising terrorism in Pakistan cannot be good news for India. The IMF has mooted its usual set of terms to release $1.1 billion at the outset: raising energy prices; slashing the currency; and raising taxation. In a country of plutocrats, the last seems a somewhat agreeable proposition, but the same cannot be said of the first two proposals. Energy price hikes will pose unconscionable hardships and add to political instability. Currency devaluation will raise the prices of essentials which are being imported, while exports may not pick up when markets are fickle and the country’s productive capacities are impaired. While there can be no denying the need for restructuring and fiscal consolidation, the IMF’s medicine seems drastic, and with a proven track record of failure. It is here that India and China, with their growing heft as bilateral ‘non-Paris Club’ creditors, must try to nudge the G-20 towards a new institutional framework.

The G-20 and multilateral agencies have already kicked off such a process. The Debt Service Suspension Initiative was started in May 2020, which was later modified in November that year and dubbed ‘Common Framework’. Given the poor response from the 68 low-income countries for which this window was created, it is evident that some changes are called for. First, the facility must include emerging economies such as Pakistan, Sri Lanka and Bangladesh. Second, debt suspension is not good enough, as it merely postpones the inevitable, while also adding to the costs of debt servicing. A suspension of payment could lead to a credit downgrade, lowering investor confidence.

A debt restructuring package that is applicable to all creditors must be the goal, with a mechanism that also helps the debtor countries negotiate terms with private lenders. The role of bilateral credit has receded in recent years, with private lenders accounting for a large share of a country’s external debt. India and China must reduce the control of the OECD in debt resolution. In this respect, the G-20 outcome statement of finance ministers is a trifle disappointing. It appears to go with the status quo of the ‘Institute of International Finance (IIF)/OECD Data Repository Portal’. India’s G-20 presidency would be a watershed if it makes some progress here.