It is very likely that you do know what debt is. But let’s start by understanding that.
What is debt?
Anu wants to host a party for her birthday. Her birthday is on the 27th. But she will get her pocket money only on the 1st – a good 3 days later. Anu can either postpone her birthday party or borrow money from a friend to throw her birthday party. If she borrows money, that is her debt. Debt is the money we borrow from someone.
Can countries be in debt?
Yes! In fact, most countries are! The money that a government borrows from lenders outside its own country is called its external debt.
What is a debt trap?
When a person (or a country) takes a fresh debt specifically to pay off an old debt, the person is returning old loans by taking new loans. i.e., they are replacing old loans with new loans.
Now, they may have borrowed 100 rs, but with interest, they have to repay 120 rs. So, now, they have to borrow, not 100, but 120 rs.
This means that their new debt is higher than their old debt, and they are getting ‘trapped’ into borrowing more and more.
It can happen to people, organisations, and yes, even countries. When a country is borrowing, not to create things or meet internal needs, but to repay earlier loans, it is very likely to be on its way to a debt trap.
Is Pakistan doing this?
Pakistan has got loans from Saudi Arabia, UAE, the World Bank, and several other countries.
In recent times, China has given large loans to Pakistan, including the most recent advance that Pakistan needed to repay some of its earlier loans.
This is Pakistan’s external debt for the last few years.
In December 2020, Pakistan returned $1 billion to Saudi Arabia (out of a total loan of $3billion).
In the same month, Pakistan also negotiated a $1.7 billion debt relief (when the borrower does not need to pay the money back immediately).
In March, UAE asked for its 1 billion dollars back, as the amount was due on March 12th.
According to the Pakistani news website Dawn.com, 87% of the loans taken from August – Dec 2020 were to pay interest on, or to repay some part of the previous loans.
Pakistan is now heavily dependent on China for future loans. This is because:
- Traditional friends like UAE and Saudi Arabia have not been as forthcoming with easy loans.
- Its internal economy and/or foreign investment is not producing enough money for it to pay off the loans.
- IMF and World Bank have also limited the funds that are released to Pakistan.
What debt trap does to countries
When the cycle of taking new loans to repay old loans spirals, countries lose control of the situation and have to follow the wishes of their lenders.
Due to such circumstances in the past, China now owns the Hambantota port in Sri Lanka.
Currently, China has funded some important projects in Pakistan and is also investing in cultural exchange projects with Pakistan. The Prime Minister of Pakistan, Mr. Imran Khan, has publicly acknowledged his country’s gratitude to China and mentioned that any issues that Pakistan has with China, will be managed internally.
Even though Pakistan did get a lot of aid and financial support during Covid, it has, somehow, not been able to create financial stability for itself.
How do countries create internal financial stability?
How do we create financial stability in our house? By making sure that we spend less than we earn.
It is the same with countries too.
Why does it matter to us?
While every country’s financial stability is important, for every country, the political and financial stability of its neighbours is even more important. Why?
Unrest and Peace
What happens when people are persecuted in a country? They try and take refuge in a neighbouring country – legally, or illegally. This creates a refugee crisis for the neighbouring country as well.
In a society where people don’t have enough money, some of them are likely to take to crime. This creates a situation for every neighbouring country as well.
Trade
Neighbours are the easiest trading partners to have. If neighbours are prosperous, chances are, the country will be able to sell more, at slightly higher prices. Also, it will be able to import at lower prices because of the low transport costs.
Military and Political situation
As a famous quote goes, relations between countries are dependent on the digestions of their leaders. A country with a stable government is easy to interact with. The countries can sign treaties with assurance that both sides will be able to honour them. They can do joint military exercises, OR, avoid military expenses because that border does not need to be guarded so zealously (India – Bhutan, for example).
Therefore, for every country, a stable neighbourhood means peaceful existence. As the saying goes, if your neighbour’s house is on fire, you cannot avoid the heat. 🙂