Learning from our last default.

THERE has been much talk recently of Pakistan's seeking a restructuring of its external debt servicing obligations. We last requested such restructuring in December 1998. What lessons does our past experience hold for our current predicament?

After it carried out a series of nuclear explosions in May 1998, important bilateral lenders imposed sanctions on Pakistan and cut off new loans. Multilateral lenders also suspended new loans.

To conserve foreign exchange, Pakistan cut back on public spending, devalued the rupee and instituted capital controls. This proved insufficient. The country was still unable to pay maturing claims and requested a restructuring of its bilateral debt through what is called a Paris Club process.

The restructuring negotiations began in December 1998 and ended in December 2001. By January 2001, three agreements had been reached, covering around $6 billion of debt. At one-third of the total bilateral debt, this was a modest yield for more than two years of effort.

Then, in December 2001, a fourth agreement was announced. This extended restructuring terms to the entire remaining stock of bilateral debt of around $12.5bn. Also and separately, sanctions were lifted and access to multilateral lending restored.

Why was the last round so generous? The reason was political. Pakistan had signed up as an ally of Western powers after the Al Qaeda-sponsored attack on the US on Sept 11, 2001, so the December round could be thought of as a reward.

The State Bank of Pakistan calculated the net present value of the debt reduction to be between 28 per cent and 44pc. The 10 years after 2001 also saw an enormous increase in grant flows to Pakistan, rising from around $130 million per annum in 2000 to around $2.9bn in 2011.

Why were we unable to use the period of debt relief to get on a sustainable debt-servicing trajectory?

Life after restructuring was initially rosy. The debt servicing ratio (or ratio of repayment claims to export earnings) declined from 33pc in 1999 to 9.5pc in 2011, due both to a decline in claims (achieved by the debt restructuring) and an increase in export earnings. Indeed, nominal exports rose sharply from $9bn in 1999 to around $31bn in 2011.

Nevertheless, Pakistan returned to the IMF in 2008 and then again in 2013 and 2019. Why were we unable to use the period of debt relief to get on a sustainable debt-servicing trajectory?

There were two main reasons for this. The first was the start (some might say...