Cancelling Developing Countries Debt. Options and Possibilities

1
Cancelling Developing Countries Debt. Options
and Possibilities

• Infid International Conference
• Jakarta, Indonesia
• November 17th, 2005

2
Status-quo after 2005

• HIPC and G8 multilateral debt deal
• IFI Debt Sustainability Framework
• Paris Club and Evian approach

3
HIPC

• Debt sustainability - focused on export capacity,
  not govt revenue - not guaranteed after
  Completion Point because of systematic IMF
  forecasting bias
• not to mention the MDGs!
• List enlargement in preparation (Eritrea, Haiti,
  Kyrgiz Republic, Nepal sure to fulfil criteria,
  possibly Bangladesh, Bhutan, Myanmar, Sri Lanka,
  Tonga, with their data still verified)
• and definitely deeper relief through G8
  Multilateral cancellation (IMF, WB, AfDB), even
  though implementation process still in the making
  by IFIs.

4
IFI Debt Sustainability Framework

• Window-dressing of Millennium Development
  Goals
  
• Once again, its repayability rather than
  real sustainability
  
• Uses same DSA approach as HIPC
• and is likely to replicate over-optimistic
  forecasts
  
• Loans vs grants rule, opens the possibility of
  reduced resource flows to LICs
  
• Potential, yet to be defined conflict with HIPC
  - G8 DSF will already be reviewed for SM 2006
  
• Never contemplates the possibility of further
  cancellation exercises

5
The Paris Club

• Less and less relevant considering overall
  present - and most likely future - loan
  dynamics
  
• but given the past, it is still central to most
  (not Argentina) restructuring/cancelling of
  sovereign debt, not least because of
  comparability of treatment provision (sovereign
  terms extended to private creditors).
• Since 2003 a greater degree of flexibility has
  ben formalized (but Serbia-Montenegro and
  Pakistan deals had anticipated the trend in 2001)

6
and its Evian Approach

• New (2003), flexible channel to concede
  cancellation by creditors on case-by-case basis
  
• Not a change in paradigm, since uses extensively
  classic analysis to assess debt
  sustainability
  
• but a useful, powerful and discretionary
  instrument, as the recent episodes clearly
  demonstrate.

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A few, basic advantages of debt reduction

• Easy, direct activation of resources
• Debt overhang trap is a long-term growth
  hampering state, removing it most often is a
  necessary pre-condition for economic recovery
  
• Does not decrease credit worthiness on the
  contrary, most often it dramatically increases it
  by realistically restoring long-term solvency
  
• The case for debt relief on the basis of economic
  efficiency and elementary social justice is
  clear, yet in order to search for pragmatic,
  operational channels we are lead to confront
  concrete political economy considerations.
  Positive rather than normative approach

8
Iraqs

• Issue of illegitimate/odious debt raised by US,
  strong sponsor of the deal
  
• 80 cancellation
• Strong conditionalities through stringent IMF
  program
  
• 3-year phasing

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and Nigerias case

• Big issue of illegitimate/odious debt
• Policy Support Instrument (PSI), not standard,
  rigid IMF program
  
• - Country-owned
• - Difficult for IMF to refuse approval of
  reviews
  
• Home-made, but IFI facilitated (though only
  informally) MDG-based debt sustainability
  analysis
  
• Credible default threat through official
  parliamentary action
  
• A big sponsor, the UK, acting as champion for
  the cause
  
• Quantitative aspects insufficient (only 60
  reduction) but from a qualitative standpoint
  better than Iraq (shorter completion time, less
  conditionality)

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And what about Argentina?

• Different scenario small sovereign debt, large
  privately-owned bondholdings
  
• Virtues of non-cooperation confrontational
  approach, IMF recepes thrown out and advice
  bluntly disregarded.
  
• Operation very successful (75 NPV haircut, 75
  creditor participation), country back to
  sustained growth. Labor market conditions are
  improving, financial markets are stable, inroads
  have been made in reducing poverty (IMF Art. IV
  2005)
• Draw-backs lamented disrupt renewed future
  access to international capital markets Not
  happening!

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Indonesias prospects

• Severely Indebted Low Income Country
• - US 83bn foreign public debt, ow ca 53bn
  Paris Club.
  
• - Public sector debt 54 of GDP, ow 32
  foreign
  
• - Debt service 6-7 GDP (ca US 7bn, to pick up
  in 2006)
  
• - Equivalent to 53 of non-oil revenues, and
  42 of primary spending
  
• - Social spending likely to contract by 30 as
  debt service picks up 2006 with peak in 2008
  
• - the interest bill alone accounts for about
  one fifth of total spending
  
• yet, following the standard financial
  approach, Indonesias debt is sustainable
  since following projections the debt-to exports
  ratio should fall below thresholds, and debt-to
  GDP ratio should reach 30 by 2010
• Of course this doesnt take into account possible
  shocks (exchange rate, oil, etc) and the
  countrys present - and future? - export weakness

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and needs

• IMF The heavy debt burden has hampered the
  governments ability to boost spending in
  priority sectors such as health, education, and
  infrastructure.
• Indonesias Progress Report of the MDGs (2004)
  states that, without external assistance in the
  form of a larger ODA from advanced countries, in
  accord with the target of goal 8 of the MDGs and
  the Monterrey Consensus, plus the significant
  reduction of the foreign debt stock, it will be
  very difficult for Indonesia to attain poverty
  eradication as envisioned in the MDGs

13
Strategy elements

• Link debt reduction to achievement of MDGs
  repayment capacity dependent variable, not the
  inverse
  
• - Efficient, direct way to liberate resources
  for poverty-reducing social spending
  
• - Fits the principle of fair burden sharing
  between debtors and creditors enshrined in
  Millennium Declaration
  
• Insistence on the mecessity of debt audits and
  underlying issue of illegitimate/odious debt
  

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as well as a few ideas and tactical
suggestions

• Elaborate in-house MDG-based DSA evaluate PSI
  conds
  
• Go on diplomatic offensive to find (a) powerful,
  simpathetic sponsor(s) amongst G8, maybe
  
• Germany, host in 2007??? Abs model
  replication! (Japan realistically major problem,
  but commitment to MDG, oil)
  
• The window of opportunity that followed the
  Tsunami has not been used yet?
  
• No excessive, unmotivated worry of an open, even
  politely confrontational approach, or of
  thepunishment of markets
  
• eventually, launch a campaign for repudiation
  by democratic means, as in Nigeria, posing a
  credible threat to creditors. Could be credibly
  based on illegitimate/odious debt argument
• Use previous country-cases to demonstrate
  unfairness of processes and the use of
  geo-political double-standards