A Review of Recent Developments in Debt and Debt-related Matters by Economic Affairs Division, Commonwealth Secretariat, London.

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A Review of Recent Developments in Debt and
Debt-related MattersbyEconomic Affairs
Division, Commonwealth Secretariat, London.
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• Presentation organised into 3 parts
• Part 1 HIPC Initiative Issues.
• Part 2 MDRI Implementation.
• Part 3 Other debt-related matters.

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Part 1 HIPC Initiative Issues

• It is noted that post-completion point HIPCs have
  increased to 21, up from 18 by April 2006, and
  interim HIPCs are now 9 so that 30 HIPCs have
  been benefiting from HIPC Initiative relief.
• A further 10 are potentially eligible for the
  relief, so that the actual and potential HIPCs
  are now 40.

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• However, with Kyrgyz Republic now joining
  (through a popular decision reported in the mass
  media) the list of countries that voluntarily
  decided not to avail themselves of the HIPC
  Initiative, the list is now effectively reduced
  from 10 to 9.
• Other countries that had earlier taken a similar
  decision of not availing themselves of the HIPC
  Initiative include Bhutan, Lao PDR, and Sri Lanka.

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• Sunset Clause of end-2006 was not extended but
  merely replaced with the grandfathering concept.
• But a number of low-income countries with
  below-the-threshold debt burden indicators and
  highly indebted countries (particularly, small
  states) with above-the-threshold per capita
  income continue to be ineligible.

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• The April 2006 CHMF recommendation that such
  countries be accommodated either by modifying the
  eligibility criteria or by launching a new
  international initiative that would address their
  debt problems is therefore being re-iterated.

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• While noting the satisfactory level of
  participation of both multilateral and Paris Club
  bilateral official creditors in the HIPC
  Initiative, there are concerns regarding the
  continued low participation, in providing HIPC
  relief, of non-Paris Club bilateral official
  creditors and, particularly, commercial
  creditors.

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• Many of these rogue creditors sell their debts to
  vulture funds that eventually recover the debts,
  often through lawsuits that result into
  significant financial and economic costs to
  HIPCs.

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• To deal with this problem of creditor lawsuits,
  we suggest concerted global actions to complement
  the efforts of the Commonwealth Secretariat that
  has set up a HIPC Debt Clinic for assisting
  Commonwealth sovereign debtors facing creditor
  litigation and in negotiating and re-negotiating
  foreign debts to minimise creditor lawsuits in
  future.

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• One recommendation is for the BWIs to re-consider
  their earlier perception that their financial and
  non-financial assistance to HIPCs in litigation
  would compromise their expected neutral and
  impartial roles to both sides, a perception that
  prevents them from translating their sympathy for
  the HIPCs in litigation into active supports.

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• Another recommendation is for the BWIs and others
  to be at the forefront in actively sensitising
  the international community and rallying
  governments, to make them muster political will
  that is reminiscent of the type that has, since
  2001, prompted enactment of legislations on
  anti-terrorism financing, on the need for
  enactment of legislations to protect LICs from
  lawsuits or seizure of assets under their
  jurisdictions in the wake of litigation.

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• HIPCs have also been increasingly reported, in
  various documents of the staffs of BWIs, to be
  facing serious capacity building challenges in
  the management of public finances and,
  especially, debts.

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• Accordingly, we recommend the setting up, under
  the auspices of the BWIs and other like-minded
  agencies, of an institutionalised and integrated
  multilateral framework for technical assistance
  on debt management matters.

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• This would be reminiscent of the existing
  Integrated Framework for Trade-related Technical
  Assistance (IF), which was established under the
  auspices of 6 multilateral institutions
  (including WTO, UN agencies and the BWIs) in the
  area of trade, to assist in strengthening of debt
  management capacity in LICs transferring to them
  of debt management technology and disseminating
  to them of best debt management practices
  elsewhere.

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Part 2 MDRI Implementation

• AfDF started MDRI implementation in September
  2006, with January 2006 still retained as the
  implementation date. The IMF had earlier started
  implementation with effect from January 2006 and
  IDA, from July 2006. The IADB has now agreed to
  also join in implementing MDRI.

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• The inherent incentive problem, arising from
  inadequately credible assurance of compensatory
  financing to be made by donors to the IFIs to
  defray their costs of implementing the MDRI,
  still lingers on.
• This is mainly because the promise to compensate
  relates to a very long future time period of up
  to 4 or 5 decades.

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• This has motivated the IFIs to devise various
  ways of minimising the implementation costs and,
  hence, benefits to the post-completion point
  HIPCs.
• To remove this incentive problem and thereby
  assist MDRI implementation achieve the objectives
  intended by the G-8 and other proponents of MDRI,
  we suggest that the idea of giving 100 percent
  guarantee to the IFIs, which donors had initially
  disagreed with, be re-visited.

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• This 100 guarantee would require donors to make
  upfront payment to the IFIs of capitalised sum of
  the series of future debt service payments that
  the IFIs will be forgoing on the eligible debts.
• Positive consideration by the IFIs of most of our
  other suggestions below on how to enhance MDRI
  implementation hinges on such guarantee being
  given to the IFIs.

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• The IDA actually implemented its plan to minimise
  MDRI implementation costs, noted at April 2006
  CHMF Meeting, by
• reducing the cutoff date of debt eligibility
  from end-2004 to end-2003
• adopting July 2006 as the implementation date for
  the existing post-completion HIPCs and
• delaying implementation of MDRI for HIPCs that
  subsequently attain completion point, sometimes
  up till July of the following calendar year after
  attainment of completion point.

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• The IMF and AfDB have no such plan for
  minimisation of implementation costs and we
  therefore re-iterate our earlier recommendation
  that the IDA too should emulate them.

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• As noted earlier at the CHMF Meeting in April
  2006, all the IFIs, in other to minimise
  implementation costs, give MDRI relief to only
  debts remaining unpaid at at or after attainment
  of the HIPC completion point.

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• This leads into a situation where the whole or
  the bulk of the otherwise eligible debts would
  have been re-paid prior to attainment of the
  completion point, with little or nothing left to
  be relieved.
• So, we re-iterate our earlier suggestion of three
  measures to address this problem, viz

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• Making delivery of MDRI relief retroactive from a
  particular common date for all HIPCs, with
  reimbursement made to HIPCs that reach the
  completion point later for debt service payments
  made after that date.
• Fast-tracking by the IMF of its track record on
  macroeconomic policy programme so that HIPCs can
  reach completion point earlier.

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• Not making attainment of HIPC completion point a
  requirement for MDRI eligibility, as was done by
  the IMF for 2 non-HIPCs, Cambodia and Tajikistan.

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• On the specific issue relating to IMFs own
  modality of implementing MDRI, we note, as was
  also noted at April 2006 CHMF Meeting, the gross
  inconsistency and non-uniform treatment of
  pre-completion point HIPCs that have per capita
  income of US380 or below vis-à-vis two
  non-HIPCs, Cambodia and Tajikistan, that both
  have similarly low level of per capita income.

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• These non-HIPCs were allowed to go through only
  one-time assessment, as opposed to several years
  of assessment, of their poverty reduction
  strategy (PRS), public expenditure management
  (PEM) and macroeconomic performance.
• We therefore reiterate our April 2006
  recommendation that pre-completion point HIPCs
  too be given the opportunity to go through only
  such one-time assessment by not making attainment
  of HIPC completion point a requirement for MDRI
  eligibility.

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• Concerning the implementation modalities that are
  common to IDA, AfDB and IADB, we note, as we also
  noted at the April 2006 CHMF Meeting, that
• The netting off mechanism deprives the countries
  of adequate resources for implementing MDGs and,
  in many cases,it effectively amounts to not
  giving them any MDRI benefit at all.

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• Application of the rather controversial PBA
  mechanism in allocating the MDRI-induced
  compensatory finance from donors is
  inappropriate. The PBA, which is based on the CPR
  that is mainly driven by the CPIA, discriminates
  against those IDA recipients with lower per
  capita income levels and, hence, the Sub-Saharan
  Africa, and would negate the underlying rationale
  of MDG attainment that prompted launching of the
  MDRI.

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• We therefore reiterate our April 2006
  recommendation that the need to attain MDGs be
  included with, and given no less weighting than,
  the CPR, in a modified form of PBA to be used in
  allocating this compensatory financing.

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• To sum up on the HIPC and MDRI debt relief
  issues, we may wish to note with concerns that
  the debt burden of a number of post-MDRI
  countries still remain unsustainable.
• For instance, Niger and Rwanda are still
  classified by the IMF/World Bank through the use
  of DSF as red light post-MDRI countries,
  implying they have a high risk of debt distress.
  Many are classified as yellow light countries,
  post-MDRI.
• Thus, the fear we express at the Livingstone CHMF
  Meeting in 2006 has come to pass that MDRI, given
  the mode of implementation, would still leave
  many beneficiaries with unsustainable debt levels.

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Part 3 Other Debt-related Matters

• We re-iterated our earlier review for 2006 CHMF
  Meeting of the IMFs Exogenous Shock Facility
  (ESF), including its prospects, its challenges
  and recommendations for its improvement. We also
  note that little has been heard of the
  implementation, modification, etc of the facility
  since April 2006.

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• We review the BWIs November 2006 paper on DSF
  for LICs.
• Much was said at April 2006 CHMF Meeting by an
  IMF Staff about the earlier version of the
  document, which has now been revised into the
  November 2006 version.
• We note that most of the revisions bother on
  either technical methodology or tinkering with
  details about policy issues, without much
  significance to aspects of policy that are of
  main concerns to LICs.

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• For completeness, we also allude to the World
  Bank document on how to prevent rival creditors
  from free riding or poaching the borrowing
  space in the finances of governments of LICs that
  was created in part by IDAs grants and MDRI
  relief a subject of another paper to be
  presented at another Session.

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• THANK YOU!