Cancelling Developing Cancelling Developing Countries’ Debt. Options and Countries’ Debt. Options and

PossibilitiesPossibilities

Infid International Conference

Jakarta, Indonesia

November 17th, 2005

Status-quo after 2005Status-quo after 2005

• HIPC and G8 multilateral debt deal

• IFI Debt Sustainability Framework

• Paris Club and Evian approach

HIPCHIPC• Debt sustainability - focused on export capacity,

not gov’t 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.

IFI Debt Sustainability IFI Debt Sustainability FrameworkFramework

• “Window-dressing” of Millennium Development Goals

• Once again, it’s “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

The Paris Club…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)…

… … and its “Evian Approach”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.

A few, basic advantages of debt A few, basic advantages of debt reductionreduction

• 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…

Iraq’s…Iraq’s…

• Issue of illegitimate/odious debt raised by US, strong “sponsor” of the deal

• 80% cancellation

• Strong conditionalities through stringent IMF program

• 3-year phasing

… … and Nigeria’s caseand Nigeria’s 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)

And what about Argentina?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!

Indonesia’s prospects…Indonesia’s 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”, Indonesia’s 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 doesn’t take into account possible shocks (exchange rate, oil, etc) and the country’s present - and future? - export weakness

… … and needsand needs

• IMF: “The heavy debt burden has hampered the government’s ability to boost spending in priority sectors such as health, education, and infrastructure.”

• Indonesia’s 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

Strategy elements…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

… … as well as a few ideas and “tactical” as well as a few ideas and “tactical” suggestionssuggestions

• Elaborate “in-house” MDG-based DSA; evaluate PSI cond’s• 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 the“punishment 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”