International Debt

International Debt African Economic Development Renata Serra

Debt figures • Developing countries’ debt: US$ 2.5 trillions • The total debt stock for SSA: • 1970s: over $20 billions • 1980s: over $100 billions • 1990s: over $222 billions • 2004: over $280 billions (excluding debt relief) • On average this is about: 60% of GDP and two times the value of export • For the most indebted countries: NPV>150% GDP

Pre-HIPC • Ad-hoc and bilateral agreements • Rescheduling of principal and interest payments by Paris Club members • Increased concessionality and new concessional lending • However, no reduction in debt stock

HIPC Initiative (1996) • Comprehensive approach • Foreign debts owed to bilateral (Paris Club), multilateral (The World Bank and IMF) and commercial creditors (London Club) • Debt is reduced to ‘sustainable level’, not just re-financed • Two stages, 3 years each: ‘decision’ and ‘completion’ points

Enhanced HIPC (1999) • More pronounced debt relief and lower threshold allowing more countries to qualify • Weaknesses of the HIPC: • Debt not sustainable even after first reductions • Funds and efforts had been insufficient • Eligibility criteria were ad hoc and not fair, excluding countries that were poor and indebted

Thresholds for eligibility • NPV of debt/exports>150% • Debt service/export>15% • For very open economies (e.g. X/GDP>30% and fiscal revenues/GDP>15%), the threshold is NPV of debt/fiscal revenues>250% • Problem: Meeting these thresholds today does not guarantee future sustainability • GDP may be a better indicator of countries’ economic capacity to repay debt than purely financial figures, such as foreign exchange reserves

Progress with HIPC • 42 countries eligible (36 in SSA) Figures are for end 2004, millions US$ and in nominal terms

Debt relief helps: Uganda case • Uganda paid an average of US$150.9 million from 1994 to 1998. Over 2001-2015 it expects to pay an average of US$95.4 billion • The budgetary saving will average US$ 55.5 million over the period 2001-2015 • This debt dividend corresponds to 8.9% of social expenditure in a typical fiscal year and 3% of total expenditure • Over the period 2001-2005, the debt dividend is even higher, and equal to US$ 83.4 million • This amounts to 13.3% of social expenditure, and 4.6% of total expenditure

Uganda (cont’d) • Creation of a Poverty Action Fund (PAF) to make poverty-reduction spending and the use of savings from debt relief more transparent • Expenditure programs targeted by PAF include: • rural feeder roads • agricultural extension • primary education and primary health care • water and sanitation: made a higher priority since the people wanted so • Through the PAF, the government makes information readily available to the public • Civil society and the parliament can follow-up • All PAF resources are published in the media • Lower levels of government (districts, schools, and health care centers) are required to display PAF allocations in public places. • Quarterly meetings are convened to discuss independent assessments of PAF expenditures

Limitations of HIPC • Inappropriate eligibility criteria: poverty is defined too narrowly and domestic debt is excluded (Kenya and Nigeria excluded up to recently) • Slow pace of implementation and long delays • Interim relief is highly insufficient and below pledges • Limited additionality of aid: no net benefits!!! • Inappropriate sustainability criteria

Beyond HIPC • HIPC is failing by its own term: • Only a minority of countries have seen their debts brought down to 150% of GDP • Unrealistic forecasts about future export and growth • The Jubilee Initiative has been advocating: • Introduction of an international insolvency framework • Complete cancellation of debt • The G8 have recently accepted to cancel the IMF and WB debt of the 18 HIPC countries (and possibly of more countries?)

International Debt