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<P><FONT SIZE=2>FYI<BR>
Eugenio<BR>
<BR>
<BR>
-----Original Message-----<BR>
From: Jürgen Kaiser [<A HREF="mailto:jurgen.kaiser@undp.org">mailto:jurgen.kaiser@undp.org</A>]<BR>
Sent: Fri 17/06/2005 23:31<BR>
To: Poverty Reduction Network<BR>
Subject: [surf-pov] INFO: Commentary on the G8 Agreement on Debt Relief Beyond HIPC: Consequences for MDG-based Debt Sustainability<BR>
<BR>
Facilitator's Note: Find the full commentary of Jürgen Kaiser, UNDP's Debt<BR>
Advisor attached, below is a version without footnotes. We welcome your<BR>
reactions or comments to the network.<BR>
<BR>
Since the 2004 IMF and World Bank Annual Meetings, the British and the US<BR>
governments have promoted competing proposals for what both called "100%<BR>
debt relief for the poorest countries". The major difference between them<BR>
was that the UK wanted to refinance the current debt service of eligible<BR>
countries until 2015, while the US favoured a debt stock write-off. The UK<BR>
proposal thus implied providing fresh money, while the Bush administration<BR>
wanted to finance relief through reducing future disbursements from the same<BR>
institutions that would provide relief - the IMF, World Bank and ADB.<BR>
<BR>
<BR>
<BR>
This bilateral exchange leading up to the Gleneagles summit was<BR>
intermediately disrupted by a competing joint French/German/Japanese<BR>
proposal to base enhanced relief on countries' individual needs - as<BR>
expressed in their debt sustainability analyses. Although this alternative<BR>
represented a potentially superior concept, it was poorly elaborated and<BR>
based on flawed World Bank definitions of debt sustainability. In fact, if<BR>
it had been carried out - it would have hardly resulted in any relief. As<BR>
this proposal is now off the table - it will not be further considered here.<BR>
<BR>
<BR>
<BR>
The G8 compromise<BR>
<BR>
<BR>
The G8<BR>
<http://www.g8.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c<BR>
=Page&cid=1078995903270&aid=1115146455234> compromise proposes the<BR>
cancellation of all debt owed by post-completion point HIPC countries to the<BR>
World Bank (notably IDA), the IMF and the African Development Bank (notably<BR>
its soft-loan window AfDF). The agreement will benefit 18 countries, 14<BR>
African and 4 Latin America. Preliminary figures suggest a reduction of 7.7<BR>
- 16.7 billion US-$ in present value terms over the whole repayment period.<BR>
Calculations by EURODAD suggest an annual debt service reduction of<BR>
1.047billion US-$ for all countries on average.<BR>
<BR>
This looks like a substantial relief at first sight. However, it is not! The<BR>
IDA and the AfDF modalities are largely in line with the US-proposal. For<BR>
every dollar of current debt service relief, IDA and AfDF will reduce<BR>
disbursements to these countries by one dollar. Countries will therefore be<BR>
paying for their own relief. While new funding will be made available to<BR>
ensure that the Development Banks' lending volumes are maintained - the<BR>
resources will be "allocated to all IDA- and AfDF recipients based on<BR>
existing IDA- and AfDF performance-based allocation criteria." This means<BR>
that each of the 18 beneficiary countries will get, on average, about 8<BR>
million in fresh money per annum (note that his calculation is indicative<BR>
only, as there will be huge variations between countries, depending on size<BR>
and performance).<BR>
<BR>
The situation looks brighter regarding the IMF. It is a minor, but not<BR>
insignificant, victory for the British to have forced the IMF into the<BR>
scheme against the will of the US. Unlike with the other two institutions,<BR>
it has been noted that there will be no dollar-to-dollar reduction in<BR>
disbursements. The IMF is to finance the relief from its own resources at<BR>
first. However, the statement notes that once countries with huge IMF<BR>
arrears are approved for tax relief (such as Sudan), bilaterals will provide<BR>
additional funds.<BR>
<BR>
Therefore, the only clear winners are the three International Financial<BR>
Institutions (IFIs) which can move substantial bad loans off their books and<BR>
compensate for lost revenue by reducing disbursements. Their medium term<BR>
viability will meanwhile be guaranteed by fresh commitments from the richest<BR>
countries on Earth. Debtor countries may benefit from additional<BR>
disbursements, yet even G8 governments have voiced doubts about the<BR>
long-term commitment, particularly of the US-government (the most important<BR>
contributor in absolute terms), to providing additional resources to the<BR>
IFIs.<BR>
<BR>
An additional improvement is also worth mentioning, namely the G8's<BR>
commitment to provide 300-500million US-$ in additional funds, to cover<BR>
"difficult-to-forecast-costs." What kind of expenses this may actually mean<BR>
is subject to guessing, as, unlike the HIPC, no hard-to-forecast medium-term<BR>
income or variable sustainability thresholds are involved. Eventually these<BR>
funds may be used to help facilitate the inclusion of interim period HIPCs<BR>
or bringing other multilateral creditors on board. In any case, it seems<BR>
that the G8 has learned a lesson from the sometimes huge discrepancies<BR>
between the calculated cost for HIPC relief at their decision points and the<BR>
ultimate costs. Occasionally adjustments via the 'topping-up' of relief at<BR>
the completion point were due to wrong projections or outright errors by the<BR>
IFIs.<BR>
<BR>
<BR>
<BR>
<BR>
Additional flaws<BR>
<BR>
<BR>
Even if the scheme had provided additional resources, rather than stealing<BR>
with one hand what the other hand has given, it would have implied<BR>
substantial conceptual flaws:<BR>
<BR>
* The most important flaw stems from the nature of fixed quotas.<BR>
Fixed quotas lead to systems where countries receive all or nothing. This is<BR>
too blunt an instrument for countries which actually require varying levels<BR>
of relief. The quota principle necessarily denies - for example - a large<BR>
group of countries the partial relief they would direly need. It will now<BR>
be harder for these countries, as with all excluded countries, to secure<BR>
relief as creditors point to the extraordinary efforts they have already<BR>
undertaken. Surprisingly, Nigeria seems to be an exception as the Paris Club<BR>
vowed to grant them appropriate relief in their Ministers' communiqué.<BR>
Ironically a few of the HIPC success stories like Mozambique or Ghana which<BR>
will benefit from "100% cancellation" might have eventually not needed full<BR>
relief. These countries already received relief way beyond the old scheme's<BR>
thresholds.<BR>
<BR>
* 100% is actually not 100% - The proposal refers to only three<BR>
multilateral creditors, which are indeed the most important ones for African<BR>
HIPCs. However they are less important for the four Latin American HIPCs.<BR>
Latin American relief will therefore fall behind African relief for no<BR>
reason other than the British and G8 special effort for Africa. Not even<BR>
African HIPCs will be relieved of all their foreign debt as there are 19<BR>
multilateral creditors (including some who resisted cooperating in the<BR>
existing HIPC framework). As these creditors are not named by the G8, and<BR>
given the debtors' newly improved solvency, creditors are unlikely to follow<BR>
the example of debt relief. Additionally, the burden of some countries' high<BR>
domestic debt may even exceed that of external debt.<BR>
<BR>
<BR>
<BR>
<BR>
Who can expect what? Some country examples<BR>
<BR>
<BR>
It is not yet possible to assess the effects of additional relief on a<BR>
present value (PV) basis. However, a preliminary view on the first full year<BR>
of implementation- 2006 - reveals a stark difference between the claim of<BR>
100% cancellation and the real reduction. Below is a closer look at four<BR>
randomly selected countries which are at least partly representative - as<BR>
three Africans and one Latin Americans stand for 14:4 on the eighteen<BR>
countries' list.<BR>
<BR>
<BR>
<BR>
<BR>
Country<BR>
<BR>
Debt Service after full HIPC relief in 2006 (m US-$)<BR>
<BR>
Debt Service to WB/IMF/AfDB<BR>
<BR>
(million US-$)<BR>
<BR>
Remaining debt service after promised reduction<BR>
<BR>
(million US-$)<BR>
<BR>
% Relief<BR>
<BR>
New debt service ratio<BR>
<BR>
Internal debt service (US-$ equivalent)<BR>
<BR>
<BR>
Niger<BR>
<BR>
30.9<BR>
<BR>
17.4<BR>
<BR>
13.5<BR>
<BR>
56%<BR>
<BR>
1.9%<BR>
<BR>
n.a.<BR>
<BR>
<BR>
Zambia<BR>
<BR>
86.3<BR>
<BR>
32.4<BR>
<BR>
53.9<BR>
<BR>
38%<BR>
<BR>
3.0%<BR>
<BR>
70<BR>
<BR>
<BR>
Bolivia<BR>
<BR>
344.6<BR>
<BR>
101.0<BR>
<BR>
243.6<BR>
<BR>
29%<BR>
<BR>
10.5%<BR>
<BR>
515<BR>
<BR>
<BR>
Ethiopia<BR>
<BR>
54.3<BR>
<BR>
15.9<BR>
<BR>
38.4<BR>
<BR>
29%<BR>
<BR>
8.6%<BR>
<BR>
n.a.<BR>
<BR>
<BR>
<BR>
First and foremost the numbers show that annual debt service relief falls<BR>
way short of a 100% cancellation. Surprisingly this is true for all African<BR>
countries. Remaining debt not covered by the proposal includes:<BR>
<BR>
* Debt to other multilaterals such as BADEA, Arab Fund, Nordic Fund,<BR>
OPEC, CAF or IDB;<BR>
<BR>
* Debt to bilateral official creditors which have not committed to<BR>
full cancellation as they have not been part of the Paris Club negotiations;<BR>
<BR>
* New debt to either of the above groups after the tentative cut-off<BR>
date (for most countries) of 20 June 2000;<BR>
<BR>
* Remaining debt to commercial creditors, occasionally already under<BR>
litigation.<BR>
<BR>
For some countries it is apparent that the domestic debt burden constitutes<BR>
a considerable strain on public budgets. While domestic debt is certainly<BR>
not the responsibility of international creditors, it should be acknowledged<BR>
that states with initially low levels of domestic debt resorted to domestic<BR>
financing in order to comply with external payment obligations. In turn,<BR>
insufficient relief through HIPC (now implicitly acknowledged by this<BR>
subsequent sweeping cancellation exercise) exacerbated the<BR>
non-sustainability of their external debt.<BR>
<BR>
<BR>
<BR>
Of course, countries need to be examined case-by-case:<BR>
<BR>
* Niger has the most substantial reduction of the group, but a large<BR>
amount of old debt will remain unless other multilaterals can be brought on<BR>
board.<BR>
<BR>
* In Zambia the completion point document has simply updated<BR>
expected export income from an exceptional 50% rise in copper prices.<BR>
Therefore the positive future debt service ratio is dependent on copper<BR>
prices remaining high. A more conservative calculation building on an<BR>
expected 25% reduction in copper prices in 2006, as expected by some<BR>
commodity trade experts, would bring the debt service ratio on remaining<BR>
debt closer to 4%.<BR>
<BR>
* Though certainly welcome, relief for Bolivia will only have a<BR>
limited effect, particularly considering their huge domestic debt service<BR>
obligations.<BR>
<BR>
* Ethiopia is the most surprising case, as its percentage of relief<BR>
hardly goes beyond Bolivia's and the debt service ratio must be expected to<BR>
remain high above HIPC averages, as forecasted by the World Bank.<BR>
<BR>
<BR>
<BR>
Further political implications<BR>
<BR>
The proposal has only been broadly outlined as of yet. The final G8 decision<BR>
will be made at the meeting in Gleneagles. But only after formal approval by<BR>
the Boards and Governors of the World Bank and the IMF at the annual meeting<BR>
next September will the proposal become operational. Many details remain to<BR>
be worked out. However, on the basis of the Finance Ministers' communiqué,<BR>
some far reaching consequences for the sovereign debt landscape can already<BR>
be identified:<BR>
<BR>
* As debtor countries are only receiving minor additional resources,<BR>
they will most likely balance their current budget and external balances<BR>
through new borrowing. With only limited new money from concessional<BR>
sources, governments are likely to take recourse to domestic as well as<BR>
non-concessional external financing at near-market conditions. The London<BR>
decision is thus laying the foundations for the next debt crisis in the same<BR>
countries.<BR>
<BR>
* HIPC, as a WB/IMF driven instrument, has received the third class<BR>
funeral it deserves. HIPC Finance Ministers will no longer make payments<BR>
based on HIPC sustainability calculations when they can look forward to the<BR>
cancellation of current obligations as well as arrears under the new scheme.<BR>
HIPC debt sustainability thresholds ceased to have relevance over night.<BR>
Obviously, creditors and important IFI shareholders have become tired of the<BR>
mission creep of HIPC-I - HIPC-II additional bilateral relief -<BR>
topping-up.etc.<BR>
<BR>
* The freshly created and formally still to be introduced Debt<BR>
<<A HREF="http://www.imf.org/external/np/sec/pn/2004/pn04119.htm">http://www.imf.org/external/np/sec/pn/2004/pn04119.htm</A>> Sustainability<BR>
Framework (DSF) of the IMF and IDA has equally been deemed irrelevant for an<BR>
important group of countries. Although the communiqué speaks about<BR>
"utilizing appropriate grant-financing as agreed" to avoid the piling-up of<BR>
new debt, the DSF will not be able to provide the basis for "informed<BR>
lending decision". The DSF defines grant-eligibility through potential debt<BR>
distress and poor governance performance. Even if new debt relief is not<BR>
100%, most countries are likely to fall below eligibility thresholds. It<BR>
will be interesting to see if IDA and the IMF try to redefine the<BR>
DSF-thresholds to provide countries with grants.<BR>
<BR>
* Related to this latter point, the communiqué expresses a<BR>
commitment towards using grant financing to "ensure that countries do not<BR>
immediately re-accumulate unsustainable external debts, and are eased into<BR>
new borrowing." Comparable commitments have been made before and regulations<BR>
regarding the concessionality of future external financing are routine in<BR>
IMF agreements under the Poverty Reduction Growth Facility (PRGF). However,<BR>
in a number of instances, these stipulations have not prevented countries<BR>
from covering balance-of-payment gaps with resources outside of<BR>
arrangements. If grant financing is provided in line with the DSF it will<BR>
imply a 20% overall volume reduction to compensate for the higher degree of<BR>
concessionality, for countries that are to receive grants-only and half of<BR>
that rate for "yellow-light" countries (which receive a mix of<BR>
grants/loans). This may partly be offset by new resources provided<BR>
bilaterally - however, if not, governments may feel forced to seek loans,<BR>
even at less-than-ODA conditions.<BR>
<BR>
* The special paragraph in the communiqué on Nigeria's treatment in<BR>
the Paris Club - while certainly due to President Obasanjo's scheduled<BR>
appearance in Gleneagles - does reveal the Ministers' awareness that there<BR>
is a world beyond the HIPCs. It remains to be seen, however, if this<BR>
commitment will go beyond the Nigeria case to an acknowledgment of the<BR>
broader and structural debt problem which demands more than one-off sweeping<BR>
action.<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
Jürgen Kaiser, 15 June 2005<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
*****<BR>
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