Operationalizing Debt Sustainability

The World Bank (WB) and the International Monetary Fund (IMF), as the leading lending agencies, have been under mounting pressure to deal with a wide range of debt sustainability challenges. The challenges have refused to subside. Instead they continue to stimulate urgent need for a new debt sustainability framework and debt management orientation that can allow for the borrowing economies to break the vicious circle of unending distress. The Heavily Indebted Poor Countries (HIPC) framework and the 2005 G8 Debt deal which is generally a compromise of the US and UK proposals are yet to shake down into a coherent...
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Operationalizing Debt Sustainability UNCTAD/DMFAS 5th Inter-regional Debt Management Conference 20-24th June2005Presentation: Operationalizing Debt SustainabilityBy Charles Mutasa11.0. IntroductionThe World Bank (WB) and the International Monetary Fund (IMF), as the leadinglending agencies, have been under mounting pressure to deal with a wide range of debtsustainability challenges. The challenges have refused to subside. Instead they continueto stimulate urgent need for a new debt sustainability framework and debt managementorientation that can allow for the borrowing economies to break the vicious circle ofunending distress. The Heavily Indebted Poor Countries (HIPC) framework and the 2005G8 Debt deal which is generally a compromise of the US and UK proposals are yet toshake down into a coherent strategic compact (with the poor countries of the borrowereconomies) capable of addressing unsustainability challenges facing the debt burden ofall the poor economies of the South.The current initiatives to tackle the Third World debt crisis have been designed to providesustainability measures and debt management orientations that are capable of guidingborrowing decisions of low-income countries in such a way as to match their need forfunds with their ability to service debt. The Debt initiatives proposed by the G8 since1996 have left the vital question of debt justice unanswered. And this is where theproblem hides as it surreptitiously haunts the economies of the debtor economies in awide and sinister variety of ways. The situation holds for both HIPC and non-HIPCThird World economies. But whereas for the HIPC countries the exterior of theframework may still seem to hold some dim hope in the distant horizon, for thoseborrower economies operating outside the HIPC agenda it no longer hides deepeningdisquiet among those that have yet to benefit from a one-fits-all approach to debtreduction mechanisms that continue to be foisted on them by the creditor institutions andtheir partners.In the recent past; the Bank and the Fund have paradoxically demonstrated a generouswillingness to admit the ‘systematic over-optimism’ of the previous IFI debtsustainability calculations and measures. Evidence abounds and, once in a good while,obtrudes everywhere with such stubbornness that is hard to wish away: growthprojections, for instance, have registered five percentage points ahead of the stark realityon the ground; a fact that has actually stimulated and sustained the unrealistic need forexcessive borrowing: drastically if not artificially undermining the rationality for debtrelief efforts.2.0. The 2005 G8 Ministers’ Conference Proposal1 Executive Director of the African Forum and Network on Debt and Development (AFRODAD). 1While the G-8 agreement is a step forward and sets an important precedent we have longadvocated for a 100% unconditional cancellation of debt to all severely indebted poorcountries. The deal only represents one eighth of what Africa needs in terms of Debtcancellation, as this means canceling only US $40 billion out of Africa’s burgeoning debtstock of over US$330 billion. The $40 billion to be cancelled represents less than 10% ofdebt cancellation required for poor nations to meet the MDGs. The plan does not includemiddle-income countries that are heavily indebted and impoverished. The G-8 Dealincludes too few countries. Globally, the 18 countries that qualify immediately representless than a third of countries (at least 62) that need full cancellation to meet theinternationally agreed Millennium Development Goals (MDGs), which seek to halveextreme poverty by 2015.Choosing 18 countries that have reached the HIPC completion point (14 of which are inAfrica) to benefit from the deal is in itself a sign that debt cancellation is been treated as aquestion of charity and not global justice. The agreement does not address the real globalpower imbalances but rather reinforces global apartheid. The question of creditor –debtorco-responsibility of the South‘s debt remains unresolved, as issues of odious andillegitimate debts continue to be swept under the carpet. It is not a lasting solution inwhich all stakeholders-debtors and creditors have a say. It is just a piecemeal measurethat seems to deal with the symptoms of the problems and not the causes.Conditionalities still remain a big deterrent to economic emancipation of the poorcountries chosen to benefit from the deal. The economic policies mandated by the HIPCInitiative will continue under the G-8 debt deal, including privatization of government-run services and industries, increased trade liberalization, and budgetary spendingrestrictions. These policies have not been proven to increase per capita income growth orreduce poverty as documented by both World Bank and civil society economists. Thebest way to resolve the Debt crisis must be within an international framework in whichboth the Creditors and Debtors have an equal say. Continuous monopoly by richcountries to tell us the best way out of the Debt and poverty vicious cycle is the greatestshortfall in global economic justice. The G8 deal does not address the moral hazards andperverse incentives inherent in the debt relationship. Unfortunately and regrettably thedeal is not premised on the understanding of the historical loan contraction and debtmanagement problems inherent in the developing world and is likely to result in therecurrence/exacerbation of the debt crisis.3.0. The viable option: Debt CancellationOne major reason why the ongoing discussions about multilateral debt cancellation hasnot yet produced concrete results is that there is no agreement about the best way to fundthe debt cancellation. We feel that the funding for debt cancellation should be evaluatedin a tiered manner; the most desirable and lea ...