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UNCTAD advocates new mechanism for ascertaining debt sustainability

Addressing a meeting of African Ministers of Finance and Planning in Addis Ababa in early May, UNCTAD's Secretary-General, Rubens Ricupero, proposed the establishment, by consensus between creditors and debtors, of an independent body composed of high-level personalities knowledgeable in development and financial matters to ascertain whether the debt of a nation was sustainable. Such a move was to be subject to an undertaking by creditors to write off such debts as were found unpayable.

by Chakravarthi Raghavan


THE need for bold international measures to deal with the African debt crisis was underscored by the United Nations Conference on Trade and Development (UNCTAD) Secretary-General Rubens Ricupero at a meeting in early May of African Ministers of Finance and Planning at Addis Ababa.

Explaining proposals advanced by UNCTAD, which he hoped could become a common position for debt policy advocacy by the UN as a whole, Ricupero called for among other measures, a review of the list of Heavily Indebted Poor Countries (HIPCs) to include all poor countries facing debt service difficulties, shortening the time-frame for implementation, applying less restrictive eligibility criteria and setting a ceiling on fiscal revenue to be used for debt service in indebted countries.

In their communique, the African Ministers took note of the idea of referring the issue of sustainability of Africa's debt to an independent body composed of eminent persons, selected by mutual agreement between debtors and creditors, and the latter committing themselves to considering debt cancellation where debt is deemed unpayable.

The Ministers welcomed the new international climate for addressing Africa's debt crisis. They said the proposals from UNCTAD and other high-level UN groupings, as well as recent reviews by the Bretton Woods Institutions, showed a new realism 'that much of the debt is unpayable, that it is a significant impediment to Africa's growth', and that current initiatives, particularly the HIPC initiative, are 'far too slow, far too selective in coverage and too conditional'.

A major paradox and contradictory reality of the times, Ricupero said, was the recent reminder from the World Bank of official development assistance (ODA) being at its lowest levels since 1981, allegedly because of budgetary constraints, while at the same time, the war on Yugoslavia (according to some estimates) might well end up costing $22 billion or more, including the resettlement of refugees, but without considering the cost of reconstruction of destroyed infrastructure. The total cost of the Gulf War, he noted, was $102 billion.

So, once more, although there are no resources to build and to develop, there is apparently no scarcity of money for war and for destruction. 'When and where are we going to find the 'moral equivalent of war' in terms of mobilising people's energies and resources for debt relief and for growth and investment in Africa?'

In terms of the current framework, a comprehensive review of the African debt situation would have to go beyond the HIPC initiative, as can be shown by the case of Uganda, 'one of the very few countries that have benefited so far but is now back in a difficult debt situation'.

It would be useful to remember that over 93% of African debt is public or publicly guaranteed, and 80% is owed to official creditors and over 40% to multilateral financial institutions. There was a continuous growth of arrears, 'perhaps the best indicator of the extent of debt overhang in Africa'.

Accumulated arrears of interest and principal payments reached $64 billion in 1996 - some 27% of total debt. More worrying was the fact that two-thirds of the increase in debt since 1988 has been due to arrears. Despite the HIPC initiative, outstanding long-term debt rose by $4.8 billion to $169.5 billion for the HIPCs as a whole last year. With commodity prices in decline, a further accumulation of arrears seems probable.

40% of revenues

The debt servicing for HIPC-eligible countries now absorbed on average 40% of revenues. Tanzania, for example, spent nine times as much on debt payment as on health care (despite the AIDS pandemic), and four times more than on education.

'In short, debt servicing is crowding out national investment in human and capital infrastructure.'

UNCTAD, Ricupero said, has recently put forth a set of proposals that could become the basis for a common position for debt policy advocacy by the United Nations as a whole.

These seven-point proposals are:

* Review the list of HIPCs in order to ensure that all poor countries facing debt servicing difficulties would be considered under the initiative. About half a dozen least developed countries (LDCs) were not currently covered. The sunset clause of the initiative extended to the end of the year 2000 must be open for review. Although the initiative should not be considered a permanent mechanism, it should not be closed before all poor countries with debt servicing difficulties are given a chance to be included. Other debtor countries, such as low-income countries which have not been granted Paris Club concessional reschedulings or are assumed to have exited from such re-schedulings, could eventually also need HIPC assistance.

* Shorten the time frame for implementation to three years, so that final debt relief can be provided after the first track record of a single instead of two Enhanced Structural Adjustment Facility (ESAF) programme instead of two, which would be sufficient to ensure that relief goes to countries with reasonably sound macroeconomic policies.

And while there was much merit in establishing a link between debt relief and poverty reduction, any such link should not take the form of additional conditionality, even of a benign nature, that could have the effect of further slowing down the HIPC process. Social policies are already monitored under ESAF programmes, and further actions to reduce poverty should perhaps be left to the initiative of debtor countries themselves, in order to ensure that such actions are demand-driven and correspond to national priorities.

* Apply less restrictive eligibility criteria, notably by reducing the sustainability thresholds of debt-and debt service-to-export ratios. For countries facing very severe foreign exchange constraints, the thresholds could be lower than the general eligibility level. The additional two criteria on export-to-GDP and fiscal revenue-to-GDP ratios should be dropped. 'The aim should be to provide a real exit from debt rescheduling.'

* Set a ceiling for the share of fiscal revenue allocated to external debt service, and provide additional debt reduction if necessary to meet this benchmark; the 25% of fiscal revenue allocated to external debt service is an excessive burden for HIPCs.

* Cancel ODA debts of HIPCs, and extend at least 90% reduction on other official bilateral debts to all HIPCs. Full cancellation of bilateral official debts for post-conflict countries, countries affected by serious natural disasters and countries with very low social and human development indicators, should also be considered.

The Paris Club debt eligible for reduction should also include post-cut-off-date debt.

* Raise funds for debt relief through partial sales of IMF gold and a prompt and substantial general allocation of Special Drawing Rights (SDRs), with industrialised countries and others in a position to do so being invited to earmark their allocations for relief to the HIPCs.

* Debt relief should be financed by resources that are additional to previously envisaged budgetary allocations. It is imperative to avoid any trade-off between debt relief and new ODA. Resources earmarked to reduce the debt burden of HIPCs should not come from the aid budget, since it would make debt reduction a sheer accounting exercise and result in a net loss of new aid to poor countries.

These proposals, Ricupero said, went beyond what has been suggested by G-7 countries and could eventually become a more or less common denominator, if one wished to stay within the context of the current framework.

But would it be sufficient to eliminate the adverse effects of the debt overhang on investment and growth in Africa? Ricupero was not so sure. Boldness or a fresh approach would require a new way of evaluating whether the debt was sustainable, payable or not.

In UNCTAD's opinion, this was a question that should be considered by an independent body composed of high-level personalities, knowledgeable with regard to financial, development and social questions, chosen in agreement among creditors and debtors with an undertaking by creditors to write off debt found to be unpayable. 'This proposal would eliminate a conflict of interest, as it would not be solely the creditors who would be deciding the criteria to be applied - and we know that all these criteria are very much open to scrutiny and debate.'

The proposal was also very much in line with chapter II of the US Bankruptcy Code (chapters II on private debt and IX on public debt). Under the notion of insolvency, debtors are able to benefit from arrangements such as debt standstill, debtor-in-possession financing and debt reduction and minority of creditors not blocking a deal.

Low savings rate

Despite its central importance, debt relief fell short of providing a full picture on how to mobilise domestic resources.

The main problem in Africa was the fact that the savings rate - around 16 to 17% of GDP, only half of the more than 33% in Asia - was extremely insufficient to generate the necessary resources for investment at a self-sustaining pace.

Besides debt reduction, this problem could only be solved by what the Prime Minister of Ethiopia had suggested to the conference, namely through self-reliant development, and sound and stable political and economic policies supplemented by a large array of mutually-reinforcing means from abroad and encompassing: official aid (in 1998 concessional official finance represented about two-thirds of total net resource flows to sub-Saharan Africa); foreign direct investment, where the current unjustifiable low levels provide substantial room for improvement; and capital market development as a relevant medium and long-term goal to create a diversity of financial instruments and tap the potential for venture capital funds, bond markets and other possibilities.

Given the relatively small economic size of many African countries, the promotion of capital market development on a regional or sub-regional basis may represent a realistic option. There is no reason here to adopt an attitude of passivity or excessive pessimism.

The African Ministers, in their communique, welcomed the consensus now forming on African debt and said it should include:

* restructuring the HIPC initiative to provide broader and faster relief, with greatly relaxed eligibility criteria;

* G7 donors should agree to complete cancellation of debts arising from bilateral aid for the poorest countries, and raise reduction of other bilateral debt to at least 90%;

* leading countries in the World Bank and IMF should raise substantially the resources for HIPC through gold sales but without hurting the interests of African gold-mining nations), issuance of SDRs and other means;

* debt relief should not be at the expense of, but be additional to, ODA.

And while debt relief for the poorest countries is a priority, the problems of middle-income indebted countries should also be addressed.

In a reference to the financial crisis, the African Ministers said a lesson for Africa was to have appropriate supervisory regulations within national financial settings. The Ministers also recognised the need for both liberalisation and institutional strengthening of capital markets, with the pace and content of liberalisation being aligned with the ongoing process of strengthening prudential supervisory regulations, and proper sequencing of capital account liberalisation. (Third World Resurgence No. 107, July 1999)

The above article first appeared in the South-North Development Monitor (SUNS - No. 4434) of which Chakravarthi Raghavan is the Chief Editor.

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