Moderator: Mr. E.E. Ngalande, Executive Director, Macroeconomic and Financial Manage-
ment Institute of Eastern and Southern Africa (MEFMI)
Panelists: Mr. Mark Thomas, Lead Economist, Economy Policy and Debt Department,
World Bank.
Ms. Patria Angeles, Deputy Director, International Department, Central Bank, Philippines.
Mr. Charles Mutasa, Executive Director, AFRODAD
The panel was intended to take stock of what has been achieved by relief initiatives so far. As the HIPC initiative is slowly coming to an end, and more and more countries receive much-needed relief, some questions still remain. These include questions such as: Are all countries that have received relief now sustainable? If not, is further relief the solution? Has the coverage of countries been wide enough? Ad- ditional countries have technically speaking become HIPCs during the implementation process - what to do with them?
Mr. Ngalande posed a number of questions related to debt sustainability, setting the stage for panelists to further develop these issues and attempt to define required actions by the international community and debtor countries for the continued improvement of debt indicators. First, Mr. Ngalande stressed that some post-HIPC countries have still not reached debt sustainability, and asked whether further debt relief will be needed for these countries. Second, he observed that the HIPC Initiative does have a sufficiently wide coverage, and suggested a discussion should take place on actions required to deal with the debt of unsus- tainable non-HIPCs. Third, Mr. Ngalande noted that some countries face litigation from vulture funds, and underlined that policies should be developed by the international community and debtor countries to deal with this practice. Finally, Mr. Ngalande pointed to the trend of increasing domestic debt stocks in a number of post-HIPCs, and stressed that this could lead to a new set of debt sustainability problems unless action is taken to tackle this issue.
Mr. Thomas began by stressing the importance of debt strategy in countries. He continued by underlin- ing the need for discussion around the Fund's and the World Bank's debt sustainability framework, as an open platform, where tools were freely available and countries could customize them as they saw fit. Mr. Thomas provided an overview of the impact of the HIPC and MDRI initiatives on the 32 countries (22 of which had reached completion point, and 10 interim countries working towards the completion point). The HIPC initiative on average had halved the debt service of the recipient countries; the MDRI had served to increase that direction of change and debt service in 2011 had been forecasted to be about 3% of exports. The total pro-poor spending for the 32 countries had more than tripled; from $6 billion in 2000 to about $20 billion in 2007. The stock of debt relief amounted to $70 billion in 2006. Regarding the 10 interim and the 9 potential countries, he indicated that there are major challenges pending to get them through the existing framework i.e. arrears and governance as well as qualification and participa- tion. As for further debt relief, the question was asked if it should look like HIPC (i.e. comprehensive but voluntary, with thresholds and conditions), like MDRI (i.e. limited to certain creditors, no thresholds, just eligible debt), like both or completely different. He then pointed out the dangers of further debt relief and mentioned the following four: arbitrary inclusion /exclusion, moral hazard and induced over-borrowing, inefficient allocation and eviscerating development finance.
Ms. Angeles underscored that in the 1980’s the Philippines were faced with a debt sustainability problem, which led to declaration of a moratorium on payments on all debt service obligations falling due. In the following ten years a series of steps were taken to restore sustainability. Four Paris Club meetings were
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held for the Philippines to reschedule USD 5.5 billion. The country also rescheduled USD 9.2 billion of principal owed to commercial creditors in the London Club and obtained a grace period of seven and half years with a maturity of seventeen years on its rescheduled payments. The multilateral debt was not re- scheduled, but multilateral institution continued to provide financing to the Philippines, and the World Bank supported market a buy-back operation on parts of the commercial debt. The Philippines also de- veloped a debt-swap program, which eliminated around USD 4 billion of external debt. The odious debt question was never satisfactorily resolved, but by now the Philippines have paid most of it. Whereas in 1983, the Philippines’ external debt was composed of 40% of short term debt obligations and 60% of me- dium and long term debt, after the completion of the restructuring, 16% of the debt stock was comprised of short term debt while 84% of the debt stock was medium and long term debt.
She specified that although creditors should assume part of the responsibility in creating an unsustainable debt situation, most of the work to avoid debt problems needs to be done by the borrower, with particular focus being placed on increasing their debt management capacity. In particular, she stressed that improv- ing fiscal discipline is one of the key measures for keeping the debt burden within sustainable limits. Ms. Angeles underlined that part of the government strategy to keep debt sustainable is to increase the share of domestic debt in the total debt stock, which is now at fifty percent, and it is planned to raise it to sixty percent in the next few years. Ms. Angeles concluded by informing the participants that the Philippines has already installed the DMFAS program in the treasury, and plans are being made to install it in the Central Bank.
Mr. Mutasa outlined that until the end of 2007, out of 22 countries that completed the HIPC process 18 were from Africa. Some of the achievements of the HIPC Initiative were the reduction in infant, child and maternal mortality rates in some African countries, improved access to drinking water, and an increased scope of immunization. However, the MDRI process did not deliver the full expected benefits, and it would appear that debt relief efforts do not necessarily translate in increased education and health expen- diture. In addition, Mr. Mutasa stressed that the Monterrey Declaration called for debt relief to be addi- tional to existing aid flows, but donor countries include debt relief figures in their ODA reports, thus arti- ficially inflating the aid flow figures.
Some of the issues that were not properly addressed in the HIPC process is a clear definition of debt sus- tainability; the adopted definition is too narrow as it ignores the need by countries to fulfill their obliga- tions of providing economic and social rights; the exclusion of domestic debt from DSA; and too many conditions imposed on countries by the IMF. Mr. Mutasa noted that the scope of the debt relief efforts so far has also not been adequate, as only a few multilateral lenders participated in HIPC and MDRI , the private sector is not covered by either of the two initiatives, and the number of countries included in the debt relief efforts is not sufficient. Mr. Mutasa called for special arrangements and provisions to be in- cluded for post conflict countries, and underlined that the issue of odious and illegitimate debt has been ignored in the design of debt relief operations. Mr. Mutasa stressed that some underlying challenges in post-HIPCs remain, notably the need for greater domestic resource mobilization, improving the effective- ness and absorptive capacity of development aid, and the ability to attract private capital flows including remittances. In order to overcome these development hurdles, Mr. Mutasa recommended that debt cancel- lation must be outright and irrevocable, it must provide sufficient fiscal space for human rights promo- tion, donors must ensure that adequate resources are available for all HIPCs, debt relief should be ex- tended to middle income countries, and a transparent and fair arbitration mechanism should be created.