External Debt: Developments and Remaining Issues

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External Debt Developments and Remaining Issues

• LEONCE NDIKUMANA
• LNdikumana_at_uneca.org

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Four main points in the 2002 Monterrey Agreement

• Preventing debt crisis must be shared burden by
  debtors and creditors (paras 47, 51)
  
• Technical assistance to strengthen capacity for
  appropriate macroeconomic policy and
  monitoring/management of debt (para 47)
  
• Key role of debt relief additional to aid
  resources (paras 48, 49, 51)
  
• Debt sustainability in relation with impact of
  debt relief on MDGs.
  

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External debt has declined but it remains high

• Debt levels have started to decline, although
  they remain high (see Fig 1 for trend)
  
• But private debt still increasing, an important
  concern ex Africa 92bn in 1999 to 110bn in
  2007.
  
• The decline in debt stocks is driven by debt
  relief initiatives (HIPC, MDRI) (Figure 2)
  
• But HIPC not enough (esp. not enough coverage)
• But economic cost of debt service remains a heavy
  burden on debtor economies.
  
• For example in 2003, African countries spent
  3.4 of GDP on debt service compared to 2.5 on
  health.

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HIPC Coverage is Low
HIPC Status for African countries
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Trends in debt for Africa
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Debt relief a major factor in decline in debt
stocks
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The developing world remains a net creditor to
the industrialized world!

• Net transfers on debt remain substantially
  negative, despite decline in debt, due to high
  interest payments
  
• Official net transfers have increased recently,
  thanks in part to debt relief
  
• Illicit capital flows (esp. capital flight)
  amplify the paradox of international capital
  flows, whereby the developing world is a creditor
  to the developed world.

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Net transfers to Africa
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Domestic debt is a concern

• Domestic financing of government deficits poses
  problems of
  
• Sustainability of debt
• Crowding-out of private investment (discouraging
  private lending)
  
• Particularly a problem for conflict countries

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Debt relief, debt sustainability and the MDGs

• It is agreed that debt relief can boost countrys
  progress towards the MDGs
  
• At the moment, many LDCs (and the majority of
  African countries) are not on track to reach the
  MDGs
  
• An increase in the volume and the scope
  (coverage) of debt relief is needed to accelerate
  progress towards the MDGs.
  
• Sustainability of progress towards MDGs requires
  that debt relief is not accompanied by new cycle
  of unsustainable borrowing.

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Does debt relief pose a problem vis-à-vis
macroeconomic policy?

• The allocation of resources is as important as
  (if not more than) volumes of resources
  
• Harnessing supply effects of debt relief
• Enhancing crowding-in effects of debt relief on
  domestic revenue direct and indirect effects
  (through higher growth and higher income/tax
  base)
• Crowding-in of debt relief on domestic revenue
  helps to
  
• Prevent new cycles of debt crisis
• Ensure sustainability of public expenditure
  programs (economic development policy in
  general)
  
• Increase government control over economic policy

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Recommendations

• R1 Preventing a new cycle of debt crisis
• Responsible lending practices
• Transparent international banking system
• Accountable borrowing and debt management
• R2 Addressing negative transfers of resources
• Increasing non-debt generating external
  financing
  
• More concessional loans
• Preventing capital flight establishing
  mechanisms for capital flight repatriation
  
• Broaden and deepen support to the Task
  Force/Leading Group on Illicit International
  Financial Flows
  

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Rx (contd)

• R3 Increasing domestic resource mobilization
• Higher tax revenue better tax administration
  broadening tax sources
  
• Savings mobilization by the financial system
  addressing shortcomings of the financial system
  (risk, competition, rural-urban bias, regulatory
  environment for intermediation).
• R4 Special condition of post-conflict countries
• Support to post-conflict reconstruction,
  especially when there is a signed peace accord

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Rx (contd)

• R5 Macroeconomic policy flexibility and
  sustainability
  
• Flexible macroeconomic framework to absorb higher
  resources
  
• Dilemma it is difficult to advocate for
  flexibility in the presence of low policy
  credibility, weak capacity and weak institutional
  environment
• Thus need for assistance in strengthening
  capacity for designing and conducting prudent yet
  pro-growth macroeconomic policy
  
• R6 Growth-supporting Global Funds
• Beyond emergency Global Funds
• Global Funds to support growth-generating
  programs e.g., energy global fund
  infrastructure global funds