Debt
United Nations, A/ AC. 257/ L. 2, June 2000
"Debt
8. Confronting external debt challenges: addressing debt problems
of developing countries, including cases of high indebtedness and moral hazard issues;
enhancing and expanding the Heavily Indebted Poor Countries Debt Initiative; avoiding the
recurrence of debt crises, through, inter alia, preventive measures to avoid unsustainable
public and private debt; technical assistance for debt management. "
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United Nations, A/AC.254/24, March 2001
" V: Debt
Debt financing is an important option that countries have to
mobilize resources for public and private investment. Many developing countries and
countries with economies in transition have managed debt financing effectively to expand
their level of investment and this, in turn, has led to growth and has generated ample
resources to repay the debt and support both consumption and investment expenditures.
Others—for different reasons, including domestic economic mismanagement, conflicts,
natural catastrophes and external economic shocks such as terms of trade changes,
international interest rate hikes or contagion— are faced with difficult, or even
unbearable, debt burdens.
It is important to note that most low-income countries do not
face primarily a debt problem. They face a broader problem of development financing and
the focus should be not so much on one particular type of flow but on the volume and
flexibility of the aggregate net transfers to each country from donors. Debt relief should
be additional and not at the expense of development assistance.
Bearing in mind the importance of fully funding and implementing
HIPC:
Are there any exceptional situations in which even more drastic
relief may be called for? For instance, in the face of natural catastrophes or as
countries emerge from conflicts? When countries, in spite of their efforts on policy and
governance, fall "off-track" in the pursuit of the poverty reduction and other
basic social targets included in the Millennium goals?
Which other special measures, including debt cancellation, should
be considered to address the challenges of poverty eradication and sustainable
development, particularly in Africa?
How to avoid " cross subsidization" of debt relief by
other developing countries?
How best to ensure, for low income countries, adequate grant
financing and appropriate concessionality of new borrowing along with sound debt
management capacity —to prevent the problem of excessive debt burdens from recurring?
For countries with a mix of official and private creditors and
relying on access to international financial markets (where attempts to offer debt relief
raise questions on moral hazard and future access to financing):
Which preventive measures, including through technical
assistance, could be put in place to avoid unsustainable accumulation of public and
private debt ?
What kind of mechanisms can help expedite the resolution of debt
crises when many types of creditors are involved and ensure fair burden sharing among them
and the debtor? How best to develop clearer principles and more transparent mechanisms for
working out debt problems? What is the feasibility of mediation-type mechanisms?"
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Report
of the Secretary-General
to the Preparatory Committee for the
High-Level International Intergovernmental Event
On Financing For Development
United Nations, A/AC.257/12, January 2001
"Bilateral and multilateral creditors should
pursue debt relief vigorously and expeditiously, including steps to provide significant
and immediate debt relief to the poorest countries. Steps should also be considered to
provide, in exceptional situations and where appropriate, for a moratorium or even for
debt cancellations. Similarly, there should be continued flexibility in addressing the
debt problems of low-income countries and for additional proposals to be formulated, where
needed, to complement the HIPC initiative.(...)
Donors should be called on to ensure that resources
are provided for debt relief without detracting from the resources that were already
intended to be available for development assistance to low-income countries. Debtor
countries should, in parallel, ensure that resources freed up by debt relief measures are
used to support growth and poverty reduction-oriented programmes. To ensure that further
debt problems do not emerge, efforts should be made to improve debt management, and new
financing for all low-income countries should be on highly concessional terms or, in the
case of countries with severe limitations in their capacity to pay, on grant terms.(...)
All creditors to developing and transition economy
countries should support measures to ensure that debt financing becomes an integral part
of their development efforts and not a hindrance to them. To complement other initiatives
under way, the potential value of a mediation-type mechanism deserves particular
consideration. Such a mechanism could be made available to debtor countries as an
additional, voluntary option for restructuring debt from private and official bilateral
creditors.(...)
International organizations should ensure that they
are equipped to respond effectively to requests from developing and transition economy
countries to improve their debt management systems. International financial institutions
should also be encouraged to vigorously pursue efforts to enhance transparency in
financial transactions so as to strengthen capacity for liability management by national
authorities."
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Joint Statement of the Co-Chairmen
at the Conclusion of the First Part of the
Third Session of the Preparatory Committee
United Nations, 8 May 2001
"V. Debt
Many Member States, international organizations and civil society
representatives participated in the discussion of external debt.10/ The convergence of
views on many of the issues seen in our summary of the February session of the Prep Com
was confirmed. In particular, delegations agreed that debt relief of lower and
middle-income countries needs to be accompanied by appropriate economic, trade and
financial policies at the national and international levels. At the same time, a strong
case was made that when debt relief is accorded, it’s funding should be in addition
to and not at the expense of development assistance.
Towards policy priorities
The need to focus on prevention of external debt problems in the
future. In this respect, there were calls for technical assistance by developed countries
and international organizations to improve debt management in developing and least
developed countries.
Reaching debt obligations that are within the capacity of
countries to service in the long term was seen as critical. There were calls for measures
to ensure that the debt reductions that take place as a result of the enhanced programme
for the heavily indebted poor countries (HIPCs) are sustainable over the longer term. The
option within the HIPC framework to consider additional debt relief at the completion
point in exceptional circumstances if exogenous factors cause fundamental changes in
country circumstances that severely affect debt sustainability was mentioned. It was also
recommended that post-HIPC assistance to some countries should be in the form of grants
and highly concessional funds.
Better supervision of private financial institutions, both
domestic and foreign, and transparency of lending transactions, which would help to ensure
more appropriate lending decisions by private creditors.
Continuation of efforts towards strengthening surveillance
capabilities of IMF and the design of early warning systems.
While there was less convergence on the following issues, some
Governments wished that they be considered further:
Until full and additional funding of multilateral debt relief
under the enhanced HIPC initiative has been provided, a discussion on broadening current
debt relief efforts is premature.
Regarding temporary assistance in debt servicing following
natural disasters, it was asked whether new instruments were required or whether the
existing system already had the requisite flexibility to ensure an appropriate response.
The issue of more focus on policies for extending support to
middle-income countries with debt-servicing difficulties was raised.
In the past, Governments have taken over responsibility for the
excessive borrowing by the domestic private sector after a financial crisis, sometimes
even nationalizing the banks. Not only does this impose a fiscal burden, but it also
creates a "moral hazard" that borrowers and lenders will not pay sufficient
attention to the risks they take. The practice should be discouraged.
Need to have clearer principles regarding debt work-outs and the
resolution of debt crises. In this respect, some delegations pointed out the need to
involve private creditors in the resolution of debt crises. [See also, Systemic Issues
chapter]
The possibility of naming a mediator to bring together all
interested parties from the creditor and debtor side for helping to resolve debt crises.
The question remains one of arriving at a mechanism for selecting appropriate mediators
acceptable to all concerned.
More prudent approaches by official lending institutions to
ensure that new loans are extended only when there are clear indications that repayment
capacity will be adequate when loans fall due."
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High-Level
Panel on Financing for Development -
Recommendations & Technical Report
United Nations, A/55/1000, 26 June 2001
Recommendations:
" Further debt relief for highly indebted poor countries
The campaign spearheaded by Jubilee 2000 resulted in a welcome
reduction in the debt burden on heavily indebted poor countries. The official estimate is
that under the HIPC Initiative the highly indebted poor countries will pay $1.1 billion
per year less in debt service than they would otherwise have paid, and $2.4 billion per
year less than they would have owed. The scheme is welcome despite the fact that the
actual delivery of substantial debt reduction has taken a very long time and that it has
not been fully financed by additional ODA, as many had originally hoped. Some donors are
simply reassigning part of their traditional aid resources to finance commitments to the
enhanced HIPC initiative.
While the enhanced HIPC scheme is clearly providing increased
resources for poverty reduction, in most cases it has not gone far enough to make these
countries’ debt sustainable. Certainly the principle that debt obligations should be
repaid is central to the functioning of credit markets; debt relief programs are an
exception for extraordinary circumstances. Yet the situation of several countries is still
desperate. A further effort is needed to reduce debt in HIPC to sustainable levels and
thus help to improve those countries’ ability to attract private finance.
In the view of some Panel members, a further debt relief
agreement would be an excellent step. Others believe it would perhaps be worth serious
consideration. Most important, all agree that a further debt relief agreement would only
be worthwhile if it is based on a firm commitment from donors to provide strictly
additional resources for its proper financing. If a re-enhanced HIPC scheme is not
financed by increased ODA, then its main effect would be to redistribute aid among poor
countries—an outcome that must certainly be avoided. All Panel members also believe
that any debt relief scheme should be designed so as to reduce, not increase, moral
hazard; that is, it should not weaken borrowers’ responsibility for their own
actions. (...)"
Technical Report:
" The HIPC Initiative
In retrospect, everyone welcomes the reduction in the debt burden
on the world’s heavily indebted poor countries that resulted from the campaign by a
broad coalition of nongovernmental organisations under the banner of Jubilee 2000. The
lowering of their debt should go part way towards achieving the desired increase in net
financial flows to lower-income countries. The official estimate is that debt service will
decline by $1.1 billion a year from what would otherwise have been paid, and by $2.4
billion a year from what would have been due. But at best, debt relief will offset only a
small part of the estimated shortfall in ODA, and this suggests one reason why the
question is still being posed as to whether debt relief has been pushed far enough.
When the HIPC initiative was first launched, in 1996, a number of
very poor countries had built up high levels of debt, to donor countries and their export
credit agencies and to the MDBs. Servicing that debt would have absorbed an unconscionably
large proportion of those countries’ fiscal revenue and foreign exchange receipts. In
reality, not all of that debt service was paid. But even so, what should have been
priority social expenditures, on education and health and so on, were being squeezed out
by the need to service debts incurred in the past, sometimes with little to show for the
borrowing. The result was a lose-lose situation. If the debts were not serviced, the
debtors’ reputation suffered, and with it their ability to access new credit, even
trade credit. If they were serviced, it was at the expense of desperately needed spending.
Given this situation, it was not too difficult to win agreement in principle that, despite
the importance of the axiom that in general credit markets will function only if debt
contracts are honoured,, debt reduction made eminent sense. Getting from agreement to
actual delivery of substantial debt reduction, however, has taken a very long time. Some
initial measures of debt relief were agreed in 1996, but these proved insufficient. An
enhanced HIPC initiative was therefore agreed in September 1999. This revamped but
maintained the conditions attached to debt relief, designed to ensure that the savings on
debt service were in fact channelled into increased spending on growth-enhancing social
programmes, while increasing the relief available.
In addition to the point of principle of whether circumstances
justify overriding the normal presumption of the sanctity of debt contracts, three
technical factors must be considered in appraising the desirability of debt relief. The
first is who pays for it. In principle, it has always been said that the HIPC initiative
will be paid for by additional ODA. Since ODA is undersupplied (as argued above), that is
appropriate, provided that it actually occurs. But one must not take it for granted that
this is necessarily the way things will work out. For example, it is sometimes argued that
the MDBs could find the resources to forgive their claims by drawing on their reserves,
but the question is whether this could be done without cost to their borrowers.
Accountants have recently argued that their triple-A credit ratings could survive such use
of the MDB reserves. This is doubtless true, but one would still have to anticipate a
widening of the spreads on the MDBs’ borrowing, and that is a cost they would have to
pass on to their borrowers. These countries, in effect, would thus pay the bill for debt
relief to the poorest. Presumably the MDBs have already tried to optimise the size of
their reserves, balancing the benefit of being able to charge less to their borrowers
against the benefit of being able to devote a larger part of their net income to
development causes[16] . Perhaps they have got the calculation marginally wrong, but the
presumption is that getting the MDBs to foot the bill for HIPC really amounts to getting
other developing countries to pay.
But matters could be even worse. Suppose that debts owed to the
International Development Association (IDA, the World Bank Group affiliate that lends on a
concessional basis to low-income countries) were forgiven under the HIPC initiative, and
that this were financed by cutting future IDA lending. In this case debt relief would be
paid for by those low-income countries whose new IDA loans decline by more than their debt
service payments. These would mostly be low-income, non-HIPCs such as Bangladesh. It is
possible that some of these countries have been making more effective use of funds to
reduce poverty than have the HIPCs. If so, debt relief would actually have a perverse
effect on the global fight against poverty. This may be a worst-case scenario, but it
would be wrong to assume that it could not happen. Who really pays for debt relief is a
crucial issue.
It is not just how much more or less money countries get, and
where it comes from, that is relevant in appraising the desirability of debt relief. There
are two major reasons why, even if debt relief were offset one for one by a reduction in
new aid receipts, it might still be a boon to the debtor. The first is that debt relief
provides aid that is not tied to imports (of food, technical assistance, and so forth)
from the donor country; such tying reduces the real value of much bilateral aid[17] . The
second is that debt relief may release resources for spending on basic social services.
This is because most aid is given as support for particular projects, whereas the payment
of debt service pre-empts general budget resources, and a lack of these may squeeze
higher-priority social expenditures. Moreover, this ability to increase spending on basic
social services has been reinforced by the conditionality that has accompanied the HIPC
initiative, which has a mandate to see to it that the savings from debt relief are indeed
directed to such spending.
These considerations suggest strongly that the debt relief
already given is to be welcomed. Donors have promised that they would finance that debt
relief without cutting other ODA, which gives hope that most of the resources are, in the
final analysis, really coming from the donors themselves. In particular, there is little
reason to fear that other low-income countries have paid for it, inasmuch as the donors
have promised to increase their subscriptions to IDA. Debt relief financed by bilateral
donors resulted in the untying of aid. And, as already noted, debt service was so high
that it was squeezing out what should have been priority social expenditures on education
and health. It is difficult to see a downside to the enhanced HIPC initiative.
Debt campaigners have compared debt service payments still due
with projected social spending and concluded that, in a number of the HIPCs, debt service
will still exceed spending on education or health. Perhaps more important, they have also
argued that some of the HIPCs remain unable to finance minimally adequate levels of social
spending, and are for this reason unlikely to be able to achieve the International
Development Goals. And they have pointed to a new IMF/World Bank study on debt
sustainability[18] to establish that many of these countries will still be vulnerable to
adverse shocks (e.g., from commodity price declines or climatic catastrophes) undermining
their ability to service their remaining debts. These considerations imply that not enough
has yet been done to help the HIPCs.
A possible concern is that if a re-enhanced HIPC initiative, a
HIPC3, were to be agreed but it was not substantially financed by increased ODA, then its
main effect would be to redistribute aid between countries. In particular, a HIPC 3 would
distribute more resources to countries that have built up high debts in the past, and the
danger is that this could be at the expense of less indebted but equally poor countries.
Insofar as aid is now being distributed rationally, taking into account both the
prevalence of poverty and the presence of policies that make aid effective in reducing
poverty, this would risk undermining the fight against poverty. In other words, while some
Panel members believe that a further debt relief agreement would be an excellent step and
all agree that it merits serious consideration, it would be essential that a HIPC3 be
financed by strictly additional resources.(...)
There is also a case for supplying ODA to low-income countries on
very concessional terms. The vast majority (approaching 90 per cent) of bilateral ODA is
in fact already provided on a grant basis, the main exception being Japanese aid. In
contrast, IDA disbursements still take the form of concessional loans. One way to reduce
the probability that low-income countries will again become over-indebted, and therefore
require a repeat of the HIPC exercise, is to increase the concessionality of IDA loans.
For example, these loans could have a term of 99 years and a grace period of 40 years. As
a quid pro quo, there should be a moral obligation on countries that graduate from IDA
borrowing to themselves become donors promptly once their income per capita rises to that
of an industrial country. The importance of improved IDA terms should not be exaggerated,
however. The bulk of the past debt problem of the HIPCs originated in export credits
rather than ODA, and official export credit agencies in the industrialised world are now
taking a more cautious attitude towards lending to such countries. "
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United Nations, 09/17/01
"Sustainable debt financing
37. Sustainable debt financing is an important option that
countries have for mobilizing resources for public and private investment. It is in the
common interest to avoid serious mismatches between financing needs and repayment capacity
and maturity of borrowings, as well as excessive debt burdens that divert resources of
developing countries and countries with economies in transition from key productive
investments and constrain the ability of governments to finance basic priority
expenditures. It is essential to put in place preventive national and international
measures, including through technical assistance, to avoid unsustainable accumulation of
public and private debt of low- and middle-income developing countries.
38. Noting the importance of providing financial sustainability
for the most highly indebted developing countries, we welcome the bilateral initiatives
undertaken by many governments to reduce outstanding indebtedness and invite further
bilateral and multilateral initiatives in this regard.
39. The Highly Indebted Poor Countries’ Initiative is making
additional resources available for development, but a further effort is needed to reduce
debt in the HIPC countries to sustainable levels. We call on industrialized countries to
expeditiously provide the resources needed for full implementation of HIPC, through
strictly additional resources and within arrangements that take fully into account the
asymmetries and differentiated responsibilities among creditors.
40. Building on the experience of HIPC II, we also call on the
International Monetary Fund and the World Bank to propose further steps to enhance the
HIPC initiative, so that its benefits can be more far-reaching, based on the following
criteria:
Assessment of debt sustainability in terms of each country’s
capacity to raise the finance needed to achieve the multilaterally agreed development
goals. Commitment from industrialized countries to provide strictly additional resources,
thus preventing the financial burden from falling on developing countries.
41. We further call on the International Monetary Fund and the
World Bank to propose policy actions for prompt, comprehensive debt relief to low-income
countries, SIDs, and landlocked developing countries, in the face of natural catastrophes
and severe terms of trade and capital account shocks."
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United Nations,12/06/01
"Sustainable debt financing and external debt relief
41. Sustainable debt financing is an important option for
mobilizing resources for public and private investment. National comprehensive strategies
to monitor and manage external liabilities, embedded in sound macroeconomic policies, are
a key element in reducing national vulnerabilities and avoiding serious mismatches between
financing needs and repayment capacity. Technical assistance for external debt management
can play an important role.
42. Noting the importance of providing financial sustainability
for the most highly indebted developing countries, we welcome the bilateral initiatives
that many governments have undertaken to reduce outstanding indebtedness, and we invite
further bilateral and multilateral initiatives in this regard.
43. The Highly Indebted Poor Countries’ (HIPC) Initiative
provides a unique opportunity to strengthen the economic prospects and poverty reduction
efforts of its beneficiary countries, as they commit to sound policies. But a continued
effort is needed to reduce debt in low-income countries to sustainable levels, and speedy
and full implementation of the HIPC initiative is critical. Any further steps to enhance
this initiative should be based on two considerations. First, debt sustainability should
be assessed in terms of each country’s capacity to raise the finance needed to
achieve the Millennium development goals. Second, any new arrangement should avoid
imposing burdens on other developing countries.
44. We call on the IMF and the World Bank to propose flexible
policy actions for prompt, comprehensive debt relief for least developed, small island,
landlocked developing countries and other low-income countries with severe debt-servicing
problems, hit by natural catastrophes, suffering severe terms of trade shocks, or emerging
from conflict.
45. While recognizing that a flexible mix of instruments is
needed to respond appropriately to countries’ different economic circumstances and
capacities for public expenditure management, we underscore the value of ongoing efforts
to support the development of clearer rules for equitable distribution of the cost of
crisis-resolution adjustments between the public and private sectors and among debtors,
creditors, and investors. We also encourage exploring innovative mechanisms to address
debt concerns of developing and transition countries."
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outcome of the International Conference on Financing for Development
-Monterrey Consensus
External debt
47. Sustainable debt financing is an important element for
mobilizing resources for public and private investment. National comprehensive strategies
to monitor and manage external liabilities, embedded in the domestic preconditions for
debt sustainability, including sound macroeconomic policies and public resource
management, are a key element in reducing national vulnerabilities. Debtors and creditors
must share the responsibility for preventing and resolving unsustainable debt situations.
Technical assistance for external debt management and debt tracking can play an important
role and should be strengthened.
48. External debt relief can play a key role in liberating
resources that can then be directed towards activities consistent with attaining
sustainable growth and development, and therefore, debt relief measures should, where
appropriate, be pursued vigorously and expeditiously, including within the Paris and
London Clubs and other relevant forums. Noting the importance of re-establishing financial
viability for those developing countries facing unsustainable debt burdens, we welcome
initiatives that have been undertaken to reduce outstanding indebtedness and invite
further national and international measures in that regard, including, as appropriate,
debt cancellation and other arrangements.
49. The enhanced Heavily Indebted Poor Countries Initiative
provides an opportunity to strengthen the economic prospects and poverty reduction efforts
of its beneficiary countries. Speedy, effective and full implementation of the enhanced
Initiative, which should be fully financed through additional resources, is critical.
Heavily indebted poor countries should take the policy measures necessary to become
eligible for the Initiative. Future reviews of debt sustainability should also bear in
mind the impact of debt relief on progress towards the achievement of the development
goals contained in the Millennium Declaration. We stress the importance of continued
flexibility with regard to the eligibility criteria. Continued efforts are needed to
reduce the debt burden of heavily indebted poor countries to sustainable levels. The
computational procedures and assumptions underlying debt sustainability analysis need to
be kept under review. Debt sustainability analysis at the completion point needs to take
into account any worsening global growth prospects and declining terms of trade. Debt
relief arrangements should seek to avoid imposing any unfair burdens on other developing
countries.
50. We stress the need for the International Monetary Fund and
the World Bank to consider any fundamental changes in countries’ debt sustainability
caused by natural catastrophes, severe terms of trade shocks or conflict, when making
policy recommendations, including for debt relief, as appropriate.
51. While recognizing that a flexible mix of instruments is
needed to respond appropriately to countries’ different economic circumstances and
capacities, we emphasize the importance of putting in place a set of clear principles for
the management and resolution of financial crises that provide for fair burden-sharing
between public and private sectors and between debtors, creditors and investors. We
encourage donor countries to take steps to ensure that resources provided for debt relief
do not detract from ODA resources intended to be available for developing countries. We
also encourage exploring innovative mechanisms to comprehensively address debt problems of
developing countries, including middle-income countries and countries with economies in
transition.
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