TWN Briefings for WSSD No.10
Comments on the External Debt Aspects of WSSD Draft Plan
By Goh Chien Yen
Total outstanding debt of developing countries and countries in transition showed little change since 1998. The total debt of these countries at the end of 2001 is estimated at US$2,450 billion. While the growth of the external indebtedness of the developing countries has stabilized, they are still faced with a mountain of debt, at about close to 40% of the GNP. Furthermore the problems of Heavily Indebted Poor Countries (HIPCs) are far from being resolved and other poor countries have been adversely affected by the continual financial and economic crises in emerging markets. Many of these crisis-stricken emerging markets are consequently suffering from domestic as well as external debt difficulties.
The WSSD draft Action Plan deals with debt in paragraphs 80, This para contains a chapeau (with three alternative texts) and three sub-paras a, b and c. Sub-para (b) has two alternative texts. The entire paragraph is in bold and square brackets, denoting no agreement. The following are comments on the texts of para 80.
Para 80 (chapeau)
The proactive language of para. 80 of the draft Plan of Implementation captures the pressing concerns and challenges faced by the developing countries.
‘Para. 80 [Reduce the unsustainable debt burden of developing countries, through speedy action for debt relief, debt cancellation and other innovative mechanisms geared to comprehensively address debt problems of developing countries, such as debt for sustainable development swaps and to ensure debt sustainability consistent with the achievement of the internationally agreed development goals, including those contained in the Millennium Declaration, taking into account the outcome of the International conference on Financing for Development. Debt relief arrangements should seek to avoid imposing any unfair burdens on other developing countries. In this regard, actions are required to: ...]’
In addition, it ties the assessment of debt sustainability of all developing countries to the Millennium Development Goals (MDGs). This is an important improvement from the Monterrey Consensus on Financing for Development, which arguably makes the point of linking debt sustainability to the MDGs only within the context of the HIPC initiative. As mentioned above the fact that many developing countries are faced with crippling indebtedness underscores the need for speedy and orderly debt relief and debt cancellation for all developing countries. This is an obvious but necessary point to make. In addition the allusion to the Monterrey conference, despite its problems, can be helpful as the debt issue has been dealt with more comprehensively there.
In these respects, para 80(alt) and (alt.2) favoured by the developed countries significantly dilutes the understanding and urgency to deal comprehensively with the debt situation in all developing countries. Para 80(alt) basically imports parts of the Monterrey text on debt with no amelioration, despite the accepted understanding that Monterrey was but a starting point for the international community to act decisively on the critical problem of unsustainable debt.
‘Para 80 (alt.2), [Consider on a case-by case basis the debt burden of developing countries and especially the poorest ones, with actions to:]’ proposed by the US, is highly regressive and must be rejected. Not only does it not make any reference to Monterrey, it sets back the very modest gains made there in dealing with the debt problems. If para 80(alt.2) is adopted as a chapeau, the explicit link between the debt sustainability of the HIPCs to the MDGs, and the need for fair burden sharing in debt management will be lost. Moreover, the ad hoc approach contained in this para creates asymmetry between debtors and creditors. It leaves far too much discretion with the major creditor countries on account of their leverage in international financial institutions.
On the HIPC Initiative [para 80 (a)]
Para 80(a) which deals with the debt of Heavily Indebted Poor Countries (HIPCs) calls for greater urgency in its implementation of the HIPC initiative and recognizes the impact of the external economic environment on the performance of these countries in satisfying the criteria of the initiative.
Under the HIPC initiative, debt relief is provided by both multilateral and bilateral creditors to bring down the total stock of debt to within ‘sustainable’ levels. When the total stock of debt is more than one and half times the value of exports, the country is deemed to have an ‘unsustainable’ level of debt. However not only has the HIPC initiative’s progress been painfully and disappointingly slow, the process to date is a failure even by this narrow criterion of debt sustainability. Accordingly 31 out of the 42 HIPC countries continue to fall short of this standard. More worrying several countries that have qualified partially for the HIPC initiative have had their interim relief suspended by the IMF as a result of so-called ‘policy slippages’ from their IMF programmes.
Many NGOs such as Jubilee Research have long criticised the HIPC initiative for failing to meet its stated objectives, for being designed in the interests of creditors, for imposing excessive and structural adjustment type conditionalities on poor countries and disregarding the human development needs of the HIPCs, as set out in the MDGs.
The para should note the failure and the inadequacy of the HIPC initiative and its poor stewardship by the IMF and the World Bank.
The para should also therefore build on the inclusion of the MDGs, in assessing the extent of debt relief to be given to the HIPCs at Monterrey, and acknowledge the plain fact that these countries simply cannot afford to make any debt service payments. According to Jubilee Research estimates, even if all the debts are cancelled, the HIPCs will need an additional US$30 billion in aid (see Briefing Paper on ODA) each year if there is any hope of meeting the first Millennium Development Target of halving poverty by 2015.
Debt Management [para 80 (b)]
As pointed out above, depending on which paragraph is adopted as the chapeau the notion of equitable burden sharing in debt resolution could be lost in the current way with which this is dealt with in para 80(b) and (b.alt) of the draft Plan of Implementation. Building on para 60 of the Monterrey Consensus, where the involvement of the private sector in debt resolution is premised on the need for fair burden sharing and to minimize moral hazard, para 80(b) of the WSSD draft Plan of Implementation should recognize that the international community has not made significant progress in providing orderly debt work out mechanisms to ensure that creditors and investors bear the consequences of the risks they have taken, and that the burden of crises be distributed equitably between debtors and creditors and among different classes of creditors.
80 (b) [Further restructure outstanding indebtedness through appropriate debt relief, cancellation and other arrangements, bringing international debtors and creditors together in relevant international fora to restructure unsustainable debt in a timely and efficient manner, taking into account the need to involve the private sector in the resolution of crises due to indebtedness, where appropriate;]
80 (b.alt) [Bring international debtors and creditors together in relevant international fora to restructure unsustainable debt in a timely and efficient manner, taking into account the need to involve the private sector in the resolution of crises due to indebtedness, where appropriate;]’
The full range of possibilities in dealing decisively with the debt problem should not be beyond the consideration of the international community. Hence, para 80(b), supported by the developing countries and resisted by the developed ones, is more consistent with the sentiment and understanding that the magnitude and urgency of the debt problems requires a comprehensive solution.