WORKSHOP ON DEBT, FINANCE AND EMERGING ISSUES IN FINANCIAL INTEGRATIONLONDON, 6-7 MARCH 2007
DOMESTIC DEBT AND ACHIEVING MDGS IN LICS
Presentation by
Dinesh Dodhia
Rappidd Consultancy Ltd
Introduction
MDGs major challenge for LICs: Sub-Saharan Africa far from achieving by 2015.
Key requirement: Govt. & donor resources targeted at MDGs.
Debt servicing: claim on Govt resources: external debt (ED) reduction to HIPCs
Govt need to service domestic debt (DD), which if freed, could be utilised for MDGs
Domestic Debt in LICs: Some Stylised Facts
66 LICS (1995-2004) av. DD/GDP ratio & DD//TD= about 20%.
Non-CFA African HIPCs (1980s/90s) DD/GDP=6-9%, but DD/TD fell 22% to 6%: End-2005 DD/GDP significant in Guinea-Bissau, Ethiopia, Sierra Leone, Burundi, Zambia & Guinea.
DD taken hold in CFA HIPCs
LA HIPCs sharp increases in 2000-03, but reduced.
Domestic Debt in LICs: Some Stylised Facts
Other African LICs, Kenya & Nigeria significant reliance: Kenya up Nigeria down
Asian LICs, Sri Lanka DD/GDP=47% TD/GDP=100%
DD/GDP underestimated LG & SOE debt excluded arrears & other un-securitised debt not clear CLs can be very large.
DD/TD expected to increase with ED reduction
Fiscal/Budgetary Impact of Domestic Debt Burden
Non-CFA Af. HIPCs (1980-2000): despite DD/TD decline DISP/TISP>40% AIDIR=21% AIFIR=1%
66 LICs (1995-2004) DISP/TISP> 40% RDIR= 3%.
Govts resorted to domestic borrowing to reduce external vulnerability cap on non-concessional external borrowing in
IMF programs.
Recently RDIR fallen, but in CP HIPCs Ethiopia, Zambia & Tanzania DISP>FISP
Sri Lanka DISP/GDP=6%, EISP/GDP=0.7%
Short maturity structure
Shallowness of financial sectors
Concentration of the investor base
Fiscal/Budgetary Impact of Domestic Debt Burden
HIPC Initiative established ED thresholds & relief given to bring ratios below thresholds Did not preclude IMF considering DD
burden, when serious macroeconomic concern (2003 programmes of Bolivia, Ghana and Nicaragua)
Debt Sustainability & Domestic Debt in LICs
Debt Sustainability & Domestic Debt in LICs
IMF/WB DSF: forward looking DSAs assessed in relation to indicative thresholds to establish risks of debt distress Advising the strategies of lending institutions,
especially IDA in determining grant/credit mix.
IMF/WB against DD in DSF due to difficulties of determining empirical thresholds: lack of historical data series, different characteristics of DD & ED purpose of DSF to guide official lending decisions.
CHMF: Need to work out prudential ratios for DD through more research & analysis. DD/GDP=10% typical African HIPC, situation varying
according financial depth, with TPD/GDP= 40-60% depending on policies and institutions.
MDRI: bringing down NPV ED ratios well below DSF indicative thresholds
perverse effect giving non-participating HIPC creditors less incentive
to provide debt relief increasing complacency of governments on tackling
DD shortcomings
Debt Sustainability & Domestic Debt in LICs
HIPC Initiative predated MDGs, although underpinnings with poverty alleviation.
MDRI more explicit link
Should DD holders provide debt relief internal borrowing: transfer of purchasing
power within country. Debt cancellation by DD holders: a tax.
Positive: if resources released used by Govt for MDGs
Rationale for Debt Relief, MDGs & Domestic Debt
Rationale for Debt Relief, MDGs & Domestic Debt
Negative: if resources transferred affected private sector
activity, growth & poverty reduction. reneging trade contractual payments affected
willingness of private sector to provide future credit to Govt
securitised debt holders deterred from holding future government debt, adversely impacting on dev of financial markets.
action that serves to reduce the high DD servicing burden, through debt restructuring: benefit to MDGs
Rationale for Debt Relief, MDGs& Domestic Debt
Should donors reduce DD stock
If existing aid diverted to reduce DD Negative: resources taken away from MDGs, unless
further rebalancing of public expenditure, Positive:
would support private sector credit & investment, hence long term growth, poverty alleviation & MDGs.
Government’s credit standing improved resulting in lower future debt servicing cost
Constraint on reducing DD eased if additional external resources utilised for DD reduction
Dealing with DD Burden: What can LIC Governments Do?
Improve DD database set up of machinery to verify arrears
claims, including agreement on disputed claims, with recording on central register.
promote centralised data on CLs
Make norms Total public DSA MDG scenario
DS dependent on macroeconomic variables, having bearing on MDGs
Need to focus on Measures to enhance growth, Maintaining strong anti-inflationary policies to ensure
low interest rates Maintaining fiscal discipline, while enhancing MDG
related expenditures Reforms to reduce quasi fiscal costs associated with
SOEs
Dealing with DD Burden: What can LIC Governments Do?
Domestic Debt Restructuringuse opportunity of low inflationary &
interest rate environment to refinance expensive debt instruments
explore prospects for lengthening maturity structure of DD instruments by test issues without significant increases in yields.
Develop policies to broaden investor base
Dealing with DD Burden: What can LIC Governments Do?
Dealing with DD Burden: What can LIC Governments Do?
Securitize arrears to ensure orderly settlementOffer incentives to settle upfront a
certain proportion of arrears or all credits up to a certain limit
seek debt reduction along the model of Brady bonds
Domestic Debt Reduction& Donors
Donors’ role in providing grants, other concessional aid & exceptional financing through debt relief
DD candidate most suited for providing future donor debt relief
Assist LICs to clear verified arrears, fully or partially with the remainder securitised.
Domestic Debt Reduction& Donors
Assist LICs to reduce high DD ratios: optionsbelow a uniform threshold, (10%): added
benefit of retiring short term debt & improving DD maturity profile
Negative: does not distinguish between different LIC circumstances
Reduce DD according to LIC circumstancesbut depends on IMF diagnosis & willingness of
donors to provide additional resources.
Domestic Debt Reduction & Donors
Insert degree of automaticity based on individual LIC circumstances
DD/GDP relief not > 10%, with eligibility for HIPCs with DD/GDP>20% or TPD/GDP 40-60% depending on the quality of policies & institutions.
Assist LICs to extend DD maturities by guaranteeing interest payments on the later portions of maturity
Provide TA for development of long term institutional investors
Domestic Debt Reduction& Donors
Provide TA for debt managementWB proposal: global debt management
partnership providing TA on a standardised diagnostic tool & work with select group of LICs demonstrating commitment to sound debt management.
Related idea: donor funded partnership for capacity building, dissemination of international best practices & knowledge transfer on domestic debt management
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