«2015 Bilateral debt Multilateral 8000 7000 poverty 6000 goals 5000 sustainability 4000 3000 macroeconomic millennium 2000 1000 0 1995 1996 1997 1998 ...»
Multilateral Debt Relief Initiative (MDRI) Debt relief, including under the recent Multilateral Debt Relief Initiative (MDRI), has put more countries in a situation where current debt is now well below any thresholds associated with risks of debt distress. Some commentators (e.g., Goldsbrough and Cheelo, 2007; Harding, 2006) have observed that this initiative for debt relief is one that truly provided additional resources for poverty reduction investments.
However, evidence in countries where MDG costing exercises have been done is that the estimated resource requirements for countries to meet the MDG’s by 2015 are large and significantly surpass the volumes of resources that will be made available by MDRI.
According to Gunter (2006), based on preliminary estimates, the benefits of the MDRI to the 18 completion point HIPCs over the next 10 years (2006-2015) amounts to US$8.5 billion, of which US$7.2 billion are estimated to benefit the 14 African completion point HIPCs. Assuming that all African HIPCs would reach the HIPC completion point within the next 5 years [from 2006], the total debt service savings from the MDRI to Africa are estimated to add up to about US$10 billion during 2006The Completion Point is the stage at which after Zambia had implemented the PRGF successfully, the country received a stock of debt relief and the bulk of assistance under the Enhanced HIPC Initiative.
25 See IMF (2000); also at www.imf.org/external/country/ZMB No.P7410-ZA (11/20/00) 26 IMF (2005a)
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2015. Comparing these US$10 billion in MDRI debt relief over the next ten years to the additional development expenditures needed to achieve the MDGs in Africa (which are estimated to amount to about US$750 billion over the next ten years) shows that the direct financial contribution of the MDRI remains small (a little over one percent!) to the actual additional financing needs of Africa.
The main point above is not that MDRI is insignificant or unimportant in its contribution to reducing debt and potentially alleviating poverty, but rather that even with truly development-oriented initiatives such as the MDRI, there is still a significant financing gap that needs to be address. Unfortunately, addressing this raises yet other questions about whether the full extent of resources that would fill the financing gap could actually be absorbed and used effectively in recipient countries. Both issues about 4 the resource gaps and about management and absorption capacities should be borne keenly in mind as one looks at Zambia’s brief to date and potential future experiences with MDRI.
Under the G8 Gleneagles proposal of 2005 also known as Multilateral Debt Relief Initiative (MDRI), the IMF Executive Board approved significant debt relief for Zambia in December 2005. As part of the Initiative, the IMF agreed to provide 100 percent debt relief for Zambia on all debt incurred by Zambia to the IMF before January 1, 2005 that had remained outstanding. IMF debt relief amounts to approximately US$577 million, or US$572 million excluding remaining assistance under the Heavily Indebted Poor Countries Initiative. This debt relief became available in early January 2006 as soon as the remaining consents of the contributors to the PRGF Trust Subsidy Account had been received. The international community had made these additional resources available to help Zambia make progress toward the MDGs (IMF, 2005a).
How did the IMF analyze the wider range of potentially feasible fiscal policy options available for Zambia following debt relief? A late 2005 assessment (IMF, 2006) concluded that with the attainment of the completion point under the HIPC and even before MDRI debt relief, Zambia’s external debt and debt service indicators would remain quite low over the long term compared with the various threshold indicators of potential debt distress. The assessment followed the recently introduced IMF-World Bank Debt Sustainability Assessment (DSA) framework. That framework, discussed in more detail further below sets indicative, country-specific debt burden thresholds that depend on the quality of a country’s policies and institutions. As measured by the World Bank’s Country Policy and Institutional Assessment (CPIA), Zambia ranks as a “medium performer” in terms of policies and institutions. The indicative thresholds of potential debt distress for countries in this category are a net present value (NPV) of debt-to-exports ratio of 150 percent, an NPV of debt-to reserve ratio of 250 percent, an NPV of debt-to-GDP ratio of 40 percent, and debt-service-to-exports and revenue ratios of 20 and 30 percent, respectively. Zambia’s debt indicators remained well below these threshold levels both under the baseline scenario and under most stress tests, except for
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a scenario involving a sharp fall in copper prices. After MDRI debt relief, debt and debt service burden indicators never came close to their respective thresholds even in such an adverse scenario. This essentially means that with MDRI Zambia’s likelihood of encountering debt distresses in the future is very low27.
Largely due to the debt relief from the HIPC initiative, at the close of 2005, Zambia’s overall external debt stock reduced by 36.1 percent to US$4.5 billion from US$7.1 billion at end-2004. According to the Ministry of Finance (MOFNP, 2006), the dramatic overall reduction in the country’s debt stock emanated from the cancellation of debt by members of the Paris Club following Zambia’s ascension to the HIPC Completion Point, which was not coupled with significant further borrowing from the Club. The stock of Paris Club debt in 2005 declined by 95.3 percent to US$117.5 million (from 4 US$2,483 million in 2004), implying a debt write off of US$2,365.5 million by the Club (see Figure 4.1).
3000 2000 1000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 On the other hand, despite the impressive debt relief figures on multilateral debt highlighted above (presumably achieved through HIPC), official Ministry of Finance data show that there was only a marginal change to the stock of multilateral debt from 2004 to 2005. The multilateral debt component declined by only 4 percent from US$3.9 billion in 2004 to US$3.7 billion in 2005. Without giving any specific details on the types, sizes and purposes new loans the Ministry of Finance (MOFNP, 2006) reports that this was mainly because of the contraction of new multilateral loans that negated 27 Of course, as discussed above and in other parts of the paper, the debt sustainability that would be fostered by MDRI and other initiatives will not necessarily fully address Zambia’s resource gap and absorptive capacity problems. These require other solutions as further discussed elsewhere in this paper.
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the debt relief gains made on the multilateral component. Hence, overall, although Figure 4.1 shows a general decline in the debt levels, there was an increase in debt owed to the World Bank, African Development Bank and Non-Paris Club members due to contraction of new debt.
As would be expected given the foregoing, relative to both exports and GDP, total external debt has reduced considerably, declining steadily from 1999 to 2002 and then quite dramatically from 2002 to 2005 (see Figure 4.2). This simply provides further evidence of the contribution of HIPC debt relief to debt reduction outturns.
400 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Generally, a key concern regarding external debt management is usually the cost of the debt to export earnings in terms of debt service payments, but judging from the country’s recent debt service record, this does not seem be a significant concern in the case of Zambia. As a proportion of exports, external debt servicing in 2005 was 7.7 percent, down from 20.9 percent the previous year. Figure 4.3 below illustrates the external debt service-to-export and external debt service-to-GDP dynamics from 1998 to 2005. Clearly, the debt relief efforts realized in 2005 reduced the country’s debt service costs and burden.
% 10 5 4 0 1998 1999 2000 2001 2002 2003 2004 2005 In absolute terms, external sector’s service payments, excluding amortisation, amounted to US$33.5 million in 2005, a reduction of 2.5 percent from US$34.3 million in 2004.
The bulk of the payments – amounting to US$23.8 million or 71 percent of total payments – were to multilateral institutions. Payments to Paris Club and Non-Paris club creditors for 27.9 percent and 0.1 percent of the total, respectively.
4.2 Implications of External Debt Levels Having benefited from the HIPC initiative and currently also benefiting from the MDRI, Zambia has already had a significant proportion of its external debt obligations written off, allowing the country to channel some of the debt resources to poverty reduction spending. The foregoing discussion clearly shows the track record of external debt reduction.
However, as earlier highlighted in detail, the resources needed to achieve the goals of the FNDP and MDGs are likely to exceed those freed up under the debt relief initiatives.
While it would be expected that in response the government will continue to make efforts to increase its domestic resource mobilization, the earlier discussion showed that there will be clear limits to the size of domestic resources that can be generated. And as we further explain later on, although scope may exist for reallocating expenditures within the national budget, the will to make hard reallocation choices to priority areas will most likely be found wanting; pro-poor expenditure switching will be limited in practice, unless perhaps external impetuses are exerted.
In the medium term Zambia will need to significantly supplement the rather limited domestic resources with those provided by donors. A key issue is therefore about the terms on which Zambia will receive these external resources – whether as grants, or as loans. The FNDP intention is clear; government intends to make every effort to mobilize additional resources to achieve the goals of the Plan. The viability of this strategy for financing development has been commented on in many parts of this paper. Basically,
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it is clear to see that an increasing preference for grant (ODA) financing to invest in the FNDP and MDGs will be inevitable. Naturally, the issue is then one of trying to forecast the size and predictability of future aid inflows. And what should Zambia do if that grant financing is insufficient or unpredictable?
Of course, considering that Zambia has been given a new lease of ‘life after debt’, new loans will increasingly become an option for development financing. The question is; will Zambia be able to borrow on a concessional basis? If it will, how much debt will it be able to successfully negotiate for and for how long? Section 5 attempts to provide answers to these among other questions.
On the other hand, there is the possibility that some amount of non-concessional (i.e., on market terms) borrowing will be undertaken. Then the concern will be that the 4 debt may again build up to be an unsustainable future liability. It therefore becomes important to try and understand, if additional loans will be entered into what should constitute a ‘sustainable’ level of debt in respect of the human development imperative?
The issues raised in the preceding three paragraphs are picked up again further below in Section 5 after a consideration of domestic debt issues.
A Global Problem Needs Global Solutions From a global historical perspective, starting with the Mexican debt crisis of the 1980s, the international financial community using various debt relief instruments has been providing assistance to many debtor countries. The idea behind these policy instruments is to reduce external debt burdens of poor countries in order to foster growth, reduce poverty, and attain external viability. This assistance has taken the form of the provision of concessional financing from international financial institutions, debt relief from official creditors mainly in the context of Paris Club rescheduling, and, in some cases, through bilateral action by the creditors.
These measures have resulted in considerable success in alleviating the external debt burdens of many middle-income countries. Many poor countries, especially those in sub-Saharan Africa, continue to suffer from unacceptable levels of poverty and heavy external debt burdens owing to a combination of factors including imprudent external debt-management policies, lack of perseverance in structural adjustment and economic reform, deterioration in their terms of trade, and poor governance. In part, these observations have led to some changes in the thinking of the international financial institutions about when to view external debt as sustainable or not.
The Debt Sustainability Framework (DSF) The International Monetary Fund (IMF) and the World Bank have designed a recent framework called the Debt Sustainability Framework (DSF), which serves as the IMF and World Bank’s new framework for managing debt of low income countries (LICs) early in 2005. The DSF applies only to LICs and excludes middle income countries.
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Among the LICs, the DSF applies to those countries that have either never entered or already graduated from the HIPC initiative. Countries in between would have assessments based on both DSF and HIPC framework carried out. The difference between the HIPC and the DSF initiatives is that the former is backward looking, mainly dealing with historical debts, while the latter is forward looking focusing on the future capacity of countries to carry debts without compromising human development.