Many poor countries came close to reneging on international debt in the late 1990s; industrial countries and the Bretton Woods institutions tried to introduce some order into their descent into bankruptcy by prolonging the tenure of their debt and writing some off. I reviewed this process in Business Standard of 16 October 1999, and proposed a mechanism of national bankruptcy.
THE JUBILEE INITIATIVE
President Clinton has announced
that he will recommend to Congress write-off of a billion dollars of debt owed
to the United States by poor countries. This follows a decision by the heads of
the Group of 7, at their meeting in Cologne last June, to forgive 80 per cent
of the poor countries’ debt; Clinton is going to propose the write-off of the
entire debt of some countries.
These proposals are rooted in the
Heavily Indebted Poor Countries (HIPC) initiative that the International
Monetary Fund and the World Bank launched in September 1996. The Fund and the
Bank were faced with three problems. First, they claim to have no bad debts;
but there were developing countries that were incapable of repaying their debt,
and the Washington institutions’ record was on the point of being besmirched.
Second, neither institution can lend to a government that cannot service its
loans (unless it is Russia); if the further aid was to be given to the
overindebted countries that were otherwise deserving of aid, it was necessary
to remove their overindebtedness. Finally, there was pressure for debt
forgiveness from various groups of do-gooders.
But it was important to leave out
of the debt forgiveness countries like India which, however poor they might be,
meticulously serviced their debts. So the Bank devised criteria that would
exclude them: only those countries were made eligible whose debt-to-export
ratios were over 250 per cent and whose ratios of debt service to exports
exceeded 25 per cent. This criterion excluded certain very open countries whom
the Fund and the Bank wanted to help. So they added another: countries with an
exports-to-GDP ratio of at least 40 per cent, a minimum ratio of fiscal revenue
to GDP of 20 per cent and a ratio of the net present value of debt to exports
of over 280 per cent also qualified. Armed with these criteria, the Fund and
the Bank have reviewed the cases of 16 countries, placed 12 of them before
their Boards, of which seven qualified for assistance and another three were on
the way to be qualified, and assistance to two – Bolivia and Uganda – has
already been released. Burkina Faso, Cote d’Ivoire, Mali, Guyana and Mozambique
are waiting for release of assistance, and Guinea-Bissau, Ethiopia and Mauritania
are on the way.
The Fund and the Bank make an
agreement with each of these countries in which they promise to reform their
policies over six years. The conditions are typical of Fund-Bank programmes –
fiscal correction, opening up of trade, repair of banks, privatization etc. The
debt write-off starts immediately but is substantially backended.
Earlier this year, the Fund and
the Bank invited comments from NGOs; they received 65 written comments and held
consultative meetings attended by about 500 participants. The comments of
charitable organizations were all in favour of more generous write-offs. The
most active campaign is the so-called Jubilee 2000 campaign. Apparently there
is an ancient Jewish tradition or myth, according to which all debts were
forgiven every 48 years. On the same lines, the Jubilee 2000 campaign is for
complete debt write-off. In actual fact it recognizes the differences in the
circumstances of individual countries.
Another active campaigner has
been the Catholic Fund for Overseas Development. Its objective is to abolish
poverty by 2015. To this end, the resources a government devotes to basic needs
and productive investment should be deducted from its revenue, and not more
than a fifth of what remains should go to debt service. Oxfam is dissatisfied
with the target debt reductions of the Fund-Bank, which it feels still leave the debtor countries so indebted that they are deprived of initiative in
domestic policy-making; it advocates deeper debt reduction.
The six-year qualifying period
also has drawn much criticism. Some NGOs feel that it is too long – that it
should be reduced to three years. But then there is the danger that a country
would not manage to do much in three years and would therefore fail to qualify
for write-off. So Christian Aid advocated a floating conditionality on the
lines of IMF’s floating tranche: the qualifying conditions would be laid down
at the beginning, but the country could take its own time to reach them.
My own preference is to make
provision for national bankruptcy. Just as an imprudent businessman can be
taken to court for not paying his debts and his assets liquidated to pay the
debts, so a country should be taken to court, and its assets used to pay its
liabilities. This may sound shocking, but is in fact the practice in respect of
local governments in the USA. Local authorities that cannot pay their debts are
taken into receivership by a liquidator appointed by Congress; their elected
governments are suspended, and financial powers transferred to the liquidator.
He repairs the revenue collection mechanism, and redirects expenditures to
ensure that as much of the debt as possible is serviced; the rest is written
off. He operates under Chapter IX of the Insolvency Act, which applies only to
governments. Over 500 municipalities have been under receivership since this
legislation was passed some 60 years ago; almost all have been restored to
health and returned to elected governments.
The same needs to be done in
respect of indebted countries. An international insolvency council should be
set up on the lines of or the International Court of Arbitration. It would appoint a panel of three judges, one
a nominee of the country, one a nominee of the creditors, and one chairman
acceptable to both. The country’s foreign assets – included those of its
bureaucrats and politicians – would be placed under the custody of the panel.
The country’s finance ministry would also be placed under the panel’s orders.
The panel would put into place a scheme of debt reduction and repair the
country’s fiscal machinery, and then give it back to its elected rulers or
dictators as the case may be.
