Thursday, September 18, 2014


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.


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.