1 External Debt: Developments and Remaining Issues LEONCE NDIKUMANA

2 Four main points in the 2002 Monterrey Agreement Preventing debt crisis must be shared burden by debtors and creditors (paras 47, 51) Technical assistance to strengthen capacity for appropriate macroeconomic policy and monitoring/management of debt (para 47) Key role of debt relief; additional to aid resources (paras 48, 49, 51) Debt sustainability in relation with impact of debt relief on MDGs.

3 External debt has declined but it remains high Debt levels have started to decline, although they remain high (see Fig 1 for trend) But private debt still increasing, an important concern; ex: Africa: $92bn in 1999 to $110bn in The decline in debt stocks is driven by debt relief initiatives (HIPC, MDRI) (Figure 2) But HIPC not enough (esp. not enough coverage) But economic cost of debt service remains a heavy burden on debtor economies. For example: in 2003, African countries spent 3.4% of GDP on debt service compared to 2.5% on health.

4 HIPC Coverage is Low HIPC Status for African countries Pre-decision point (8 countries) Decision point (7 countries) Completion point (18 countries) Central African Republic, the Comoros, Côte d’Ivoire, Eritrea, Liberia, Somalia, Sudan and Togo Note: in color = conflict and recently post-conflict Burundi, Chad, Democratic Republic of Congo, Republic of Congo, Gambia, Guinea, Guinea-Bissau Benin, Burkina Faso, Cameroon, Ethiopia, Ghana, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal, Sierra Leone, Tanzania, Uganda, Zambia, Sao Tome and Principe

5 Trends in debt for Africa

6 Debt relief a major factor in decline in debt stocks

7 The developing world remains a “net creditor” to the industrialized world! Net transfers on debt remain substantially negative, despite decline in debt, due to high interest payments Official net transfers have increased recently, thanks in part to debt relief Illicit capital flows (esp. capital flight) amplify the paradox of international capital flows, whereby the developing world is a creditor to the developed world.

8 Net transfers to Africa

9 Domestic debt is a concern Domestic financing of government deficits poses problems of Sustainability of debt Crowding-out of private investment (discouraging private lending) Particularly a problem for conflict countries

10 Debt relief, debt sustainability and the MDGs It is agreed that debt relief can boost country’s progress towards the MDGs At the moment, many LDCs (and the majority of African countries) are not on track to reach the MDGs An increase in the volume and the scope (coverage) of debt relief is needed to accelerate progress towards the MDGs. Sustainability of progress towards MDGs requires that debt relief is not accompanied by new cycle of unsustainable borrowing.

11 Does debt relief pose a problem vis-à-vis macroeconomic policy? The allocation of resources is as important as (if not more than) volumes of resources Harnessing supply effects of debt relief Enhancing crowding-in effects of debt relief on domestic revenue: direct and indirect effects (through higher growth and higher income/tax base) Crowding-in of debt relief on domestic revenue helps to: Prevent new cycles of debt crisis Ensure sustainability of public expenditure programs (economic development policy in general) Increase government control over economic policy

12 Recommendations R1: Preventing a new cycle of debt crisis Responsible lending practices Transparent international banking system Accountable borrowing and debt management R2: Addressing negative transfers of resources Increasing non-debt generating external financing More concessional loans Preventing capital flight; establishing mechanisms for capital flight repatriation Broaden and deepen support to the Task Force/Leading Group on Illicit International Financial Flows

13 Rx (cont’d) R3: Increasing domestic resource mobilization Higher tax revenue: better tax administration; broadening tax sources Savings mobilization by the financial system: addressing shortcomings of the financial system (risk, competition, rural-urban bias, regulatory environment for intermediation). R4: Special condition of post-conflict countries Support to post-conflict reconstruction, especially when there is a signed peace accord

14 Rx (cont’d) R5: Macroeconomic policy: flexibility and sustainability Flexible macroeconomic framework to absorb higher resources Dilemma: it is difficult to advocate for flexibility in the presence of low policy credibility, weak capacity and weak institutional environment Thus need for assistance in strengthening capacity for designing and conducting prudent yet pro-growth macroeconomic policy R6: Growth-supporting “Global Funds” Beyond emergency “Global Funds” “Global Funds” to support growth-generating programs; e.g., energy global fund; infrastructure global funds