Debt around the world – winter 2013

9 December 2013

Below are some developments from the world of global debt over the past few months.

1. The Scottish Government launched its White Paper ‘Scotland’s Future’ on the 26th November. In this, debt relief is highlighted as a priority for international development, with the statement:

“The Scottish Government will give careful consideration to the question of ‘unjust’ debts; will work to ensure that Scottish export politics do not create new unjust debts; and support moves to establish Scotland as an international centre for debt arbitration.”

While remaining neutral on the issue of Scottish independence, Jubilee Scotland is welcoming the Government’s recognition of sovereign debt as a key issue for Scotland’s international development policy. This is a great campaign success. It is recognised however that in either scenario following the referendum Jubilee Scotland’s work must continue to ensure unjust debts are given full consideration through an audit of Scottish and UK debts and a commitment made to cancel all those deemed to be unjust.

Jubilee Scotland’s paper outlining their asks for debt justice in both a yes and no vote, and responses by the Yes Scotland and Better Together campaigns can be found here.

The Scottish Government’s commitment appears in chapter 6 of the white paper.

2. Egypt has been revealed to be the most indebted country in the Middle East and Africa, seventh in the World. (Argentina remains in first place globally as the country least likely to be able to pay its debts.) Egypt’s debts now make up 79.8 percent of its GDP, totalling $234.4 billion which is the equivalent of $2600 for every Egyptian citizen. The likelihood of Egypt being unable to pay its debts has now risen to 37.9 percent. Egypt is a key case for Scotland and the UK with many debts owed by the country being to UK Export Finance for loans made during the Mubarak regime and for arms. Meanwhile, Kuwait plans to buy $2 billion of Egyptian bonds as part of a second aid package having already pledged $15 billion in aid alongside Saudi Arabia and the United Arab Emirates earlier this year.

Read more on Egypt’s debts here.

3. Greneda is making plans to lower its income tax threshold on the recommendations of the International Monetary Fund (IMF) and as part of its debt restructuring programme. Grenada is currently seeking to hold a conference with all of its creditors to come to a mutual agreement about how to meet its debt obligations.

4. The IMF Fiscal Monitor Report estimates that Pakistan requires $76.9 billion, the equivalent of 30 percent of its yearly GDP to pay off its existing debts. This places it at the top of the of the list of indebted emerging countries and suggests it is going to find itself borrowing more in order to meet its repayments.

5. Several developing countries, including Jamaica, El Salvador and Pakistan, are failing to meet international development goals after rich countries reneged on a pledge to deal with their debts. Moreover, unjust debts in countries such as Greece, Portugal and Latvia are now increasing poverty at an alarming rate. These findings are part of Jubilee Debt Campaign’s ‘Life and debt: Global studies of debt and resistance‘, published in October 2013. The report compares debt crises in nine countries: Egypt, El Salvador, Greece, Jamaica, Latvia, Pakistan, the Philippines, Portugal and Tunisia.

Key findings include:

  • Jamaica pays more on its foreign debt repayments than Greece at a staggering 33 percent of its revenue.
  • Greece is spending 29 percent on its revenue on debt repayments.
  • El Salvador continues to spend 25% of government revenue on foreign debt payments, the debt originating from lending by the western world to the vicious military junta in the 1980s, whilst hunger and extreme poverty are increasing.
  • Pakistan is unlikely to be able to meet many of the Millennium Development Goals because of its debts, including those aiming to halve the proportion of people going hungry, eliminating gender disparity at all levels of education, and reducing by two-thirds the child mortality rate.

The report also gives inspiring examples of the campaigns in countries for debt justice, for example calls in Tunisia for a debt audit.

6. At the Commonwealth Heads of Government Meeting in Colombo, Sri Lanka, 15-17th November 2013, on the issue of debt it was minuted that:

‘Heads welcomed the report of the Commonwealth High Level Mission on the debt and financing challenges of Small States. Heads emphasised the need to continue advancing global awareness of unsustainable Small States’ debt and the accompanying financial challenges they confront, building on the Mission’s recent work. They endorsed the recommendations of the Mission’s Report, underlining the importance of continued collaboration within the international community to address these debt and financing challenges and to build small states’ resilience as well as continued engagement on innovative solutions such as the Mission’s proposals for debt reduction and the inclusion of a vulnerability criterion in debt alleviation interventions and allocation procedures of international financial institutions. Heads reaffirmed their support for the Commonwealth Secretariat’s current debt management and recording work.’

It is reassuring to see sovereign debt maintaining a place on the agenda of the Commonwealth Heads of Government. The report to which they refer includes recommendations on the need for integration of resilience building of small states, provision of grace periods for debt repayment during times of natural disasters or other external shocks and provision of countercyclical loans. Whilst these are valuable contributions to the pursuit of debt justice, Jubilee Scotland believes these efforts must go further if they are to tackle the unjust economic systems which support existing lending and borrowing principles. Equally, more attention must be paid to the concept of ‘unjust debt’ and its necessary cancellation.

7. The IMF wants Sri Lanka to boost its tax reveunes to cut both its budget deficit and public debts, a further demonstration of the IMF seeking to impose its economic policies on developing countries. Read the full story here.

8. Qatar has agreed to provide $150 million in debt relief to Palestine. This was announced by US Secretary of State John Kerry during Israeli-Palestinian peace talks in October although no further details were provided.

9. A new Eurodad report, ‘The new debt vulnerabilities. 10 reasons why the debt crisis is not over’ was published in November 2013. It finds that debt vulnerabilities have changed, but overall have not been substantially reduced. The number of bank failures has dropped since the height of the financial crisis which is good news. However, the downside is that governments have paid a high price to stabilise the financial sector, and sovereign debt levels have surged. It states that:

Debt has not been canceled or paid off, it has simply been shifted from one balance sheet to another, and primarily from the private purse to public or government coffers.
The opportunity to use the financial crisis for fundamental reforms in nation and international debt management and debt crises prevention and resolution has largely been wasted.

To read a summary of the report and its recommendations as well as download a copy you can visit the Eurodad website.

10. A Bank of England report has criticised existing methods of dealing with sovereign debt crisis. Referring to bailouts in Greece, Ireland, Portugal and Cyprus, the authors say using public money to bail out nations leaves taxpayers shouldering an “inequitable” burden. They suggest that private creditors, those who lent indebted nations the cash in the first place, should instead foot the bill for any rescue.

Whilst acknowledging that current trends in ad hoc bailouts in response to debt crises are poor, the report pays no attention to considering alternative longer-term solutions to debt workout upon which Jubilee Scotland campaigns. It maintains a commitment to bailouts and simply shifts emphasis from public to private rescue plans.

Note: in a disclaimer the report states that the views are not necessarily the official view of the Bank of England, rather the authors of the paper.

11. US American Brooking Institution recently published a new paper on sovereign debt restructuring entitled ‘Revisiting Sovereign Bankruptcy’. It highlights creditors’ role in irresponsible lending, a positive statement in shifting focus away from placing blame on debtor countries for their debt burden. It also promotes the contribution of stakeholders, including NGOs and civicil soviety, in discussions of debt restructuring. Jubilee Scotland welcomes these commitments. On the downside, however, there are only very weak proposals for a reformed scheme. Whilst understanding the need a statutory insolvency framework for sovereign states – a system through which debts can be restructured – rather than presenting alternative ways in which this can be done they point largely only to a wide range of challenges which are presented.

Read a full account written by Jürgen Kaiser of Erlassjahr, a Eurodad member and a partner organisation of Jubilee Scotland.

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January Campaign Update on Indonesia

1 February 2008

Jubilee Scotland is currently trying to convince the UK government to cancel the >£500 million it’s owed by Indonesia. This is a small goal within a much broader international objective, which is to promote the doctrine of ‘odious debt’.

‘Odious debt’ is a concept which enjoys some international credibility, but not nearly enough! Put simply, it is based on the idea that, if a dictator takes out loans for violent, abusive or simply frivolous purposes, his people should not be required to pay back the debt after he has gone. Every victory of debt-cancellation on this basis – and there are many such campaigns all over the world – strengthens this important doctrine.

Why is there any need for this? What was wrong with campaigning for debt cancellation solely on the basis of a country’s poverty? Here are a couple of reasons to be going along with, although there are plenty more.

Firstly, the existing debt-cancellation mechanisms demand that a country be branded as a ‘Heavily Indebted Poor Country’ before it qualifies for debt relief. It is obvious why this is demeaning.

Secondly, if debt cancellation is enacted on the basis of bad lending, it turns the spotlight back on the lender, and perhaps makes them think twice about dealing with dictators in the future.

This is a global movement within which Jubilee Scotland plays a small part. Jubilee USA are campaigning, for example, on cancelling the debts extended to Haiti’s infamous Duvalier regime, the European anti-debt coalition EURODAD is working to get government’s to sign a declaration of responsible lending, while the Norwegian government has already cancelled its debts to Ecuador and other countries on the grounds of illegitimacy.

More to follow…


G8 in Rostock: The State of Debt

7 June 2007

The “Another World is Possible” rally in Rostock, 2nd June.

At about 2.30pm, several thousand people dressed in black emerged from the ranks of the eighty-thousand peaceful demonstrators and marched at the police. Clashes started shortly afterwards. The police’s initial charges were limited, and did not disperse the group in black – though they did send panicking bystanders fleeing into the festival area that had been agreed as a no-conflict zone. After several hours, as crowds restricted access by fire engines to a burning car, heavy anti-riot machines were brought in and five hundred injuries from tear gas ensured, with two hundred arrests and injuries to twenty police (according to reports).

I don’t think that the violent protestors on Saturday had a thought-out political programme (whereas the peaceful summit blockaders do – and they are being injured and arrested in large numbers, possibly as a result of tougher policing following Saturday’s violence). However, their actions lent the Summit a needed air of crisis. For as regards the intermeshed causes of global poverty, the only thing in question at the Summit is what margin of backsliding will be countenanced. This G8 is a theatre of sterile debate: 2005’s categorical pledges to end global poverty have been broken down – as they always are – into incomprehensible technical formulae, which consume the intellectual energy that should be spent on making a just world.

For background information, and pictures, see Jubilee Scotland’s website.

Debt and poverty: the trends and debates.

Level of reduction

The G8’s debt deal has been implemented for twenty-two countries. This has reduced the net debts of these countries from US$34.7 billion to US$15.4 billion (calculated by Eurodad using World Bank figures: see Eurodad p.6). Of these twenty-two, the eighteen in Sub Saharan Africa have had debts reduced from US$26.3 billion to US$9.3 billion.

Meanwhile:

The World Bank offsets the costs of this debt cancellation by reducing the loans it makes to the countries in question (see “World Bank Debt Relief – TOTAL scam“, and “Disappearing Debt Relief“).

The crucial question for us is: by how much are countries’ monthly debt repayments being reduced? The IMF’s recent State of Implementation for HIPC (PDF here) report shows that, due to new borrowing, the debt service is not reducing by very much at all. It looks like it is down by about a fifth (18%) (p.10, fig.4).

How can it be that the overall debts are being reduced by over half, but the debt service reduces only by a fifth? One reason is that countries are taking on new loans. The IMF says that countries will have to show “strengthened management of both external and domestic debt” to avoid falling back into unsustainable debt. That is, it blames the countries themselves for their debt problems. But, arguably, the root problem of debt was not poor financial management: it was the structurally unfair trade that prevents the poorest negotiating a fair price for their exports. The fact that countries are having to take on new loans to survive suggests that the structural problems are unresolved. There will always be those, however, who want to present the African finance ministers as feckless or venal. Another reason may be that the loans being cancelled were not really being serviced anyway, or that there were other debts that were not being serviced which were serviced using the relief (this certainly happened in Zambia), such that the debt cancellation was on paper only.

However, some judge the debt cancellation a success, because what definitely is reducing is the ratio between debt service and export earnings. This is down by over half (p.10, fig.4). The very poor countries are making more from exports, and so are judged by able to pay off their debts.

The IMF reports that poverty reducing expenditures have increased from 7% of GDP to 10% of GDP in the poorest, most indebted countries, since 1999; however, the definition of what counts as a poverty reducing expenditure has also been expanding over that period, so the actual increase may be lower. An alternative World Bank report says there is an increase in education spending, and a very slight increase in health spending, in the poorest countries (p.12 nt.16).

A fair summary of the present situation, then, could be that the G8 has done very little to solve the problem of debt, and that the high primary goods prices caused by China’s growth are providing a temporary respite to Africa’s problems.


Disappearing debt relief

29 November 2006

The debt relief offered to Zambia through the Heavily Indebted Poor Countries (HIPC) initiative would reduce the money available for human development.  This is a surprising claim in a paper by John Weeks and Terry McKinley for the United Nations Development Programme (PDF here).  When G8 Debt Deal cancellation (MDRI) is added, Zambia does see a net benefit: but only a very slight one, and far below what was promised.

Officially, Zambia is receiving a reduction in debt service equal to 5.3% of its GDP, annually, over the next few years; but according to McKinley and Weeks the new money available for anti-poverty spending is only 0.8% of GDP.  Where’s the rest?

1. Redirection of G8 debt relief to private debts

According to Weeks and McKinley, over half of the funds accruing to Zambia by way of debt relief are redirected to pay other debts.

Given that the Bank of Zambia faced large debt service obligations, whose non-payment could have resulted in a curtailment of non-HIPC donor assistance, [some of the] HIPC interim debt service relief accruing to the Bank of Zambia was designated for debt service payments.  [IMF 2005]

Thus, according to McKinley and Weeks, “over half of HIPC interim debt relief (3.1 out of 5.7 percentage points) was merely an accounting entry.”

The debts to be serviced by this redirection of HIPC money are likely to be private sector debts – possibly government bonds bought by domestic businesses, possibly commercial banks in donor (G8) countries.  If so, banks are benefitting from money supposedly given to the poor.  Note that the figures given above are for interim HIPC relief; the figures for relief at completion point are lower (see section 3, below), but still considerable.

2. Tighter public spending limits

One of the conditions Zambia had to meet for debt relief was a reduction in its fiscal deficit: public overspending was to be reduced from 3.9% of GDP (2000-2004) to 0.6% of GDP (2006 onwards) (p. 11, table four).  Unless these savings are found by cutting budgets which have nothing to do with human development, the consequences will be felt by the poor.

3. Reduction in grants and other loans

As pointed out previously, the World Bank reduces the amount of aid available to heavily indebted countries in order to offset the cost of debt cancellation.  According to EURODAD, Zambia will receive debt service reduction of $38 million in financial year 07-08; but it will have its loans from the World Bank’s International Development Association reduced by about $31 million (pdf of report here; table 4; loans reduction calculated by subtracting column three from column two, or column four from column one).  Net benefit to Zambia of G8 deal is thus $7 million a year.

McKinley and Weeks calculate the reduction in grants, plus the accounting entries described above, to total 3.0% of GDP.  In summary (paraphrasing p.11):

The G8 debt deal ought to reduce Zambia’s debt service by 6.9% of GDP.  Better terms of trade also improves things by 0.2% of GDP.  Total improvement in Zambia’s finances ought to be 7.1% of GDP (as it stood in 2005).

However:

Redirection of debt relief to commercial debt service, plus reduction in grants, reduces this by 3.0. Tighter deficit limits reduces it by 3.3.

So:

Real benefit to Zambia of G8 Debt Deal is: 0.8% of GDP.

However…

The use of debt relief to service commercial debts looks like a naked transfer of aid money to the private sector, but it’s possible that the IMF is doing Zambia a favour by allowing this.  Officially, countries are meant to clear debt arrears before they can receive HIPC relief; this redirection of interim relief might have been a way for Zambia to meet that criteria and so qualify for completion point.  This needs further investigation.

On the face of it, though, it seems the conditions attached to debt relief have the effect of making virtually all the money disappear.  If the analysis is right – and if, as seems possible, what holds for Zambia also holds generally – we can expect very little improvement over the next few years, and the lack of improvement might well be used to discredit the idea of debt relief itself. 

But if the situation really is as McKinley and Weeks describe, debt relief is not at fault: the fault lies with the conditions under which it is disbursed.