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International Debt, IMF and Economic Development

International Debt, IMF and Economic Development. Rita Buckley: Department of Economics, University of Limerick. Origins of the Debt Crisis. External Causes Oil Price Shocks (73 &79) World Financial Markets (74-79) Roll-over Credit Syndicated Loans Anti-Inflationary Monetary Policy.

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International Debt, IMF and Economic Development

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  1. International Debt,IMF and Economic Development Rita Buckley: Department of Economics, University of Limerick.

  2. Origins of the Debt Crisis External Causes • Oil Price Shocks (73 &79) • World Financial Markets (74-79) • Roll-over Credit • Syndicated Loans • Anti-Inflationary Monetary Policy

  3. Internal Causes • Regulated Financial markets • Substantial Budget deficits • Monetary Financing of budget deficits • Over Valued Currency • High Trade Barriers

  4. The IMF and the Debt Problem • IMF V Private Banks • IMF Conditionality • large devaluation • credit ceilings • reduction in governments budget deficit • reduction in protectionism • opening up of domestic economy to FDI

  5. Reaction to Debt Crisis • Reaction:Call a halt to further lending or continue to lend? • International Financial System • BIS- short term loan to Mexico • IMF Tactical Approach; Formula • IMF to reach agreement with debtor country on the policy conditions under which the IMF was willing to lend money to the country • Private Banks with outstanding claims on the country would continue to extend credit facilities • Rescheduling of Debts

  6. Has the Debt Problem Disappeared? • Developed Countries- Yes • Developing Countries • burden of repayment • IMF restrictive policies • Effects on developing Countries • economic growth (negative for some) • declining per capita consumption • declining investment • vicious cycle

  7. Defining Unsustainable Debt Levels • 41 developing countries (33 are African) • 32 countries classified as Severely indebted low-income countries • per capita GNP (1993 level) of US$695or less • present value of debt to exports higher than 220% or • present value of debt to GNP higher than 80% • 9 countries that have received concessional rescheduling form the Paris club creditors

  8. Evolution of External Debt Burden • The external debt burden of many low income countries has increased significantly between the late 1970s and the early 1990s (see Table 1 and figure 1) • Declining HIPC debt burden in the late 1990s (see table) • The debt to export ratio increased by at least 3 or 4 times from the late 1970s to the early 1990’s.

  9. Total Debt and Debt Service1970-1999: Selected Years Source: World Bank, 2000a

  10. Total Debt and Debt Service Ratios, 1999 Source World Bank, 2000a

  11. Factors Behind the Increase in the Debt Burden • Exogenous factors • Adverse terms of trade shocks • Adverse weather conditions • Lack of Sustained Adjustment policies when facing exogenous shocks • Lending and refinancing by creditors • Lack of prudent debt management strategy • Political Factors

  12. Debt Crisis Management • Table 1

  13. Schemes to reduce the burden of debt for HIPC • G-7 summit : “Toronto Terms” agreed on a menu of options including partial forgiveness, longer maturities and lower interest rates (87/88) • World Bank (1987) Special Programme of Assistance (SPA) to low income Africa and IMF with the Enhanced Structural Adjustment Facility (ESAF) • G-7 (1990): “Trinidad Terms” • Paris Club (1994) “Naples Terms”

  14. Recent Initiatives • Debt Initiative for the Heavily Indebted Poor Countries (HIPCs) [IMF and World Bank] • HIPC1( 1996) • HIPC2 (2000) • Aim: “ to provide special assistance for heavily indebted poor countries that pursue IMF- and World Bank-supported adjustment and reform programs, but for whom traditional debt relief mechanisms are insufficient” (April, 2000)

  15. Criteria for Eligibility for HIPC Initiative • Be eligible for concessional assistance from the IMF and World Bank • Face an unsustainable debt burden, beyond available debt relief mechanisms • Establish a track record of reform and sound policies through IMF and World Bank supported programs

  16. Conclusions The general Debt Crisis of the 1980s has been addressed, however the problem of managing international debt has not gone away and the potential for future debt crises remain. This problem has been exacerbated by the rise of global finance, the decline of state authority, and the relative limited flexibility of international institutions like the IMF in adjusting to this changing environment

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