IFIs Latin American Monitor
Wed Nov 09 2005
Upon setting 2006 budgets, Latin American governments have been allocating a significant part of resources to debt service payments. This effort, aimed at gradually diminishing the debt burden on the economy, is being made within a context of significant economic recovery. However, not only does this strategy compromise the distribution of resources towards other crucial areas for the development of these countries, but debt rates continue to be very high. Colombia, Venezuela, Panama, Mexico and El Salvador are some examples of that which is taking place in the region.
The recently released report by Anoop Singh (Director of the IMF’s Western Hemisphere Department) "Global context and regional outlook for Latin America and the Caribbean", shows the general trend in Latin America to preserve macroeconomic balances and progressively reduce debt burdens on the economy. However, in spite of efforts, there are still very high rates of debt (due to the sharp rise in the late 1990s), and what is of serious concern, those resources allocated to debt services, payment of interests and debt purchase – amortization – go to the detriment of investment in social programmes and infrastructure. Budgets should also be set with a view to the macroeconomic requirements and structural reforms agreed with the IMF, which allow access to credits of the World Bank and Inter-American Development Bank (IADB).
The general tendency is aimed at modifying the debt composition, that is to say, to start cancellating the external debt owed to multilateral institutions through the issuance of internal or “sovereign” debt at lower interest rates. This process responds to the awareness of some national governments about the constraints that the conditions imposed by IFIs in order to grant credits imply to their actions. “To acquire debt to pay debt” is the motto of most countries in the region, on account of which the level of internal indebtedness represents a major burden to middle-income economies although in better conditions for their governments.
In this sense, according to ECLAC’s Employment Outlook 2005 report, the debt which accounted for 42.7% of GDP in 2003 fell to 35.7% in 2004. Besides, some countries took advantage of the favourable situation to extend their deadlines for debt servicing, thus renegotiating their maturities.
On the other hand, the article “La Deuda Externa” posted on the website Ecoportal also refers to ECLAC’s figures. Between 2002 and 2004, the net transfer of resources from Latin American countries reached 153.91 billion dollars. This amount exceeded by 45.15% the 105.53 billion dollars that entered by way of foreign direct investment. In this way, governments allocated in this period between 40 and 65% of their budgets to debt servicing payments.
This situation is reflected on national discussions with regards to Latin American budgets. Colombia, Venezuela, Panama, Mexico and El Salvador are some examples of that which is taking place in the region. All these countries, the same as Peru, Nicaragua, Uruguay and Argentina – among others – have their budgets cut down as a result of the external debt. The share allocated to health, education and infrastructure bears the burden of this distribution of expenditure.
However, it is worth pointing out the differences in terms of effects on fiscal accounts, between oil exporting countries (Colombia, Ecuador, Mexico, Trinidad and Tobago and Venezuela) and the rest of countries in the region, which have difficulties to develop amidst high energy costs.
According to Singh’s declarations, this is a very important moment for countries that are oil exporters to use their windfall gains either to reduce their public debt, or to increase effective and high-quality investments or to save. It is the way how countries will strike this balance between saving, investing and reducing the public debt that will determine the country's medium term growth rate.
This perspective is being criticized by those Latin American politicians who propose the use of oil resources to develop productive investment rather than to reduce indebtedness. The macroeconomic evolution analyzed by international institutions takes into account variables that are not necessarily translated into an equitable distribution of income.
International institutions “preach” a strict control over public expenditure that may allow to pay for loans undertaken, a low level of inflation and the approval of structural reforms: tax, banking, financial and pension system reforms. This recipe might vary from one country to another, as the case may be, but maintains a pattern within the region, of which it is necessary to get rid of.
The last IMF mission that visited Colombia highlighted the good performance of the economy, the compliance with the fiscal deficit target, the low inflation and the strengthening of the financial system. However, it insisted on the need of structural reforms on taxes and the transfer system. Besides, it suggested that the government should not intervene “so much” and let the exchange rate float more freely.
On the other hand, to comply with IMF guidelines, the Ministry of Finance announced that no resources to fill vacancies or hire staff will be authorized in the 2006 budget if entities do not evidence solvency to face it. Thirty-five per cent of expenditure will be allocated to payment of interests and capital amortizations of internal and external debt.
But prospects for the Colombian economy are “good”. According to Robert Renhack, chief of the IMF mission, a 4% annual sustained economic growth is expected, as well as an inflation level between 4 and 5% by the end of 2005, and between 3 and 5% for 2006, a fiscal deficit of 2.5% for 2005 and 2% for 2006.
The debt-to-GDP ratio also follows the guidelines expected by Singh, since it reached 30% in 2003 and stands at 20% by the end of 2005.
The Venezuelan Parliament started discussions on the 2006 budget. On this occasion, the budget increases 27% with regards to the previous year’s budget due to a 5% rise in GDP, which according to prospects will amount to about 130 billion dollars.
Oil revenues, swollen by current high prices, are estimated at 32 billion dollars. This figure, a subject of dispute between the government and the opposition, allows to increase by 80% the share allocated to health, education and sports; while the total of social programmes accounts for 40% of the budget. Forty-seven per cent of this projected expenditure will be financed by oil revenues.
According to figures of the Ministry of Economy, in 2005 Venezuela’s debt servicing accounted for 6.4% of GDP, while this rate is expected to fall to 5% in 2006. The same target applies to the real amount of public debt which at the closing of the first semester of 2005 amounted to 39.2% of GDP and is expected to follow along the same line until reaching 35%.
The IMF’s position in Venezuela is outstandingly different from that in the rest of countries in the region. Venezuela’s status as oil producer country (the largest example in Latin America) provides another context to its relationship with the IMF.
Recently, Singh answered questions about the Venezuelan case at a press conference and stated that the country has recovered from the difficult situation it went through some years ago. With the current oil price levels, the IMF considers that it will have no difficulties in terms of growth next year.
Likewise, the Venezuelan Parliament is considering a proposal made by the government to reduce external indebtedness through a fund created with the country’s large international reserves (petro-dollars). In this sense, ruling party legislators are defending this proposal, stating that it is part of “a policy” to be promoted by the government following the implementation of the 2006 budget aimed at “putting an end to dependence on multilateral institutions”. (Diario Perú 21, October 20, 2005).
In the 2006 budget, submitted by the Executive to the General Assembly, the interests, commissions and amortizations of the Panamanian debt (external and internal) amount to 1.71 billion dollars, which accounts for 25% of the total expenditure included. This figure constrains social development, since it doubles the amount of public investments proposed and largely exceeds those resources allocated to programmes for the promotion of production, building of schools, hospitals and infrastructure works.
The economy will grow by 5%, inflation will oscillate between 1.5 and 2% and fiscal deficit will undergo a reduction of 0.7% of GDP between 2005 and 2006. Although there is a strong rise in investments, including social programmes aimed at the most vulnerable sectors (food, education, health and housing), these will be financed by savings from current expenditure. According to Economy Minister Ricaurte Vásquez, this implies an achievement since it does not represent a relative increase in debt.
On account of the above, debt growth (internal and external) will be decelerated, thus falling with regards to GDP from 66.9% in 2005 to 63.7% by the end of 2006.
México has also reduced its debt with respect to GDP. Between 1994 and 2004, this ratio fell 20 percentual points, dropping from 45.7 to 25%. The strategy aimed at not increasing external indebtedness resulted in a change in terms of public debt structure, on account of which since 2001 the internal debt exceeds the external debt. At the end of August 2005, the total public debt is made up of 62.2% of internal debt and 37.8% of external debt.
This goes hand in hand with the strategy followed in the region, but does not necessarily mean that Mexico’s public accounts show surplus, since the budget has a strong increase in terms of current expenditure which is financed by oil surpluses and public debt (in spite of the fact that this is banned by legislation, which provides that debt issuance shall only be used for those works that directly produce an increase in public revenues).
This country is also making efforts to reduce the debt-to-GDP ratio.This ratio rose sharply following the 2001 earthquakes, since until 2000 the debt amounted to 30% of the GDP, and rose two years later to 40%. For 2006, a rate of 39.8% is projected, while the indebtedness policy is aimed at falling to 38.5% - this at the end of the five-year period (2004-2009) – and at reducing the debt service amount with regards to current revenues. The path of debt reduction is made up of two elements: reduction of current expenditure and increase of tax revenues.
However, in order to fulfil commitments, the country should resort in 2006 to new indebtedness in the amount of just over 660 million for the purpose of covering the payment of 400 million in pensions, 100 million of aWorld Bank loan, 150 million to refinance payment of eurobonds due in 2006 and 13 million in issuance of public debt instruments.
Observatorio Internacional de la Deuda
Declaration of Havana, II South-North Consultation
Press Release: IMF Executive Board completes first review under the Stand-By arrangement for Colombia