Source:
Fundación Jubileo (Bolivia)
Thu Nov 23 2006
To ensure external debt sustainability is not enough for poor countries, it is also necessary to assess the impact of debt policies and fiscal measures on human development. Indebtedness should be related to a benefit for the country, therefore the impact should be caused by the destination of resources and the results.
The concept of debt sustainability – normally used for analytical purposes – is based on the determination of whether a country is capable of covering its current and future debt liabilities, without having to resort to debt relief, renegotiations with creditors or to fall into arrears.
Generally, this concept has been only focused on analyzing payment capacity but not the capacity to generate human development. This measurement of debt sustainability is carried out by using criteria and evaluation parameters that are based on the situation of indebtedness, having economic stability as essential condition. The debt relief required within the framework of the Highly Indebted Poor Countries Initiative (HIPC) was defined according to this approach.
The needs for debt relief required by a country to achieve sustainability were defined on the basis of financial indicators, in terms of macroeconomic and debt projections that were drawn up by countries under the programmes agreed with the IMF.
Subsequently, the Multilateral Debt Relief Initiative (MDRI) proposed by the world’s richest countries (G8) decided to grant debt relief to those countries that had complied with the implementation of the poverty reduction programme and structural reforms set forth within the framework of the HIPC initiative.
Bolivia had access to both relief initiatives and, according to the Central Bank, the main 2005 external debt indicators are below the levels considered as sustainable. However, undertaking non-concessional (expensive) external debt is an alement that could rise again external debt indicators within the next years.
On the other hand, the World Bank has designed a new approach to debt sustainability analyses for low income countries like Bolivia, for the purpose of guiding finance decisions made by creditors, so that the countries’ need for funds matches their future debt payment capacity.
Under this approach, the Country Policy and Institutional Assessment (CPIA) measures the quality of the country’s institutional performance. According to the final rating, which results from the analysis of several debt indicators in combination with performance levels, financiers may be able to define the combination of credits and grants to be allocated.
In the 2004 World Bank paper, Bolivia was rated as a high-risk country. This might be affecting finance in the future.
Given the fact that this methodology gives priority to measuring sustainability through payment capacity and institutional performance, it puts aside the commitment to achieve the Millennium Goals.
The challenge of poverty reduction
To ensure external debt sustainability is not enough for poor countries, it is also necessary to assess the impact of debt policies and fiscal measures on human development.
In Bolivia, the poverty indicator rose from 63% to 67% and it is estimated that out of the 17 indicators of the Millennium Development Goals, only six will be achieved by 2015, the deadline set to reach these goals.
Debt relief resources and structural reform outcomes do not ensure the fulfillment of those goals.
As an alternative, the European Network on Debt and Development (Eurodad) drew up a proposal considering the calculation of the level of debt a country could be able to pay to creditors in terms of their basic needs (education, health care and basic sanitation) and essential spending (basic infrastructure, pensions, domestic debt, police and judicial expenses).
This calculation indicates that one-third of the remaining fiscal revenue, once those priority spending areas have been covered, can be allocated to debt payment. This approach addresses, in the first place, human development factors and then external debt payment.
Indebtedness should be related to a benefit for the country, therefore the impact should be caused by the destination of resources and the results. In the case of Bolivia, this implies the challenge of poverty reduction.
An analysis with a human-based approach must consider that:
• Financing resulting from debt relief is necessary although not sufficient when it comes to achieve sustainable levels of human development.
• In order to solve the problem of indebtedness and to propose a financing strategy it is necessary to take into account the impact on human development.
• People must have the chance to be aware of the decisions made on indebtedness.
• The total debt (external and internal) has a fiscal impact on resources for human development and it is also important to consider the peculiarities of a country.
• Financial indicators fail to show the real impact of a financing strategy. It would be important to propose goals in terms of social indicators or parameters that would indicate the fulfillment of minimum living standards, which would in fact be indicating the social sustainability of a strategy.
• It could also be applied to sub-national governments, since these are entities that also became indebted and gave priority to debt service over investment, in order to become sustainable in terms of their payment capacity, taking into account that their mandate consists of the provision of services aimed at achieving a better quality of live for the population.
This article was first published at Jubilee Magazine Nº4 - See full magazine (pdf format - Spanish language)
Related Information:
* Debt relief as if people mattered: A rights-based approach to debt sustainability, by New Economics Foundation
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