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sachs attachment
Prof. Jeffrey D. Sachs
June 1999
Financial Feasibility of the Jubilee 2000 Program
The Jubilee 2000 Program calls for the outright cancellation of the
unpayable debts of the worlds poorest countries. This
would mean the total cancellation of debts for a large number of the
so-called Highly Indebted Poor Countries (HIPCs),
though probably not a complete cancellation of debts for all countries in
the HIPC list. Many finance officials and
politicians have charged that the Jubilee 2000 Program is unrealistic,
claiming that a complete debt writeoff for a large
proportion of the HIPC countries would require enormous budgetary outlays
by the rich countries, and therefore would
be politically infeasible. This objection appears to be mistaken. The
Jubilee 2000 Program could be accommodated at
little budgetary cost to the United States (and presumably other creditor
countries), and would not pose fundamental
risks to the international financial institutions or commercial banks.
The 42 HIPC countries (the original 41 HIPC countries plus Malawi) have
the following approximate debt profile (all
data in $US billion) for key categories of external indebtedness. Note
that all data are provisional, as alternative published
sources provide somewhat differing estimates:
Owed to IMF:
of which:
ESAF
Standby and others
7.83
5.02
2.81
Owed to World Bank:
of which:
IBRD
IDA
38.62
4.41
34.21
Owed to DAC Bilateral Creditors
of which:
United States
Others
41.2
6.1
35.1
Owed to commercial banks
19.1
Owed to regional development
banks (mainly IDB, AfDB)
22.0*
Total of the above categories
*(RDB estimates are less
certain)
128.75
This list is not comprehensive. There is, in addition, external debt owed
to suppliers, short-term private-sector debts, and
debts owed to non-DAC bilateral donors (e.g. Russia). This memo will not
discuss these other debts, except to note that
non-DAC bilateral donors would be expected to participate in debt relief,
presumably on a pari passu basis. There may be
good reason for a differentiating the treatment of official debts (e.g.
IMF, World Bank, Bilateral creditors) and long-term
commercial bank debt, from the treatment of suppliers credits and
short-term private debts (e.g. it would be appropriate
to emphasize timely payments on trade credits to the extent that they are
financing current flows of exports and imports).
The IDA loans have a substantial grant element (around 70%), so that the
present value of the $34 billion of IDA debt is
approximately $10 billion. The ESAF also has a substantial grant element
(around 30%), so that the present value of the
$5.0 ESAF loans is around $3.5 billion. Some of the regional development
bank claims, especially in the case of Africa
(under the window of the Africa Development Fund) also have a concessional
component. The DAC bilateral debt also
has a undetermined portion of concessionality, so that the present value
of the DAC bilateral debt is below $41.2 billion,
but by how much is unclear.
Achieving a debt writeoff for each category of debt
This memo considers the case of a complete writeoff of the major debt
categories shown on the preceding page. As
already noted, most HIPC countries would receive such a complete
cancellation under the Jubilee 2000 proposals, but
others would not.
IMF Debt. The HIPC countries owe approximately $7.8 billion to the IMF, of
which around $5 billion is in the form of
ESAF loans. The simplest method of debt relief would be the following. IMF
Gold is currently valued on the IMF books
at 35 SDR per ounce, for a total book value of 3.6 billion SDR, or $4.9
billion dollars. The current market value of the
gold is approximately $27 billion. The IMF could revalue the gold on its
books to market value, and thereby recognize a
capital gain of around $22 billion. In the IMFs balance sheet, this
capital gain could be allocated to the Special
Disbursement Account (SDA), which in turn could transfer assets to the
ESAF-HIPC Trust account. It is clear that a
small proportion of the capital gains would enable a complete writeoff of
all IMF claims on the HIPC countries without
disturbing the current quota levels of IMF members.
Of course, to realize the capital gains, the gold would have to be sold in
stages on the world market. There is a long
history of using IMF gold sales for developing country purposes, notably
during 1976-80 when gold sales were used to
establish a Trust Fund to make low-interest rate loans. In the current
round of debate, the IMF has cautiously
recommended selling a small amount of gold, investing the proceeds in
interest bearing assets, and then using the
interest payments on the gold sales to finance a small annual flow of debt
reduction operations. It is obvious that a
bolder move would be to sell the gold and use the proceeds outright (not
the interest on the invested proceeds) to achieve
a much larger amount of debt reduction.
To be concrete, if 36 million ounces of gold are sold, the revenues would
be approximately $9.4 billion dollars, against a
current book value of the 34 million ounces of gold equal to $1.6 billion.
Of the total sales, $7.8 billion could then be
transferred to the ESAF-HIPC Trust account and used to cancel the IMF
claims on the HIPCs, while the remaining $1.6
billion (equal to the original balance sheet amount) would be invested in
interest-bearing securities. In essence, the IMF
would simply be using the realized capital gains ($7.8 billion), in their
entirety, to retire the HIPC debt in line with the
Jubilee 2000 proposals. Note that this would take a vote of 85 percent of
IMF membership, but with leadership from the
U.S. and Europe, and support from the HIPCs, this would be achieved.
There are several alternative methods that could also be used, in lieu of
the gold revaluation and sales, or in conjunction
with it. The Reserve Account in the General Department of the IMF has
approximately 2.133 billion SDR ($2.9 billion)
which could be charged against debt writeoffs. The reserve account in the
ESAF Trust Fund has approximately $2.82
billion, and the subsidy account also has reserves that could provide
another $2 billion or so that could be used against
writeoffs of ESAF claims. Thus, some combination of gold revaluation
(and/or gold sales at market value) combined
with the use of various reserve funds available to adverse contingencies,
could easily fund a complete writeoff of IMF
claims on HIPC countries.
World Bank Debt. The $4.4 billion of IBRD (non-concessionary) claims on
the HIPCs could be written off directly
against loan loss reserves and against bank capital, which is now
approximately $27 billion. The IBRD has already
provisioned for $3.24 billion of loan losses. Thus, the loan loss
provisions could absorb around $3 billion of losses,
while World Bank capital would absorb around $1 - 1.5 billion. Bank
capital would be reduced from around $27 billion
to around $26 billion, without impairing the Banks credit standing.
The IDA claims are held in a separate account, such at that IDA losses do
not directly impair IBRD capital. An outright
cancellation of IDA claims against the HIPCs would substantially reduce
the availability of future IDA lending (reducing
IDA resources by approximately $10 billion in net present value), but it
would not otherwise impair World Bank capital
or other Bank functions. The net result would be a scaling down of IDA
activities, unless and until IDA is replenished by
new donations from member governments. Still, it would be much more
realistic to cancel the IDA claims outright, than
to demand repayment simply to relend the funds back to the same countries
(or more accurately, to lend the funds back to
the HIPCs simply so that they can stay current on their IDA debts).
Bilateral Debt. Most governments already hold their HIPC claims on the
books at far below face value. In the United
States, for example, the face value of HIPC claims total approximately
$6.1 billion. While the exact valuation of these
claims (under the Interagency Country Risk Assessment System) is
confidential, the informed estimate is that the debt is
held on the books at approximately $0.10 per $1 of face value. The
budgetary costs of a debt writedown are equal to the
current book value of the debt. Thus, the cost of a complete writeoff of
the $6.1 billion would be approximately $600
million. In other countries, similar accounting practices would allow
steep writedowns without budgetary appropriations.
Commercial Bank Debt. Since the mid-1980s, the commercial banks have
agreed to cancel bad debts in the context of the
London Club. The amount of commercial bank debt outstanding -- around
$19.1 billion -- is a tiny fraction of bank
exposure to developing countries. A substantial or even complete writedown
of these claims would have no discernible
effect on the bank capital of international commercial banks. These losses
would be a small fraction of those incurred in
the recent emerging markets crisis. In any event, the HIPC claims are
probably already heavily provisioned against in the
balance sheets.
Regional Development Bank Debt. The InterAmerican Development Bank could
easily absorb a complete writeoff of debt
to the four Latin American HIPC countries (Bolivia, Guyana, Honduras, and
Nicaragua). The total debt owed by these
countries is approximately $1.1 billion. The IDBs bank capital is $ 94
billion, of which $90 billion is callable capital.
Loan loss reserve funds are about $1 billion, and various other special
reserves are available to absorb losses. Similarly,
the Asian Development Bank exposure to the two HIPC countries (Myanmar and
Vietnam) is minimal. The problematic
case is the African Development Bank (AfDB). A substantial writeoff of
African debts would involve a substantial
proportion of all lending by the concessional African Development Fund
(ADF). Indeed, practical solutions may require
the winding up the ADF in its current form. The need for financial
restructuring of the AfDB is already evident, even
independent of an intensification of the HIPC initiative.
Discussion
The Jubilee 2000 proposals have elicited scepticism in part because the
IMF and the World Bank have claimed that they
are unable to absorb the necessary writeoffs without substantial new
contributions from the donor governments. This
position appears to be unjustified, even if it understandable from the
point of view of those two institutions. In fact, both
have substantial cushions with which to absorb capital losses, and these
institutions should be pressed harder to accept
such writedowns. The IMF has huge unrealized capital gains on gold
reserves (as well as other reserve accounts in the
General Account as well as the ESAF Trust Fund), while the World Bank has
substantial bank capital. In any event, both
the ESAF and IDA loans could be reduced sharply without impairing Bank
capital or Fund resources, since both
programs are heavily backed by grants, not by Bank capital or IMF quota
rights.
As for the bilateral donors, budget practices differ across countries, so
each will have a distinctive budgetary burden that
results from debt writeoffs. In the U.S., at least, it appears that most
of the U.S. debt could be written off at a budgetary
cost of around $0.10 per $1.00 of debt reduction. This would mean that the
full stock of U.S. bilateral claims against the
HIPCs, estimated at around $6.1 billion, could probably be eliminated with
a budgetary outlay of around $610 million.
There may be some modest added costs to recapitalizing (in part) the World
Bank and regional development banks hit by
the writedowns.
Conclusion
The assumptions in this note still need to be tested with critical
scrutiny. No doubt some technical details would need to
be adjusted to achieve the results outlined here. If the assumptions are
essentially correct, however, it suggests that the
U.S. Administration could, at a very modest budgetary cost and well within
political limits, champion the Jubilee 2000
call for a full elimination of the crushing debt burden facing the worlds
poorest countries.