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Policy options and practical steps in tackling Debt Crises for developing countries

By Dr. Foday M. Kallon

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A debt, whether secured or unsecured, private or public, syndicated or bilateral, or combinations of the above, is an obligation including the moral aspect, owed by one party (the debtor) to a second party (the creditor).  In corporate finance strategy, the concept of debt may assume a slightly expanded connotation.  Sovereign debt is also a form of debt.  Sovereign debts can be reservedly referred to as Government debts, especially those held in bonds denominated in foreign currencies (Euro, SDR, dollar, pound sterling etc).

Under the doctrine of sovereign immunity, the repayment of sovereign debt cannot be forced by the creditors and it is thus subject sometimes to inevitable rescheduling, interest rate reduction, or even implicit rejection.  If one is in doubt of this, one should refer to the Greek debt problem.  Europe’s monetary union is even more worried than the Greeks.  A bail-out mechanism is eminent and inevitable.  Or sell Greek Government bonds at secondary markets!  If the impact of the Greek debts is let on and considered harmless for the short term, it may, in the medium-term, infect the monetary union.  Any further austerity measure from the Greek Government would definitely be rejected by the populace, for this is considered indirect dictates of the IMF and EU.  Of course, the only protection available to the creditor(s) is threat of the loss of credibility and lowering of the international standing (the sovereign debt rating) of a country, which may make it much more difficult to borrow in the future.  As such , donor and debt-driven economies (especially those of the developing countries), should invariable be worried about the timely and complete repayment of their debts, even if it involved only rescheduling the debt and simple debt servicing.

 

It is no doubt that the HIPC (Heavily Indebted Poor Countries) and MDRI (Multilateral Debt Relief Initiative) initiatives have succeeded in achieving some appreciable development and progress.  The MDRI, in principle, provides for 100 percent relief on eligible debt from three multilateral institutions (the IMF, IDA of the World Bank, and the African Development Bank) to a specific category of low GDP or low-income countries.  The debt relief initiatives have helped the low-income countries concerned to expand their financial capacities in favour of pro-poor spending and investment.  This is due to the enhanced capacity and the requisite reforms that had been launched under HIPC.  Through this, some of these countries were able to mitigate the impact of the financial and economic crisis that was unavoidably imported from the west, mainly the USA, the ignition key to the global financial crisis.  The irresponsible behaviour of encouraging households in that country to assume debt beyond their means in order to “mint and siphon” huge profits from packaging these mortgages into collateralized securities of dubious quality resulted in creating conditions that did not augur well for the world economy.  The drive to enrich the few bankrupted the many, not because of the irrationality of the borrower, but mainly because of the totally unregulated economy which permitted unfettered socially destructive behaviour.

However, the debt relief initiatives will be completed within the near future, as planned.  At the same time, many developing countries (including some that have been granted debt relief on a large scale) continue to be vulnerable to new over-indebtedness.  Hence, new mechanisms need to be developed to prevent debt crises from emerging and, should they emerge, to cushion their negative social and economic impacts.  The currently proposed refinancing problems in Europe’s monetary union have once more highlighted the risks that indebtedness poses to stability and growth.  Therefore, at the European level, a debate is currently underway on mechanisms for preventing and overcoming financial crises faced by countries within a monetary union (take note WAMU).   Yes, there is as of yet no Euro-crisis in sight, some would say, but a debt crisis has engulfed the Greeks.  West African monetary union can learn a lot from the bitter experience posed by Greek debt crisis to the EU.

With a view to ensuring developing countries’ long-term debt sustainability, one focus needs to be on the difficult process of prevention.  USA is currently the largest debtor in the world; either per capita or in volume, whichever way one takes this.  The development of government capacity in the fields of debt management and good financial governance in borrowing operations needs to be given greater attention by developing countries and emerging economies as well as the international community.  Another important step is to define what good financial governance means for both creditors and debtors alike, and to incorporate relevant principles in financing agreements.  The two sides anywhere anytime have never come to agreement as to what good financial governance would really mean in practice.

Nonetheless, it will not always be possible to prevent debt crises.  Therefore, the second focus must be on strengthening mechanisms for debt acceptance, management and resolution.  Informal mechanisms such as Paris Club negotiations are constantly losing relevance because debt portfolios are becoming more diverse in composition and structure.  As a result, debt restructuring is becoming more and more complicated and costly.  One response or approach to these challenges might be the broad-based introduction of collective action clauses so as to embed creditor coordination in an international sovereign debt restructuring mechanism.  Beautiful!  Is it not?  Also workable?  Only empirical evidence would deliver the appropriate answer.

At policy meetings therefore, discussions should focus on the pros and cons of these numerous options, with a special focus on the interests of the developing countries under considerations.  The aim should be to identify policy options and practical steps at the national and international levels.  In implementing such policies on the debtor side in our countries, one should exercise absolute supremacy and allow the predominance of the financial deregulations and shun the influence of arbitrary power in dispensing development finances.  Just to mention; Ghana has been legitimately removed from the list of developing countries.  The country is now rated among the emerging economies and the fastest growing economy in Africa, if not in the world.  May Allah’s wrath not dawn on Sierra Leone, for our lagging behind unnecessarily too long in our developmental strides.  Bob Marley was correct when he once said “In the abundance of drinking water only the fool remains thirsty.”  Are Sierra Leoneans then fools?

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