Editorial

Debt forgiveness would help the Caribbean, but…

Sunday, June 01, 2014    

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The total public debt stocks of nearly all Caricom countries exceed the threshold of 65 per cent of GDP which is used by the International Monetary Fund (IMF) to define a "high level public debt vulnerability".

Several Caricom members, including Barbados, Jamaica and St Kitts, are weighted down by debt levels which are well above that threshold.

The servicing of that debt has reduced the fiscal space and the ability of governments to deliver social services and infrastructure by consuming a sizeable portion of fiscal revenue. It is also a constraint on the capacity of governments to support economic growth.

Recent research has shown that economic growth is inhibited when the debt/GDP ratio reaches a level of 90 per cent and that a country cannot grow out of debt.

Caricom countries have sought to manage their public debt by restructuring and refinancing the debt, but end up in a vicious circle of indebtedness in which they are borrowing to repay debt.

The alternative to this is either to reduce borrowing by draconian cuts in government expenditure and increased taxation, or to have the debt drastically reduced by debt cancellation, euphemistically called debt forgiveness, which has its own problems.

First, debt forgiveness would only reduce or eliminate debt owed to official bilateral donors and would not include commercial debt and money owed to the multilateral institutions.

Second, debt forgiveness is usually reserved for the least developed countries. For example, Guyana (along with Haiti) is the only least developed country that would qualify. Guyana benefited from the Heavily Indebted Poor Countries initiative and Caricom was given a debt write-off by Canada.

The question is, who would be willing to grant debt forgiveness to the middle-income countries of the Caribbean which are seen as profligate and not deserving of such special treatment?

Third, a case would have to be made to the international community and international financial institutions to take an action which is unprecedented and would open the flood gates to all developing countries. This would be a hard sell. And do we have the kind of diplomatic and technical personnel to successfully make this argument?

Fourth, debt forgiveness on a scale and for any kind of conditions will come with binding conditionality to assure the donors that debt forgiveness will not be a recurring refrain like preferential trade arrangements.

The governments have not displayed the type of discipline to implement the conditions which would include those imposed on the African countries that got relief. To qualify for a write-off, countries would have to meet four conditions: formulate a periodic Poverty Reduction Strategy Paper and implement it; pursue sound macroeconomic policies of the type prescribed by the IMF; severely limit expensive commercial borrowing; and invest whatever they saved in debt payments into social programmes.

They had to do all this transparently, ie their plans, accounts and performance were open to all those who had called for debt cancellation.

Debt forgiveness can help Caricom countries, as it did for Guyana and several poor African countries because every little bit helps. The major benefit over and above the financial easement would be the requirement not to let the debt reach crisis proportions again.

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