Finance

Background

Showcasing the impact of debt in poor countries and a proposal for fair and green recovery financing

29 March 2021 | Minutes

This virtual Civil Society Policy Forum session on 29 March 2021 was sponsored by Christian Aid, CAFOD, Jubilee USA, Caritas Zambia, ACT Alliance, CIDSE, AACC, and WCC. A video recording of the event can be found here.

Panellists

  • Moderator: Marcello Estevão, Global Director of the World Bank Group’s Macroeconomics, Trade and Investment Global Practice
  • Rev. Suzanne Matale, Independent Commission for the Reform of International Corporate Taxation (ICRICT)
  • Eric LeCompte, Executive Director, Jubilee USA
  • Eugene Kabilika, Caritas Zambia
  • Jeromin Zettelmeyer, Deputy Director, Strategy Policy and Review Department, IMF

Session

Eugene Kabilika, Caritas Zambia

  • Zambia experienced strong growth 1964-74. This was pushed by government expenditure, so debt began to grow. 1975-1991 saw slow growth, high inflation, exchange rate misalignments and low domestic investment, leading to social unrest.
  • Debt servicing put pressure on government to remove food subsidies, which led to commodity prices rising. General large-scale inflation, coupled with a deterioration in social indicators. IMF structural adjustment programme started in 1991, with further negative social consequences.
  • In 2003 and 2005 there was some cancellation of Zambia’s debt, which reduced the debt burden and helped country to bounce back. Debt cancellation decreased current account imbalances and stabilised inflation and the exchange rate.
  • However, the situation has worsened again. In 2021, Zambia allocated more money to debt servicing than education, health, water and sanitation combined. External reserves increasingly being used to service debt.
  • To respond to the crises, we need debt restructuring and cancellation. But private sector creditors need to be part of the conversations.
  • Civil Society Organisations in in Zambia know that the government does not listen to them. As such, we believe that multilateral and bilateral partners can help to encourage government to change their behaviours.

Eric LeCompte, Executive Director, Jubilee USA

  • In Zambia, the Jesuit and broader religious community have been working on the issue of debt since the mid-1990s. This was the same era that the global jubilee movement started.
  • We collaborated with the likes of the G7 on the Multilateral Debt Relief Initiative and HIPC. This relieved countries of an enormous amount of debt, allowing 54 million additional children to go to school in Sub-Saharan Africa.
  • After the global financial crisis the IMF publish papers on improving debt restructuring. The UN General Assembly even passed a debt relief permanent restructuring process plan in 2014. In 2015, we saw at Addis Ababa development finance summit strong commitments made to put in place a permanent debt restructuring process. Unfortunately, none of these were implemented or moved forward.
  • 56% of world’s countries are now in debt distress. We see a global wave of debt restructurings happening, without the tools in place to make the process work effectively.
  • Tools like the Debt Service Suspension Initiative (DSSI) are hamstrung by the lack of private sector participation.
  • An important development is the Common Framework. Although G7 and G20 have called for private participation, it’s not clear if they can be compelled. In the 1990s debt was principally in the public sector – but now for many the majority comes from the private sector.
  • Middle income countries (MICs) are experiencing debt instability, but don’t qualify for most initiatives. A big question is how to get debt restricting right for both lower and middle income countries. We need to expand debt relief and aid to MICs, including by exploring how SDR reallocation can support them.

Jeromin Zettelmeyer, Deputy Director, Strategy Policy and Review Department, IMF

  • I basically agree with the two speakers on the magnitude of the problem and need to find common solution. In differing, I would underline that we have in fact made quite a bit of progress and more is in the pipeline.
  • We are trying very hard to help Zambia to engage with private creditors, however it is not realistic to think private creditors will seriously engage with Zambia unless we have agreed with the government on an IMF support programme working towards the stabilisation of the economic situation, reforms that might improve abilities to pay back in the future, measures to raise growth. We are in discussion with the government, and are confident that there will be some form of conclusion to move forward on debt relief.
  • The Common Framework is a coordination device to address arguably the most difficult problem that has been holding back debt relief over past decade – the fact that the Paris Club does not include the largest creditors in Africa and beyond, particularly China. In principle the Framework is a big step forward, but we haven’t got it off the ground yet.
  • DSSI is about debt suspension, whereas the Common Framework is about (a) providing debt relief for countries with unsustainable debt and (b) help countries to stretch out debt repayment over a longer framework.
  • It is important for private sector to participate in debt treatments. Public debt relief is ultimately financed by tax payers. If private sector does not help to shoulder the burden, then interest from the public side will go away.
  • For this reason, the Common Framework includes a comparability of treatment principle. Essentially a condition that states that debt relief from public creditors is provided on the assumption that the debtor will seek comparable treatment from the private creditors. In principle, if it does not happen, the official sector can stop its debt relief. Even if it doesn’t stop it, it will at least look less favourably on future aid requests. That said, the principle is a soft tool and it remains to be seen how it will work with the Common Framework.
  • We have also been pushing for the extension of the DSSI until the end of 2021. The extension is important because financing problems of DSSI countries remain and the Common Framework is not fully in place yet. DSSI is a transition device.
  • The SDR allocation is another initiative that we have been considering for a while. We are working on implementing this. Exchanging SDRs for hard currency is the equivalent of countries being able to issue low-interest debt without return. In this sense it is better than concessional financing.
    Marcello Estevão, Global Director of the World Bank Group’s Macroeconomics, Trade and Investment Global Practice
  • I agree with magnitude of the problem. I don’t think there is much debate on the need of debt relief. The issue is how to keep developing countries on a sustainable debt path. To do this you need good fiscal policies and debt management from countries.
  • The World Bank and IMF teams help countries to have an adequate macroeconomic framework – getting countries to best practice.
  • It is hard to bring private sector into the Common Framework. But the compatibility of treatment rule should help. Chad/Ehtiopia/Zambia have different types of exposure to the private sector – we are working with the G20 on how to overcome these.
  • Our key development objective is to have a fully-fledged debt framework where countries don’t have to have a debt jubilee.

Rev. Suzanne Matale, Independent Commission for the Reform of International Corporate Taxation (ICRICT)

  • The faith community globally has come together to bring to light the situation in the Global South. Covid-19 is like pouring fuel on an already raging flower. Perhaps IMF and World Bank could be termed as the fire brigade.
  • There is an urgent need for global tax reforms to support the recovery, addressing rampant tax evasion and avoidance. If not, even if we cancel debt, it won’t be long until it returns.
  • It is estimated that around $100 billion a year is lost due to aggressive corporate tax avoidance by wealthy individuals.
  • We cannot work in silos. We must not forget the Sustainable Development Goals and the Paris Accords. We need to assure the quality of human life.
  • Economic and financial matters cannot be left in the hands of accountants, economists, and ex-pats. They have to be opened up to public debate.

Marcello Estevão, Global Director of the World Bank Group’s Macroeconomics, Trade and Investment Global Practice

  • You make a great point about not working in silos. For example, on tax revenues. Our vision is about broadening tax bases e.g. addressing illicit tax flows (we help countries to do this, including on the IT side – we collaborate with private sector firms to implement digital solutions to try to detect better who is evading tax). We also work on better tax rules, especially for the digital economy.
  • There are other things to be done e.g. taxing fossil fuels. Making sure you transfer these revenues to the poor that can be hurt by increased cost in consuming fossil fuels.
  • We are also thinking about ways that wealth could be taxed. We need to have a holistic way of looking at this issue.

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