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As Debt Market Heats Up, Debt Managers Get Ready

Over 120 debt managers from low-income countries and emerging markets convened in Berne, Switzerland, in June to discuss the results of debt relief and find better ways to manage country debts prudently.

“This year’s conference provides a timely opportunity to reflect on the past experiences of debt relief in developing countries and shed light on the new challenges debt managers of low and middle-income countries are facing,” said Marie-Gabrielle Ineichen, Switzerland’s Secretary for Economic Affairs.

The occasion was the Debt Management Facility’s Second Annual Stakeholders' Forum on June 8-9, cosponsored by the World Bank’s Economic Policy and Debt Department and the Swiss State Secretariat for Economic Affairs. Under the theme of “Managing Debt: Lessons Learned and Emerging Issues,” the conference coincided with the 20th anniversary of the Swiss debt relief program.

“Debt relief has increased the availability of resources to spend on essential services,” said Otaviano Canuto, World Bank Vice President for Poverty Reduction and Economic Management. “But debt relief is not enough without prudent borrowing and lending.”

Basel.gifUp to last March, debt-service payments of the 36 Heavily Indebted Poor Countries (HIPCs) that have qualified for debt relief—had declined as a result of debt relief. For these countries, the average debt-service payment relative to GDP dropped from 3.1 percent of GDP in 2001 to 1 percent of GDP in 2009.

“In Ghana (debt relief) has contributed to increases in poverty reduction spending to achieve the Millennium Development Goals,” said Yvonne Quansah, Director of the Financial Service Division at the Ministry of Finance and Economic Policy of Ghana.

Some participants, on the other hand, thought that debt relief initiatives supported by the World Bank, other multilateral institutions, and creditor countries, came too late –particularly their implementation. “Had creditors implemented the relief 20 years ago, the cost of debt relief could have been much lower,” said Jurgen Kaiser, Political Coordinator of the German Jubilee Campaign.

Now that many of the countries that benefited from debt relief are back in the international debt market, the challenge is how to prevent excessive borrowing and a new debt crisis.

“You need to get your house in order first,” said Ahmed Afif, Principal Secretary of the Ministry of Finance of Seychelles. “If you are asking creditors to sacrifice, you need to show that you are serious and have to make sacrifices too.”

The recent surge in interest from low-income countries to issue sovereign bonds in the international capital market, borrowing by subnational governments, increased use of public private partnership (PPP) schemes, as well as the large private capital inflows and outflows—just to name a few—pose significant challenges to developing country policy makers.

So some policy and operational solutions to prevent countries from re-accumulating debt were discussed by participants, such as general borrowing principles, rules sanctioned by independent judicial council, and a charter for responsible borrowing. Nevertheless, there is no international consensus among countries over which way to take other than improving methods to achieve debt sustainability.

“The Forum confirmed a rich menu of important topics in debt management and the substantial progress that has been made,” said Jeff Lewis, World Bank Director for the Economic Policy and Debt Department. "Discussions also underscored that debt management does not occur in a vacuum -- strengthening debt management capacity is critical to formulating robust fiscal and monetary policies that can prevent another cycle of excessive debt accumulation."

The Debt Management Facility (DMF), which sponsored the conference, is a multi-donor trust fund supported by financial contributions from the governments of Austria, Belgium, Canada, Netherlands, Norway, Switzerland, and the African Development Bank.  Its objective is to strengthen debt management capacity and institutions in developing countries.

Last updated: 2011-06-15

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