Meeting of Multilateral Development Banks on Debt Issues Washington D.C., July 6-7, 2011 Chairman s Summary On July 6 and 7, the World Bank (the Bank) hosted the 2011 annual meeting of Multilateral Development Banks in Washington D.C. Representatives from twelve multilateral financial institutions participated in the meeting, and two bilateral creditors attended as observers. This is the sixteenth year that the MDBs meet to discuss debt and related issues. Jeffrey Lewis, Director of the Economic Policy and Debt Department (PRMED) and chair of the meeting welcomed the participants as a new member. His opening remarks focused on the history of the initiative and its achievements to date. The initiative was originally envisaged as a short-term measure to address the excessive debt levels of highly indebted poor countries. Today, 90% of HIPCs have reached the decision point and 80% the completion point. With the initiative largely completed, the future of HIPC is discussed. In this context, he set the agenda for the two days and urged the participants to consider whether the forum was still relevant in its current form and if so, how to enhance its effectiveness. The participants were invited to a tour de table. Progress in the implementation of the HIPC and MDRI Initiatives since last year. Progress has been slower than during the last 2 years where a total of nine countries reached the Completion Point (CP) and two, the decision point (DP). Since July 2010, two additional countries (Togo and Guinea-Bissau) have reached the CP bringing the number to 32 CP out of the 40 eligible countries. The number of countries that reached the DP remains at 36. The debt burdens of post-cp countries have been reduced by 90% compared to DP levels and key debt burden indicators have substantially declined. Most of the Interim countries (Comoros, Cote d Ivoire and Guinea) are making good progress on their CP triggers. Only Chad still faces serious political challenges, unable to implement policies and to maintain macroeconomic stability, and all pre-cp HIPCs (except Kyrgyz Republic) are fragile states as per the Bank s definition. Further challenges on implementation of the HIPC Initiative remains: (i) taking the remaining 8 pre-cp countries to the CP; (ii) ensuring full participation of all creditors; and (iii) maintaining debt sustainability. Debt relief alone, however, is not sufficient to guarantee debt sustainability. Strengthening debt management capacity and institutions in these countries is critical to maintain a sustainable debt level. The annual reporting exercise on the delivery of debt relief captured 97% of the total cost of HIPC & MDRI, with 11 institutions providing data compared to 14 last year. Participation by other bilateral and commercial creditors is key for the delivery of debt relief to pre-cp countries. Non-Paris Club (NPC) official bilateral creditors and commercial creditors need to participate more fully. For example, NPC creditors account for about 13% (US$10 billion) of total cost of HIPC Initiative debt relief and around 40% are estimated delivery by NPC creditors of expected HIPC relief to post-cp HIPCs. Updated status of 1
implementation of the HIPC Initiative and MDRI is scheduled for end-october 2011 after the Annual Meetings. The deadline for MDBs submission is set for August 26, 2011, which gives more time to capture further participation by other bilateral and commercial creditors. Options for the future of the Initiative are considered. HIPC Initiative has never meant to be permanent. In fact, slower than expected progress required repeated extensions of the sunset clause since 1996. In 2004, the Boards decided that potential eligibility would be ring-fenced to countries meeting the Initiative s income and indebtedness criteria based on end-2004 data. In 2006, 14 countries were included on the list of potentially eligible countries that met income and indebtedness criteria at end-2004. Three of which indicated no interest (Bhutan, Lao P.D.R. and Sri Lanka) and Nepal followed in 2009. Afghanistan was added on the eligibility list in 2007. Myanmar and Zimbabwe are two countries where eligibility is still not confirmed. The Boards of IDA and IMF have requested to reconsider the rules of the HIPC Initiative and define an exit strategy for countries that have expressed their intention not to avail themselves of HIPC Initiative debt relief. Informal discussions were held with IDA and IMF Executive Directors earlier this year on options to further ring-fence the HIPCs, and maintain status quo. Making the initiative permanent or closing the initiative are two options that were not considered. Both Boards will consider the costing implication of the options for the future of the HIPC Initiative. Monitoring and reporting on debt vulnerabilities in LICs, including HIPCs, would be intensified. Many LICs were less affected by the 2008 economic crisis than developed countries and MICs because of debt relief and possibly, improved debt management capacity. However, the crisis highlighted the need to focus at certain aspects of LICs deeper than before in order to track vulnerabilities. A need to monitor debt sustainability and the risks associated with their debt portfolios is even more critical. Reporting on debt relief delivery and litigation against HIPCs is discussed in the context of individual debt sustainability analysis, implying a change on the reporting. Emerging Issues for Debt Management on MDBs operations. Out of the 40 countries identified as eligible for HIPC/MDRI debt relief globally, 33 are regional member countries of the African Development Bank (AfDB). The impact of debt relief under HIPC/MDRI has been positive with significant decrease in stock of external public debt and improved fiscal space and ability to borrow. However, debt sustainability remains a serious concern for several countries despite having received debt relief they still have huge unmet financing needs and have urgent structural issues to address. Debt issues in fragile and conflict states were presented. Positive progress on the Asian Development Bank (AsDB) operations is reported with half of the member countries having improved their debt distress level since 2005. The challenges that AsDB oversees for the region are capacity and political will. Some of the countries are not in position to manage their debt having problem of capacity. A new focus is on the large infrastructure which receives financing from non-traditional creditors and Public Private Partnerships. Debt management issues in LAC are (1) improve debt statistics; (2) estimate and manage contingent liabilities; (3) manage natural disaster risks with lending facilities and lending support; (4) coordinate 2
asset and liability management; and (5) develop debt sustainability methodology. The Inter-American Development Bank (IaDB) aims is to support its member countries through network support; operational and policy dialogue support; and knowledge products. They are in search for pilot countries in all areas of operations. Two countries cases were presented by the European Investment Bank (EIB) illustrating situations where creative solutions needed to apply. Lessons learned include proper negotiation still needs to be maintained between parties; and changing the rule in a highly bureaucrat institution may sometimes be the only solution. Protecting Multilateral Aid from Lawsuits by Creditors. IFIs and MDBs should be concerned about lawsuits. They are increasingly on the radar screen for creditor litigation. Much of the concern arises from the activities of vulture funds, which are often legally indistinguishable from other creditors. They may serve a useful purpose but could be extremely disruptive to the lending program and the debt relief effort. Financial transactions are still vulnerable and the threat of creditor litigation remains ever present. The legal and policy rationale for enhanced protections and options available were presented. Collaborative frameworks are being proposed between IFIs and MDBs. The Debt Reduction Facility (DRF) has helped resolve many litigation cases, but not all. The DRF was established in 1989 to help IDA-only HIPC countries reduce their sovereign external commercial debt (ECD) as part of a broader debt resolution program, through ECD buyback operations at a discount. Since 1991, DRF has supported 25 debt reduction operations in 22 IDA-only countries. Beneficiary countries extinguished US$10.4 billion of external commercial debt at a cost of about US$754 million. Significant resources and time are still required to eliminate remaining external commercial debt claims, estimated to US$12 billion. The market is still uncertain with litigation threat remaining and vulture funds monitoring developments. Implementation of the Non-Concessional Borrowing policies. The new debt limit policies, implemented in close coordination between IMF and the Bank are moving away from a single design policy for concessionality requirements to a menu of options. The new policies have been made more flexible to address the Non-Concessional Borrowing (NCB), except when capacity is low and vulnerabilities high, hence preserving consistency of the NCB policies. The implementation of the new policies has raised a few operational issues which will need to be reconsidered in the context of the forthcoming review of the debt limits policy. Improving the Debt Sustainability Framework (DSF) is an ongoing effort. The revision of the DSF that was done in 2009 has enhanced its flexibility and has stressed the importance of better assessing the investment-growth nexus in each DSA. The revision has been ongoing to better understand the framework itself. However, simplifying the framework should not jeopardize the validity and the richness of the analysis. A joint Board paper is being prepared to present possible ways to modify the framework. A modified framework could be available in 2012 after the Boards guidance. Investment Growth Nexus and Infrastructure Lending. According to a study done by a number of stakeholders, Africa remains a challenge with high cost to develop its infrastructure. In fact, it was 3
reported that transforming Africa s infrastructure will require an additional US$31 billion a year. Some interesting findings were highlighted: one third of the infrastructure needs should be directed to operations and maintenance; almost half of the spending needs are associated with power; three quarters of infrastructure spending is financed by African tax-payers and consumers. It is clear that the extent of infrastructure challenge varies from country to country the Democratic Republic of Congo was discussed. AsDB and the Caribbean Development Bank (CDB) shared their experience on infrastructure lending activities. Implementation of the work program on debt management technical assistance was updated. During FY11, 29 countries underwent the Debt Management Performance Assessment (DeMPA), 10 countries developed a reform plan, and 16 joint Bank-Fund medium-term debt management (MTDS) missions were undertaken. The outreach program included 14 training events and the Debt Manager's Practitioners' Program was operationalized with 7 participants having joined the program to-date. Key lessons were articulated including country ownership as key to reforms; Reform priorities should be articulated by authorities; and, programmatic approach, with DeMPA, Reform Plan and MTDS has proved useful. The importance of Subnational Debt in Developing Countries was also presented, highlighting the impact of the global financial crisis on state and local debt. Issues were given particular weight by participants: How to tell the HIPCs stories: Greater effort is required to publicize the achievements of HIPC/MDRI, the benefits of debt relief, and the significance of forward-looking initiatives the Bank, the IMF and its partners have established to prevent the re-accumulation of unsustainable levels of debt in client countries; Litigation by vulture funds: Vulture funds are disruptive to development and to the very gains HIPCs have achieved through debt relief. This threat is taken seriously. Collective action clauses are presently on the agenda to prevent further litigation cases; Other suggestions: Have more case studies on the MICs and share lessons learned; provide solutions on how to reduce arrears in client countries; explore options for a dedicated forum for information sharing and coordination of MDBs implementation of NCB policy; improve efficiency and effectiveness of debt-related efforts by combining DMF forum with MDBs meeting, a thought for next meetings?; and Investment-Growth Nexus remains a key area - How to link DSF, NCB and investment growth. G-20 coordination on the HIPC agenda: Broader issues are discussed at the G-20 level and participants would like to maintain such exchange of information - and monitor strategy related to the future of the HIPC. 4
The next annual meeting. Participants responses to the MDB meeting were unanimous. All agree that the current format is still relevant and should be continued on an annual basis. The Bank noted to keep participants informed about on-going work in the Bank and the G-20 concerning the future of HIPC s. 5