The Case for Debt Forgiveness

The Congress party doctrine of playing the game of brinkmanship with serious issues proved to be disastrous. The harsh reality now is that we have a national debt we will never be able to repay, and we dare not play games with it.

Chief Economic Advisor, Dr Patrick Antoine, and the Conference of Churches raised the idea of debt forgiveness, not as wishful thinking, but as a mechanism that is already working for dozens of debt-stressed, underdeveloped countries like Grenada around the world.

As debt forgiveness movements gain momentum it is imperative that we get on board. This discourse advocates debt forgiveness as a critical priority that should inform the conversation in Parliament and the public domain.

A brief economic assessment reveals a national debt of U$2,300’000’000 with debt-to-GDP ratio over 100 percent. For every dollar of national income 60¢ finances the debt and 30¢ administration obligations, leaving 10¢ for social and capital infrastructure and a counterpart funding deficit.

The 2013 budgetary estimates for administration alone was 65% current expenditure. Resources available for debt servicing are minimal. We lack revenue streams from inflows of real and financial asset investments, mineral resources, and hydrocarbon deposits of natural gas and oil.

The trade deficit is a massive net import, tourism is volatile and unpredictable, and increasing the tax burden to repay the debt burden is not an option.

Moreover, begging is not an economic activity, only a crutch propping up the debilitating dependency syndrome. Hence, with the debt overhang spiraling dangerously out of control, our administrations keep “kicking the can down the road” constantly refinancing, rescheduling, restructuring, calling for “haircuts”, all desperate attempts to avoid the inevitable liquidity crisis and default.

We cannot grow an economy with all that baggage. Debt forgiveness is not a cure-it-all panacea; however, it would eliminate the fiscal/liquidity crisis, default risks, rating agency downgrades, and give the nation a fresh start.

The 60% allocated to service the debt would translate into socio-economic welfare, poverty reduction, and human capital development.

Debt forgiveness has precedents as old as the Bible. In Leviticus 25, God commanded Moses to give debt relief in the Year of the Jubilee, and today the Jubilee tradition is global, its basic principle: debts do not always have to be repaid.

Beginning 1996, HIPC initiatives for heavily indebted countries launched by the World Bank and International Monetary Fund began debt relief for 66 African countries, and the Caribbean and Latin America.

But Washington-based multilateral institutions imposed tough conditionalities and eligibility criteria on beneficiaries. Since 2006, U.K Multilateral Debt Relief Initiatives (MDRI) have been forgiving private, commercial, and bilateral debts of Asian countries, examples, Vietnam, Mongolia, and Sri Lanka.

In 2007, hemispheric initiatives were implemented by the Inter-American Development Bank. Notwithstanding its considerable resources of gold, diamond, bauxite, hydropower, and vast timberland, Guyana received a U$800 million WB/IMF/IDB package liquidating 100% debts. And last year Russia cancelled Guyana’s U$280, 000 bilateral debt.

The U.S. 2008 Jubilee Act provides relief for 24 HIPCs that do not support militarisation, terrorism, and narcotics trafficking. And in June 2013 Brazil announced writing off U$900 million debt for a dozen African countries.

Notwithstanding its moral imperative, making the case for debt forgiveness faces technical, institutional, and logistical challenges, and three issues stand out. Initially HIPC/MDRI initiatives targeted countries with per capita income under US$380, revised to U$1.409 PPP by 2011.

The WB 2012 indicator disqualified Grenada classifying our U$7.10 GDP per capita in the upper middle income category of Brazil and South Africa. But per capita income would be a flawed indicator of Grenada’s economic health because it ignores two important factors: one, our income distribution disparities and two, the World Bank’s own 2011 findings that 53% of Grenadians live under the poverty line.

Clearly, this eligibility criteria needs revisiting with realistic proxies like the Human Development Index (HDI) and the Gini Coefficient.

Next is the classical argument that debt forgiveness encourages moral hazard and bad behaviour. But multilateral relief is provided in small tranches overtime with regular institutional monitoring ensuring that recipients introduce systemic structural transformation to their economies. Countries are compelled to do the right thing to obviate the need for future relief.

Thirdly, IMF/WB detractors argue that debt forgiveness would undermine global aid and lending from wealthy creditors. However, granting any country debt forgiveness equates to a massive aid package and studies show that multilateral loans have not diminished due to HIPC vulnerabilities to global exogenous shocks and natural disaster.

Jay Bruno

 

 

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