Financial and trade perspectives on external debt with reference to LDCs and India

Presented at the CADTM South Asia in Colombo, Sri Lanka, December 9-11, 2010

Introduction

Among the Millennium Development Goals (MDG) and targets launched by United Nations since 2000, Goal 8 pertains to develop a ‘Global partnership for development between Developed Countries’ (DCs) and Developing Countries (LDCs) assumes great significance as far as the global debt of the LDCs is concerned, in items 8.10 to 8.16. Some of the salient features are as follows:

 8.10: Debt sustainability reflects the number of countries having reached highly indebted poor countries (HIPC) decision points and those that have reached their HIPC completion points;
 8.11: Debt relief committed under HIPC and multilateral debt relief initiatives (MDRI);
 8.12: Debt service as a percentage of export of goods and services;
 8.13: Proportion of population with access to affordable essential drugs on a sustainable basis;
 8.14: Telephone lines per 100 population;
 8.15: Cellular subscribers per 100;
 8.16: Internet users per 100 population.

Perspective on Global Financial Crisis

The global crisis may be seen from the persistent levels of high unemployment witnessed in major DCs and increased rates of under employment and unemployment in LDCs. Stagnant employment recovery has posed risk for output expansion, suppressing both investment and consumption demand globally. Fiscal and monetary options at the disposal of DCs and LDCs had very little intervention impact on global recession culminating into a depression. These stimuli measures in various forms has added fuel to the fire in most DCs widening their fiscal deficits and public debt at critical levels. This is not only a challenge to the global economy but makes it remote and unattainable for MDG, since poverty reduction strategies are linked to creation of employment opportunities and provision of adequate purchasing power for the poor in LDCs. Widening income insecurity and disparities of income and wealth among and between DCs and LDCs, weakening on social sector spending which earlier acted as a cushion and safety net at times of crisis, has now serious implications on tackling debt through access to education, basic health services, food, drinking water and sanitation in LDCs. The global crisis has aggravated the LDC debt and trade in 2009. World volume of trade fell by 13% compounded by fall in commodity prices between September 2008 to March 2009 and fall in GDP from 13% to 9% for transition economies and W. Asia. This was followed by deterioration in terms of trade, balance of trade by way of payments for primary commodity exporters and reduced prices and value of their export revenues. The dollar value of trade in most LDCs was 20% lower than pre crisis levels. Even the Seventh Ministerial Conference of WTO at Geneva in November 2009 has been disappointing due to lack of consensus on market access in agriculture and industrial goods, agricultural subsidies and special and enhanced treatment to LDCs for debt management.

The Doha Round of MTN

The Doha round of multilateral trade negotiations (MTN) has remained inconclusive. The uncertainties while dealing with the concerted efforts towards tackling debt problems of HIPCs, declared eligible under the criteria with heavy debt service obligations, remains on paper due to limited fiscal resources for attaining MDG. Market access based on an open, rule based, predictable and non-discriminatory international trading system propagated by DCs as a panacea for building of domestic capacities in LDCs has proved to be contrary to expectations. Doha made several efforts to remove trade barriers in areas of interest to LDCs such as agriculture, services, non-agriculture trade, tariff escalations, protection of Intellectual Property Rights (IPRs) and to protect public health in LDCs with access to affordable medicines. The biggest challenge however has been the various degrees and dimensions of protectionism practiced in DCs which affected LDCs exports. Doha’s attempt towards negotiations in reduction of tariff peaks and escalation in products of particular export interest to LDCs with high value added, for generating greater revenue from exporting processed goods have not received the support from the DCs. The need of the hour is market access for both raw and processed commodities and synchronizing corresponding tariff levels at both upstream and downstream stages. The incidence of agricultural tariff peak at 36% is on the higher side and differences exist between fully processed agriculture products and for raw agriculture materials.

Trade Distortions and Subsidies

Trade distorting subsidies at US $376b in absolute terms was US $12b in higher in 2008 than in 2007 for OECD countries with harmful effects when targeted at locally consumed products. Even when decoupled from production and prices they act as barriers to trade and limits LDC export access to DCs. The subsidised products that enter global markets also drives down prices and incurs loss of income and hurts LDC exporters through two channels. First, insulation of producers from world prices shifts the burden of adjustments abroad and second, OECD exports makes inroads into market shares of most efficient and local producers in LDCs thereby aggravating their food security problems. If the rules of the game are fair to LDCs then exports could be linked to MDG for increased income, enhancing government revenues, creation of employment for women and young job seekers, empower women and could even act as an engine of growth to avoid the debt trap.

Debt Sustainability Initiatives

The initiation of debt sustainability initiatives for HIPCs in 1996, further enhanced in 1998 and MDG initiatives in 2000 has not made any dent so far on the LDCs debt problems. The issue of debt has to be addressed from the LDC perspective of high vulnerability and trade volatility coupled with weak export capacity based on a narrow and vulnerable basket of commodities. A new and emerging threat is disguised protectionism in the form of various non-tariff barriers. The issue of sustainability of debt is a serious one and must be seen against the background of global slowdown, fall in trade, remittances and commodity prices. This has created crisis in private finance, deterioration of terms of trade (ToT), balance of trade (BoT), balance of payments (BoP) and immiserising growth coined by Prof. Jagadish Bhagawati of Columbia University. There is a vicious circle of debt leading to fiscal deficits widening, multilateral financial institutions resorting to mass scale lending and governments borrowing more at home. The public debt ratios also rises due to the combined pull and push factors of increased internal and external borrowing and rise in costs, fall in fiscal revenues, export earnings and incomes leading to higher debt service obligation.

The Monterrey Benchmarking

The IMF and World Bank (Bretton Woods) classifies 39 countries, out of which 11 is in debt distress and 16 as on high risk of debt distress. If the Monterrey initiatives held in Mexico in 2002 are considered as a benchmark there is some hope to meet the emerging challenges on debt which inter alia includes a debt sustainability frame work to launch a technical working group of relevant stakeholders, including Bretton Woods, bilateral and multilateral donors, ODA resources and Moratorium on debt. The critical issues such as debt service obligations for those affected by financial crisis, external shocks, conflicts, natural disasters, conclusion of all agreements under HIPC initiatives, setting schemes of independent arbitration and mediation, provision of further support in organizing adhoc meetings of debtor with creditors also needs to be addressed seriously.

Perspectives on GAP Analysis

There is also a challenge to bridge the GAP analysis to sustain debt in terms of 3 dimensions. The ‘Delivery Gap’ is envisaged as short fall between promised delivery on global commitments and actual delivery. The ‘Coverage Gap’ which is a short fall in actual delivery on global commitments which is a reasonable distribution of actual receipts across beneficiary countries and the ‘Need Gap’ which is country specific. Measuring gaps is a big challenge as the analysis, strategies, approaches and costs vary from country to country. Though the total commitment under HIPC initiative was $76b, upto 2009 only $58.5b was actually committed to cover the relief of 35 countries out of the 40 eligible for debt relief. Additionally $27b was provided under the MDRI but even that has fallen short by $4b at the end of 2009 under the HIPC initiative.

External Debt Servicing

A key indicator of external debt of LDCs is the ratio of external debt servicing ie., total foreign interest and principal payments during a year to exports of goods and services. The global crisis has affected the denominator of this ratio due to recession and fall in foreign exchange earnings and remittances in many LDCs. Every region of LDC was affected due to policy changes and choices of different degrees and borrowing opportunities. The ratio of short-term debt to total outstanding debt and the ratio of short term debt to international reserves are the two most common indicators of liquidity. The rise in quantum of lending by multilateral financial institutions from $36b in 2007 to $65b in 2009 has impacted and reflected in higher ratio of public debt to GDP in LDCs.

ODA as a Strategy

There is another option viable to mitigate the debt burden as part of Official Development Assistance (ODA) target of the development assistance committee of Organisation for Economic Cooperation and Development (OECD) countries. Even though aid reached $120b in 2009 it was less than 1% in real terms. The share of ODA in donor gross national income (GNI) was 0.31% well below the target of 0.7% and only 5 countries have exceeded the target. Aid to Africa with HIPC concentration was $44b in 2009 with a $16b gap as per Gleneagles, DAC meet held in France in 2005. The ODA delivery gap shortfall is estimated to be US $20b in 2010 (based on 2004 prices and exchange rates), which requires political will and commitment on the part of DCs.

DFQF and Aid for Trade

A serious concern is the provision of duty free and quota free (DFQF) market access for 97% of products emanating from LDCs and as of now only 81% has been covered since 2008. Access for LDCs products into DCs has also created more problems among LDCs as well. For example Bangladesh garment exports to US may be problematic to other LDC competitors, if most favoured nation (MFN) clause is used to discriminate others. In the case of Pakistan in the war against terrorism, garment exporters enjoyed quota and duty free entry into EU and US markets at the expense of Indian exporters not withstanding the various disguised forms of protectionism practiced based on labour standards as in the case of Tiruppur textiles in Tamilnadu. What is more important and lacking is to ensure aid for trade, which is not only the conventional market access in DCs any more, but capacity building in LDCs to develop and formulate trade strategies and help them negotiate more efficiently in international forums by investing in infrastructure and productive capacity. This can to some extent mitigate the problems of tariff escalation, preferential erosion of markets and decline in terms of trade for debt reduction. South -South trade is a viable option but not the last resort, but with more serious efforts and political will and commitment it could be a viable strategy for tackling the evils of debt, poverty, deprivation and malnutrition in LDCs.

WTO and Critical Issues

The Challenges under WTO and its inter-linkages with debt mitigation pertain to crucial areas as follows:

1. TRIPs : The issues for trade related intellectual property rights (TRIPs) pertains to trademarks, patent, copy rights, infringement, unfair competition, levels of protection, effective procedures, remedies, non-discrimination, moral and ethical issues, problems of pharma and drugs, nature of market structure and concerns of LDCs based on their traditional and indigenous knowledge systems and improved technology for climate change mitigation and adaptation. Protection of IPRs must not be at the expense of public health in LDCs nor restricting access to affordable medicines. The restrictions on use of IPRs reduces the ability of LDCs to develop their domestic technological capabilities creating a dependency syndrome and debt trap as they can no longer profit from freely coping and replicating technologies from abroad (reverse reengineering), the strategy adopted by DCs earlier.

2. TRIMs : The concerns for trade related investment measures (TRIMs) relate to technical regulations to be based on product performance than on design, descriptive features, suit local conditions appropriate to human, plant, animal, health and environmental standards. Technical standards vary from country to country. The problems of local content requirements, exchange restrictions, export performance requirements, level playing, performance clause, EU stipulations, mandatory certifications, manufacturers to adhere to technical files of DCs, register products of high risk, documentation and certification act as non tariff barriers. The regulation on foreign investment such as local content requirements and technology transfer has implications for local industry and employment in LDCs. This further aggravates debt concerns of LDCs by making them depend on DCs for technology.

3. GATS : In the general agreement on trade in services (GATS), the trade in services are known as Modes of Supply. There are four modes under GATS regime covering 150 services and 12 sectors under Articles IV and XI:2. The problems pertain to transparency, MFN status, national treatment, market access, lack of clarity and uniformity, asymmetry and its highly skewed nature in favour of DCs.
 Mode 1: Cross border which means service alone moves in the form of email, telephone, internet, courier, foreign banks, consultancy and telecom known as CROSS BORDER SUPPLY.
 Mode 2: The customer travels to supplier country. Individuals in one country makes use of services of another county eg. Tourism – CONSUMPTION ABROAD
 Mode 3: The company in a country wants to set up office, subsidiary, branch in another country as in the case of banks, financial services, shipping, air transport, insurance, accountancy – COMMERCIAL PRESENCE
 Mode 4: The Individual travels from ones country to another to supply his services which may be of temporary nature like skilled, unskilled, semiskilled and construction workers – MOVEMENT OF NATURAL PERSONS

4. AoA: Agreement on Agriculture (AoA), since agriculture is the back bone of many LDCs, it contributes to primary commodity exports, food security and employment, exports and income to poor and marginal farmers. Phasing out subsidies in DCs is very crucial for LDCs. Agricultural issues are confined to the Box Analysis of three types: (a) Red Box (prohibited): As in the case of DEPB, concession on interest on export credit, and use of domestic goods over foreign goods. (b) Blue Box (Amber): Actionable: If tariff, anti dumping measures adopted by a country affects or causes injury to domestic industry of another country, based on evidence action may be taken against dumping country. Besides production limiting programmes, monetary support for subsidies and government purchases at minimum prices are under scrutiny. (c) Green Box (Non Actionable): It is meant only for industrial research, R&D, food security, backward regions, pest and disease control, livelihood, disaster relief and environmental assistance.

LDCs Concerns on WTO

The LDCs concerns on debt impinge on tariff peaks, escalation and various subsidies practiced in DCs. For example in the case of Marine (Shrim) exports, the problems and controversy ranged from Tuna fishing, Dolphins, Turtle evading device, sanitary and psytosanitary conditions and now anti dumping. In the case of fruits and vegetables it was the presence of monochrotopus, pesticides and chemicals. Further, under the Agreement on subsidies and Countervailing Measures, those demarcated for research and public procurement as non actionable and lack of adherence to them in reality, subsequent tightening of import restrictions by stringent sanitary and psytosanitary standards by DCs also aggravates debt of small producers and farmers. The GATS provision on WTO rules of MFN and national treatment has to be extended to services such as banking, education, tourism, health delivery and water supply and sanitation based on non discrimination.. The DCs want to open up their financial service markets in LDCs by establishing of foreign financial institutions via (M3) and freedom of cross border for financial flows, instruments and services via (M1 and M2). The LDCs are willing and made compromises on all modes but M4 is of crucial significance to them involving international labour mobility, services and consumption abroad (Tourism and Services). Movement of persons from LDCs migrating to find temporary jobs for which DCs are not willing to be flexible and accommodative. Imposing conditions such as economic needs test, social security contributions, visa regimes, qualifications and social clauses are highly discriminative and unethical. The welfare effect of liberalization of labour according to UN estimates is 25 times greater than the flow of goods and services and capital. Eventhough under TRIPs knowledge has become a private commodity and is no longer a public good in a market economy, it remains a controversial issue. TRIPs has commodified knowledge presented by private property rights which according to Prof. Joseph Stigtlitz, Former Vice President of the World Bank and an ardent opponent of mindless globalization process, it is unjustified and unacceptable, as it reduces the economy’s dynamic efficiency leading to under utilization of many resources and aggravates poverty and indebtedness in LDCs.

Dimensions of India’s External Debt

India’s external debt is placed at US $273.1b at end-June 2010, an increase of US $10.8b when compared to March 2010. The main contributors are short term trade credits, commercial borrowings and multilateral government borrowings. The share of commercial borrowings was 27.3% at June end 2010, short term debt 21.2%, NRI deposits 17.6%, and multilateral debt 16.4%. Based on residual maturity, short term debt was 42.5% of external debt. The ratio of short term debt to foreign exchange reserves rose to 21% as at end of June 2010 over the previous quarter. US $ denominated debt was 59.8% of the total external debt stock, Indian Rupee 13.2%, Japanese Yen 11.5%, SDR 10%, and Euro 3.3%. Interestingly the ratio of foreign exchange reserves to external debt at June end 2010 came down to 101% from 106.4% at end March 2010 because foreign exchange reserves had risen marginally. Foreign exchange reserves provide a cover of 101% to external debt. Long term debt was at $215.2b and short term debt US $57.8b which was 78.8% and 21.2% respectively as at end June 2010. The share of commercial borrowing was highest at 27.3%, short term debt 21.2%, NRI deposit 17.6% and multilateral debt 16.4% in total external debt. The appreciation of US $ against major international currencies and Indian Rupee resulted in decline of $1.3b in India’s external debt over the quarter as the valuation effect.

External Debt: Cross Country Comparison

The data from Global Development Finance online data base, World Bank and international comparison of external debt of 20 most indebted countries reveals that India is the fifth most indebted country in 2008 based on GDP.
 The element of concessionality in India’s external debt portfolio was fourth highest after Pakistan, Indonesia and Philippines.
 India’s debt service ratio was third lowest after China and Malaysia in first and second position.
 In terms of ratio of external debt to gross national income (GNI), India’s position was sixth lowest, China having the lowest ratio.
 India’s position with respect to short term debt to total external debt was tenth lowest, Pakistan having the lowest ratio.
 In terms of short term debt to total reserves, India was fourth with China, Russia and Pakistan with lower ratios.
 The share of debt securities was 10.7% of total external debt of India at March end 2010, loans at 49% and Mexico was the highest. Indonesia has the largest share of government debt in its total external debt.

Conclusion

The paradox is that the World Bank study has already identified the nature and extent of the LDCs problems as well as their causes and those pertaining to debt and global crisis and even provided the solutions for the same. The analysis shows that in economic terms cutting barriers to trade in agriculture, manufacturing, services by a third would boost global economy by US $613b. Abolishing all trade barriers, the global economy would be boosted by $2.8 trillion and lift 320 million people above the poverty line by 2015 which is the time frame for achieving quantitative bench marks for MDG, goals of eradication of poverty, hunger, illiteracy and diseases apart from achieving greater gender equality, empowerment of women, environmental sustainability and global partnership for development. In tangible terms abolition of all tariff and non-tariff barriers would result in gains to LDCs by $182b for services, $162b for manufactures and $32b in agriculture. The study also shows that 70 percent of burden on LDCs manufactured exports results from trade barriers with other LDCs. The dilemma however is that the DCs embark on the gospel of free trade as a panacea and exigency for the ills of the global economy but has to ensure its sanctity, sustainability and stability in letter and spirit. However the illusion remains due to the problem of incompatibility and inconsistency based on double standards between preaching and practicing the rules of the game which in reality must be fair and equitable to one and all. The myth however is that it requires good governance structures and institutional framework, lack of corruption and transparency at the highest levels. Besides the necessary political will, coupled with commitment on the part of international institutions governed by DCs based on global interdependence, mutuality of interest, reciprocity, in reality remains a fallacy.

References

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National Development and Strategies, Policy notes, Economic and Social Affairs, United States, New York, 2008.

Reserve Bank of India Bulletin, India’s External Debt: Trend, Policy Changes and Cross-country Comparisons, October 2010, Volume LXIV Number 10, pp.2013-2039, New Delhi.

The Global Partnership for Development at a Critical Juncture, MDG Gap Task Force Report 2010, United Nations, New York, 2010.

UNCTAD Handbook of Trade and Statistics, Geneva, 2009.

World Economic and Social Survey, 2010, United Nations, New York, 2010.