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Will Debt-for-MDG projects Deliver?

Will Debt-for-MDG projects Deliver?

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Published by Miriam Azurin
Former House Speaker Jose de Venecia proposed a debt swap as a mechanism for achieving the Philippine's development goals while paying its huge debt payments. But is it feasible?
Former House Speaker Jose de Venecia proposed a debt swap as a mechanism for achieving the Philippine's development goals while paying its huge debt payments. But is it feasible?

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Published by: Miriam Azurin on Jul 30, 2008
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05/09/2014

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WILL DEBT-FOR-EQUITY IN MDG PROJECTS DELIVER?
 
|
 
PLCPD POLICY BRIEF
1
 
PLCPD POLICY BRIEF
WILL DEBT-FOR-EQUITIN MDG PROJECTSDELIVER?
Miriam Arnelle Azurin-Abaja
G
rotesque inequalities in income andliving standards characterized the lasttwo decades ending the secondmillennium. The 1999 United Nations HumanDevelopment Report revealed that while 1.3billion people struggled to live on less thanUS$1 a day, the world’s richest 200 peopledoubled their net worth between 1994 and1998 to more than US$1 trillion. The world’stop three billionaires alone possess more assetsthan the combined Gross National Product of allthe least developed countries and their combinedpopulation of 600 million people.
1
These inequalities spawned around 840 millionmalnourished and close to one billion extremelypoor and hungry people worldwide. More than880 million people lack access to health serviceswhile 2.6 billion people have no access to basicsanitation.This deplorable situation compelled worldleaders to lay down a new global vision forhumanity, called the Millennium Declaration,which they have committed to making a realityby the year 2015. The global imperatives of thisdeclaration are specified and encapsulated in aset of eight achievable goals called theMillennium Development Goals
(MDGs):
1 –Eradicate extreme poverty & hunger2 –Achieve universal primary education3 –Promote gender equality4 –Reduce child mortality5 –Improve maternal health6 Combat HIV/AIDS, malaria & otherdiseases7 –Ensure environmental sustainability8 –Global partnership for development.The
MDGs
have 18 time-bound targets,measured by 48 quantifiable indicators formonitoring progress.But the attainment of the
MDGs
depends onthe financing capabilities of the governments ofdeveloping countries.
 
Goal 8, in this sense, isviewed as the pipeline for realizing the
MDGs
because it lays down the framework for globalpartnership for development through an opensystem – increasing official developmentassistance
[ODA]
0.7% of rich countries’ GNP;technology transfer; and debt relief fordeveloping countries. Goal 8 sets the tone forthe elimination of poverty as a sharedresponsibility of both developed and developingcountries rather than the sole responsibility ofthe latter. These commitments were furtherstrengthened at the 2002 MonterreyConsensus.
G
Photo by: Luis Liwanag
Expanding choices, uplifting lives through effective population and human development legislation 
 
2
PLCPD POLICY BRIEF
|
 
WILL DEBT-FOR-EQUITY IN MDG PROJECTS DELIVER?
To estimate the resources needed to achieve the
MDGs
, the UN created the Zedillo Commissionand assigned it to present an
MDG
-costingreport in time for the 2002 InternationalConference on Financing for Development atMonterrey, Canada in 2002. The report revealedthat an extra US$50 billion a year, from the
ODA
of donor-countries and internal sources ofdeveloping countries, would be required to meetthe Goals.
2
Both the
Declaration
and the
2002 MonterreyConsensus
admit that huge external debt paymentsof developing countries are drawing out much ofthe resources needed for rigorous spending ondevelopment. Target 15 of Goal 8 seeks to endand of the debtor government, to make paymentat a higher price in exchange for cancellation ofthe debt.Debt conversion is a means to providedevelopment financing in an innovative manner,and implicitly includes some kind of debt relief.However, by no means should it be considered away to solve the debt crisis.
4
Debt swaps have different particular objectives.The main purpose of a debt-for-equity swap is toearn profits for an investor, while a debt-for-development arrangement aims to provideadditional funds for development activitieswithin a country.
History Repeating Itself
 A study commissioned by the United NationsDevelopment Programme (UNDP) estimatedthe minimum resources required to meet the
MDGs
in the Philippines by 2015, specificallyfor improving basic education, health, water andsanitation services and facilities alone, at P2.5trillion.
5
Despite these limitations, the Philippinegovernment states that it has “high” and“medium” probabilities of attaining these goals.
6
Many sectors believe otherwise, pointing to theincreasing share of debt payments that impactnegatively on spending for social services.
[SeeTable 1]
In 2005, nearly 33.24% of thenational budget went to payments for interest ondebts alone while only 28% was allotted to socialservices. If payments for debt principal wereincluded, allocations for these, siphoned off fromsocial spending on education, health, socialsecurity, employment, housing, land distributionand subsidies for local government units, wouldmake up around 77% of the national budget.The government proposes a similar pie in 2006.If resources for poverty reduction will continueto be rechanneled to debt payments and if thepopulation growth rate continues to rise, thenachieving the
MDGs
may end up as a mere pipedream. Although heavily indebted, the Philippines isnot included in the list of
HIPCs
eligible fordebt discounts because it has proven that it canindebtedness by rechannelingresources to poverty elimination.
[See Box 1]
The debt relief initiative forHeavily Indebted PoorCountries
(HIPC)
is dubbedas the most successfulinnovation that opens todeveloping countries thepossibility of freeingthemselves from unsustainabledebt burdens. To date, debtreduction packages have beenapproved for 28 countries, 24of them in Africa, providing$33 billion (net present valueterms) in debt service reliefover time.
3
Despite existingdebate on the efficacy of theInitiative, it was so widelyaccepted that it ended upbeing reflected in the
MDGs
and was defined in theMonterrey Consensus as a debt managementstrategy. Apart from the HIPC process, developingcountries have also engaged in debt swaps to easethe burden of debt payments. Some forms haveinvolved equities while others merely channelpayments into development projects. Whicheverform it may take, a swap, to be effective andsuccessful, should be based on the willingness ofcreditors to accept
less than face value for debts
INDICATORS OF GOAL 8,TARGET 15
Deal comprehensively with thedebt problems of developingcountries through national andinternational measures in orderto make debt sustainable inthe long term.
Indicator 42
Total number of countries thathave reached their HIPCdecision points and numberthat have reached their HIPCcompletion points(cumulative).
Indicator 43
Debt relief committed underHIPC initiative, US$.
Indicator 44
Debt service as a percentageof exports of goods andservices.
Box 1
 
WILL DEBT-FOR-EQUITY IN MDG PROJECTS DELIVER?
 
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PLCPD POLICY BRIEF
3
pay its debts and even avoids to default byputting into law an automatic appropriation ofdebt payments in its annual spending program.This becomes an impediment to maximizing theMDG targets under the HIPC framework.So House Speaker Jose De Venecia floated aproposal before the United Nations General Assembly in September 2005, apparently toexpand the debt relief to include the rest of the
HIPC
and middle-income countries. Theproposal, entitled “Debt for Equity in MDGProjects: A Philippine Proposal for Converting50 Percent of the Debt Owed by the 100Highly Indebted Countries to EquityInvestments in the Millennium DevelopmentGoals of the United Nations,” seeks a massiveconversion of debts into equities to attractinvestments for
MDG
projects in heavily-indebted poor and middle-income countries.The proposal further insinuates its legitimacyby stating that “the
HIPCs
make up a tinygroup—compared with the
absolute
number ofpoor peoples in the
so-called 
middle-incomecountries.”
7
The proposal to convert debt payments toequities reportedly stirred up the interest ofinternational financial institutions
(IFIs).
Ironically, the local community is
Table 1EXPENDITURE PROGRAM BY SECTOR, 2000-2006(In Million Pesos)2000 2001 2002 2003 2004 2005 2006ECONOMIC SERVICES 167,216 141,236 151,255 164,108 168,224 157,994 197,176
% of total for the year 24.50 20.18 20.39 20.22 19.4 17.2 18.72
SOCIAL SERVICES 212,982 217,217 230,495 235,568 250,205 254,263 293,390
% of total for the year 31.21 31.04 31.06 29.05 28.86 27.68 27.91
DEFENSE 36,208 32,782 38,907 40,645 42,683 44,173 52,427
% of total for the year 5.31 4.68 5.24 5.01 4.92 4.81 4.98
GEN. PUBLIC SERVICES 122,526 120,019 132,878 134,944 139,320 141,868 161,497
% of total for the year 17.95 17.15 17.91 16.61 16.07 15.44 15.33
NETLENDING 2,634 7,023 2,626 5,500 5,676 6,928 8,250
% of total for the year 0.38 1 0.35 0.68 0.65 0.75 0.78
INTERESTPAYMENTS 140,894 181,601 185,861 230,697 260,901 313,393 339,998
% of total for the year 20.65 25.95 25.05 28.43 30.09 34.12 32.28
TOTAL 682,460 699,878 742,022 811,462 867,010 918,619 1,053,277
% of total for the year 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Source: Budget Expenditures and Sources of Financing, DBM
 
unimpressed because of the repercussions ofthe proposal.Debt-for-equity swap
[D/E]
is not a new idea.It figured prominently among the creativesolutions proposed for the international debtcrisis in the 1980s, although its practice wasalready documented as early as 1965 in Brazil.
8
More than 40 developing countries havedefaulted on loans and have been forced toreschedule debts with commercial banks or findother means of relief. The Brady Plan, namedafter US Treasury Secretary Nicholas Brady,proposed a set of individualized market-baseddebt and debt reduction mechanisms. One ofthese is debt conversion, a practice formerly usedonly by private firms, until the World WideFund suggested in 1984 that it could be used forconservation purposes. A
D/E
swap converts the external debt of adebtor country into local currency funding forequity investment in that debtor-country. It isa multi-step and multi-party process
 
involving
 
atleast three parties: the debtor, the foreigninvestor and the creditor-country
[See Box 2]
.Commercial and bilateral publicly guaranteeddebt is the common type of debt that is eligibleunder the scheme. Typically, the investor (a bankor a private company) buys the debt at a

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