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Multilateral Indexed Loans And Debt Sustainability

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  • Alessandro Missale
  • Emanuele Bacchiocchi

Abstract

We study the potential for introducing indexation on loans provided by multilateral lenders to low income countries (LICs), and thus whether a reform of their lending policy is feasible and economically justified. To this end, we provide new evidence for a group of 40 international development association (IDA) countries over the 1990–2010 period for three types of debt: (i) foreign currency loans indexed to real gross domestic product (GDP); (ii) foreign currency loans indexed to the dollar value of exports; and (iii) inflation-indexed loans denominated in local currency. We find that both GDP indexation and domestic currency lending are feasible policies, since individual country risk could be easily diversified in a portfolio of loans to IDA countries. The estimation of capital asset pricing model (CAPM) beta coefficients suggests that, while the risk of export-indexed loans is difficult to hedge, loans indexed to GDP or denominated in local currencies could be introduced at current interest rates; their risk premium is no greater than one per cent. The insurance that indexed debt might offer to LICs against macroeconomic shocks threatening their debt sustainability depends on the conditional covariances of GDP growth, real exchange-rate depreciation and net exports that we estimate as the covariances of the forecast errors obtained from a VAR model. The analysis shows that GDP-indexed or export-indexed loans would help to stabilize the debt ratio of the majority of IDA countries in our sample, but a larger number of them would benefit from a re-denomination of loans in local currency. A main lesson from our analysis is that a ‘one size fits all solution’ does not exist to the problem of stabilizing the debt ratio. This suggests that a reform of multilateral lending that is desirable to all LICs would be difficult to implement.

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Bibliographic Info

Paper provided by United Nations Conference on Trade and Development in its series UNCTAD Discussion Papers with number 209.

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Date of creation: 2012
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Handle: RePEc:unc:dispap:209

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References

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  1. Heiner FLASSBECK, 2002. "The Exchange Rate: Economic Policy Tool Or Market Price?," UNCTAD Discussion Papers 157, United Nations Conference on Trade and Development.
  2. Sebastian Dullien, 2009. "Central Banking, Financial Institutions And Credit Creation In Developing Countries," UNCTAD Discussion Papers 193, United Nations Conference on Trade and Development.
  3. S.M. Shafaeddin, 2005. "Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?," UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development.
  4. Bicchetti, David & Maystre, Nicolas Maystre, 2013. "The synchronized and long-lasting structural change on commodity markets: Evidence from high frequency data," Algorithmic Finance, IOS Press, vol. 2(3-4), pages 233-239.
  5. Martina Metzger, 2008. "Regional Cooperation And Integration In Sub-Saharan Africa," UNCTAD Discussion Papers 189, United Nations Conference on Trade and Development.
  6. Shigehisa Kasahara, 2004. "The Flying Geese Paradigm: A Critical Study Of Its Application To East Asian Regional Development," UNCTAD Discussion Papers 169, United Nations Conference on Trade and Development.
  7. S.M. Shafaeddin, 2002. "The Impact Of China´S Accession To Wto On The Exports Of Developing Countries," UNCTAD Discussion Papers 160, United Nations Conference on Trade and Development.
  8. Mehdi SHAFAEDDIN, 2000. "What Did Frederick List Actually Say? Some Clarifications On The Infant Industry Argument," UNCTAD Discussion Papers 149, United Nations Conference on Trade and Development.
  9. Manuel R. AGOSIN & Ricardo MAYER, 2000. "Foreign Investment In Developing Countries, Does It Crowd In Domestic Investment?," UNCTAD Discussion Papers 146, United Nations Conference on Trade and Development.
  10. Michael Geiger, 2008. "Instruments Of Monetary Policy In China And Their Effectiveness: 1994–2006," UNCTAD Discussion Papers 187, United Nations Conference on Trade and Development.
  11. Lucas Assuncao & ZhongXiang Zhang, 2002. "Domestics Climate Change Policies And The Wto," UNCTAD Discussion Papers 164, United Nations Conference on Trade and Development.
  12. Alberto Gabriele, 2004. "Policy Alternatives In Reforming Power Utilities In Developing Countries: A Critical Survey," UNCTAD Discussion Papers 168, United Nations Conference on Trade and Development.
  13. Robert Rowthorn & Ken Coutts, 2004. "De-industrialisation and the balance of payments in advanced economies," Cambridge Journal of Economics, Oxford University Press, vol. 28(5), pages 767-790, September.
  14. Marwan Elkhoury, 2007. "Credit Rating Agencies And Their Potential Impact On Developing Countries," UNCTAD Discussion Papers 186, United Nations Conference on Trade and Development.
  15. B. Andersen, & Z. Kozul-Wright & R. Kozul-Wright, 2000. "Copyrights, Competition And Development: The Case Of The Music Industry," UNCTAD Discussion Papers 145, United Nations Conference on Trade and Development.
  16. Yuefen Li, 2003. "China´S Accession To Wto: Exaggerated Fears?," UNCTAD Discussion Papers 165, United Nations Conference on Trade and Development.
  17. Alberto GABRIELE, 2001. "Science And Technology Policies, Industrial Reform And Technical Progress In China. Can Socialist Property Rights Be Compatible With Technological Catching Up?," UNCTAD Discussion Papers 155, United Nations Conference on Trade and Development.
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Cited by:
  1. Jörg Mayer, 2013. "Towards More Balanced Growth Strategies In Developing Countries: Issues Related To Market Size, Trade Balances And Purchasing Power," UNCTAD Discussion Papers 214, United Nations Conference on Trade and Development.
  2. Giovanni Andrea Cornia & Bruno Martorano, 2012. "Development Policies and Income Inequality in Selected Developing Regions, 1980–2010," UNCTAD Discussion Papers 210, United Nations Conference on Trade and Development.
  3. Vladimir Filimonov & David Bicchetti & Nicolas Maystre, 2013. "Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets," UNCTAD Discussion Papers 212, United Nations Conference on Trade and Development.
  4. Bua, Giovanna & Pradelli, Juan & Presbitero, Andrea F., 2014. "Domestic public debt in low-income countries : trends and structure," Policy Research Working Paper Series 6777, The World Bank.
  5. Stephany Griffith-Jones, 2014. "A Brics Development Bank: A Dream Coming True?," UNCTAD Discussion Papers 215, United Nations Conference on Trade and Development.
  6. André Nassif & Carmem Feijó & Eliane Araújo, 2014. "Structural Change And Economicdevelopment: Is Brazil Catching Up Or Falling Behind?," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 091, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  7. Shigehisa Kasahara, 2013. "The Asian Developmental State And The Flying Geese Paradigm," UNCTAD Discussion Papers 213, United Nations Conference on Trade and Development.
  8. Andrew Cornford, 2014. "Macroprudential Regulation: Potential Implications For Rules For Cross-Border Banking," UNCTAD Discussion Papers 216, United Nations Conference on Trade and Development.

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