A non-linear Macroeconometric Impact Model of External Debt Cancellation in Severely Indebted Low Income Country (SILIC) Economies
AbstractOn the basis of models I developed to simulate mathematical relationships between external debt and fiscal and balance of payments variables my thesis evaluates whether debt cancellation will overcome the debt overhang and crowding out effects of external debt and allow Severely Indebted Low Income Country (SILIC) economies to meet their current and future debt service in full, without further debt relief, without further rescheduling or accumulation of arrears and without unduly compromising economic growth. I find that recipients of debt cancellation have not lowered their total indebtedness [as a condition for solving their debt overhang problem] nor have they leveraged exchange market stability, increased fiscal spending or higher import capacity [as a condition for solving their ‘debt crowding out’ problem]. Recipients of debt cancellation have also failed to improve debt service capacity, resulting in failure to meet current debt service obligations and continued accumulation of arrears. The principal explanation for this result is that debt cancellation is "pseudo" or "accounting" money and it has a crowding-out effect on new lending from bilateral sources. Since losses in new external disbursements undermine the capacity of countries to meet demands of their development programs and their current and future debt service in full [without further debt relief] debt cancellation forces countries to borrow more from non bilateral sources and therefore accumulate further debts. In the context of an endogenous growth style model where capital accumulation is the sole force driving growth these results underscore the desirability of implementing optimal rescheduling policy because implied guarantees of new external resources minimise the risk of debt repudiation, lowers uncertainty, and also allows the cycle of international borrowing to ensure that debts do not crowd out new investment. By reducing uncertainty, optimal rescheduling policy also contributes to lowering debt overhang and remains an essential part the gradual exit strategy from external indebtedness.
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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0304002.
Date of creation: 06 Apr 2003
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international economics; external debt; debt relief; poor country debt; HIPC; Paris Club;
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