Paris Club Debt Relief, Traditional Frameworks and Implications for Poor Country Debt

This paper examines economic rationale and efficiency effects of proposals directed at alleviating debt problems of poor countries. Key to the investigation is determination of whether proposed mechanisms tackle fundamental causes of the debt crisis. The paper finds that despite the enthusiasm for debt relief, the major proposals have not tackled issues central to debt problems of poor countries. The Baker plan and Schumer Watkins plan targeted wealthier debtors in Latin America who threatened integrity of the international banking system, while the Bradley Plan failed to identify who was going to bear the cost of the debt write relief. Proposals of the Brandt report calling for global correction of imbalances in the international economic system [also echoed in Mitterand and Lawson proposals] addressed resource needs of poor countries, but simply failed to get international consensus. Lopsided commercial debt concerns of the Brady Plan have also eluded poor economies the bulk of whose debt is multilateral. By rescheduling small amounts of debt at market interest rates during 1980’s high inflation, Paris Club relief under "Toronto Terms" and “ London terms” also failed to ameliorate poor country debt. “Naples Terms” innovatively offered deeper relief, but most poor countries were ineligible as a result of a large part of the debts of being multilateral. By providing funds to buy commercial debt, the IDA Debt Reduction Facility of the World Bank similarly eluded poor states. However, by increasing multilateral financing under SAF, ESAF at a faster pace the IMF has substituted the drop in bilateral assistance, and also facilitated debt stock restructuring. By disbursing IDA credits and resources of the Fifth dimension program the World Bank has also strengthened the move towards greater concessionality. However, preponderance of exogenous factors that constrained export performance, lack of sustained economic reform, and factors constraining the ability of poor economies to realise their full potential, multilateral debt service demands are rising in relation to exports. Poor countries always have the ‘willingness to pay’ but the fact that a large share of new multilateral disbursements is merely being recycled into multilateral debt service while demands of the development program are not met in full is affecting their ‘ability to pay’. The challenge facing the bilateral amd international financial community is to extricate poor countries from the multilateral debt trap.