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A non-linear Macroeconometric Impact Model of External Debt Cancellation in Severely Indebted Low Income Country (SILIC) Economies

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  • P. Kalonga Stambuli PhD thesis

    (special Summary for WUSTL archives)

Abstract

On 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.

Suggested Citation

  • P. Kalonga Stambuli PhD thesis, 2003. "A non-linear Macroeconometric Impact Model of External Debt Cancellation in Severely Indebted Low Income Country (SILIC) Economies," International Finance 0304002, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0304002
    Note: Type of Document - Text; prepared on IBM PC ; to print on HP;
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    More about this item

    Keywords

    international economics; external debt; debt relief; poor country debt; HIPC; Paris Club;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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