A non-linear Macroeconometric Impact Model of External Debt Cancellation in Severely Indebted Low Income Country (SILIC) Economies
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.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0304002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.