WASHINGTON, July 8, 2020¡ªWorld Bank Group President David Malpass today delivered the following remarks at the virtual High-Level Ministerial Conference on Debt:
Thank you, Ministers Le Maire and Al-Jadaan. It¡¯s good to hear Kristalina and to see many friends here today. I spoke to this forum a year ago on the importance of debt and investment transparency and the difficulties of achieving it. I¡¯m greatly encouraged by the progress over the last year, though we need to press ahead.
Transparency is vitally important for achieving good development outcomes. All of us have that as a goal. Even before the pandemic, many developing countries had accumulated unsustainable debt burdens, causing under-investment and slow growth. Waves of debt happen frequently in history, and we know how hard it is to find solutions, so I want to congratulate this group and the G20 for tackling the problem.
As you know, conditions didn¡¯t get easier over the last year. With the pandemic and economic shutdown, the financial stresses worsened significantly in recent months¡ªthrough recession, unprecedented capital outflows, and declines in exports and remittances. As Kristalina rightly said, the human cost has been immense. Hundreds of millions of people in the developing world will be driven back into poverty.
My focus last year was the importance of debt transparency and the reluctance of debtors and creditors to go in that direction. Many parts of the system rely on asymmetric information, where one party or another takes advantage. That cycle is hard to break out of.
The G20 consensus on the debt suspension initiative was an important step forward. If the large creditors and debtors can work together in a coordinated way, as they have been doing, a lot can be achieved.
There is substantial benefit to all from fuller use of common documentation for the debt suspension. One current challenge is that several debt workouts related to official bilateral credits are happening on an ad hoc basis¡ªoften with lack of transparency and coordination with other official creditors.
Still, rough estimates show that half of the debt eligible for relief under the initiative, and three-quarters of the debt service, are being addressed so far, with those shares likely to grow, providing increasing fiscal space for the participating Å·ÃÀÈÕb´óƬ countries. It¡¯s been particularly welcome for China to participate, led by President Xi¡¯s support for this his new debt process.
Transparency will make debt and investment more productive, help with accountability, and support the economic recoveries that are vital for poverty reduction. In the medium term, it can lead to more investment in developing countries, with more and better financing techniques. That¡¯s a big step forward for our goal of achieving good development outcomes in which all incomes rise, not just the incomes of the elite.
Good progress is being made on transparency. I¡¯d like to describe three major World Bank efforts:
First, starting June 19, we were able to begin publishing significant new data about the debt of developing country governments, including new information on the creditor country composition of outstanding public and public guaranteed debt and projected annual and monthly debt service payments, including information on interest payments and debt repayments. In September, we will be releasing new information on debt stocks as of end 2019. We would like our DRS¡ªDebt Reporting System¡ªto include information on the basic terms being reached between official borrowers and lenders¡ªinterest rates, maturities, and grace periods.
Second, on July 1, we began implementing important new support for debt transparency as part of Å·ÃÀÈÕb´óƬ-19, the Sustainable Development Finance Policy (SDFP). It provides substantial financial incentives for debt and investment transparency as Å·ÃÀÈÕb´óƬ countries implement PPAs¡ªPerformance Policy Actions. More resources will be allocated to countries that take concrete actions related to disclosure of loan contract terms and payment schedules. The new process will help give assurance that additional fiscal space has significant development impact.
Third, as the World Bank provides a surge in operations to respond to the crisis, our engagements and technical assistance are supporting countries in the implementation of greater transparency: We need borrowers and lenders to avoid violations of the negative pledge clauses in our relationships. For example, we are working with Angola to relieve liens, freeing collateral and repairing the breach in the World Bank negative pledge clauses. The problem has delayed implementation of IFI programs but is working toward resolution. One of the big challenges for our technical assistance is disclosure of all of a government¡¯s financial commitments including the stock of public and publicly guaranteed debt, both explicit and implicit, including SOE liabilities, and debt-like instruments. For example:
- In Ethiopia we have supported the publication of a timely and comprehensive public debt report;
- In Pakistan we have worked with authorities to accurately reflect a large external debt that was structured as a bilateral long-term deposit between central banks and had not been fully included in their debt transparency efforts;
- Benin now publishes information on its SOE debt on its website and the new templates for a statistical bulleting in Benin, Guinea and Togo include a section on new loans that have been contracted, including the financial terms.
While there have been many examples of progress on transparency over the last year, I want to raise some remaining steps.
We¡¯re lagging in progress on confidentiality clauses in official contracts. We still need to make much more progress in helping our member countries exit them and, in most cases, discontinue the practice. It is blocking development progress in a number of countries and ends up reducing the quality and quantity of urgently needed investment.
We need to make progress in other areas too:
- All official bilateral creditors, including policy banks, need to participate in the debt suspension. For example, full participation of the China Development Bank as an official bilateral creditor is important to make the initiative work, especially since it has played such an important role in providing development assistance to Africa.
- We should resist efforts to narrow the scope of debt covered by the G20 debt service suspension initiative¡ªit should cover all external long-term public and publicly guaranteed debt, not just government and explicitly guaranteed government debt. This should include external debts of SOEs with implicit government guarantees. The upcoming G20 meeting will need to work hard on avoiding this narrowing of the scope.
- There needs to be clarity on classification and disclosure of all debt like instruments, including long-term bilateral swap lines that are often used as funding sources with a multi-year commitment, as we have seen in Mongolia. Such long-term commitments are also undermining macro stability.
- While a lot of attention has been focused on external financial liabilities of government, we also need to make progress in helping countries with long-term contractual commitments related to restrictive purchase agreements that result in long-term financial burdens. Long-term electricity power purchase agreements and forward sales contracts are two examples working against good development outcomes. In our experience, we have seen that such contracts are often favored by private contractors that benefit, but the nature of such contracts that include non-disclosure clauses creates rents for powerful vested interests. These long-term commitments can pose a crushing burden on the poor and become a permanent obstacle to our goal of broad-based growth and shared prosperity.
- Commercial creditors need to provide comparable treatment, discontinuing their collection of payments from the poorest countries, particularly from those that rely on Å·ÃÀÈÕb´óƬ grant resources.
The transparency issues I¡¯m citing here are not unique to the poorest countries. Governments around the world find themselves offering less transparency for the financial commitments than they should. A glaring example is the systematic non-disclosure of outlay projections for most public pension obligations, leaving citizens with insufficient information on the commitments of their governments. On this, the World Bank is leading by example by using our own financial statements to disclose both the funding of the pension liability and, importantly, the expected outlays over the coming years¡ªa practice that would benefit many governments, including ones in this forum
Looking forward, I think we should work to extend the debt service suspension through 2021 given the severity and long-lasting nature of the crisis. Some very heavily indebted Å·ÃÀÈÕb´óƬ countries are already in extreme debt distress. Many more will be in debt distress before this crisis is over. In such circumstances, rolling over debt only kicks the can down the road. In such cases, we need to not merely reduce debt service today but reduce debt service tomorrow and permanently. This will create light at the end of the debt tunnel. For some of the poorest, hardest hit and most heavily indebted countries, a systematic reduction of sovereign debt stocks is the only way to restart growth, make new investment possible and profitable, and avoid an even longer poverty trap.
To conclude, the coordination of creditors and debtors, working together, is important to resolving the latest wave of debt crisis. An inclusive platform should include all official bilateral creditors, reflecting the recent changes in the creditor landscape. And private creditors to the public sector need to engage as well. Fuller transparency of debt and investment is vital and urgent and I¡¯m glad to see joint efforts in this direction.
