We consider schemes which gear service on concessional debt to export earnings and oil import expenditures. The schemes operate by accelerating and retarding debt repayments, and are structured as overlays in which existing debt contracts are augmented by a set of floating for fixed swaps, where the swap prices are defined in terms of the world prices of the export commodities. We analyze the effectiveness of schemes through counterfactual simulation of the debt service of ten moderately or highly indebted commodity-dependent African economies.
The results are mixed. The schemes do ease the debt service burden and can also offset the variability of export earnings but only to a limited extent. The explanation for this mixed performance is that changes in export earnings are not highly correlated with changes in world commodity prices – both because of differences between world prices and the prices obtained by individual exporters, and because of quantity variation.
This paper is based on an earlier paper, “Realignment of debt service obligations and ability to pay in concessional lending: feasibility and modalities” which was commissioned by the World Bank. Versions of that paper were presented at a workshop on Debt Sustainability in Low Income Countries organized by the Commonwealth Secretariat in Accra, Ghana, June 2003, two subsequent World Bank workshops and an Expert Group Meeting on debt sustainability organized by the United Nations Economic Commission for Africa in Dakar, Senegal, November 2003.
We are grateful to Joshua Aizenman, Ron Anderson, Angelique DePlaa, Mark Dorfman, Vikram Nehru and Panos Varangis for comments on earlier drafts; and to Karina Garcia-Casalderrey, Shane Streifel and Joe Thornton for assistance. The opinions expressed here are the authors’ and do not necessarily reflect the official views of the World Bank. All errors remain our own responsibility.
“There is, on this subject of commodities, a sort of conspiracy of silence. There are no simple solutions. Many of the remedies introduced in the past – especially the major commodity agreements – have failed and we do not want to repeat these experiences. Yet there is no justification for the current indifference.” (President J. Chirac).
By Prof. Christopher L. Gilbert, Prof. Alexandra Tabova
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