Swapping foreign debt for tsunami relief

Swapping foreign debt for tsunami relief

Romeo A. Reyes, Jakarta

The magnitude of the natural disaster that the Indian Ocean
rim countries suffered from the catastrophic earthquake and
tsunami is said to be the worst in living memory. The Declaration
of the Special ASEAN Leaders Summit described the devastation as
"unprecedented". Over 150,000 are confirmed dead, a good number
of whom were from rich countries enjoying their holidays on Dec.
26, and still counting as dead bodies turn up from remote coastal
areas. Not surprisingly, the loss of lives, injury, and damage to
private property and public infrastructure are greatest in the
province of Aceh, where the epicenter of the earthquake was
traced just off its coast.

The outpouring of sympathy and support from the international
community for the surviving victims is perhaps unprecedented as
well. Many countries rushed to provide emergency relief.
Government and non-government organizations have been providing
food, water, clothing, shelter, medicines and health equipment
and personnel, along with the necessary logistics to bring them
where they are needed at the soonest time possible, lest the
survivors eventually become a fatality.

In addition to emergency relief already provided in kind,
governments and multilateral financial institutions through which
governments channel their assistance pledged to provide US$4
billion to the affected countries for continuation of emergency
relief and medium-term rehabilitation and reconstruction.

In any emergency situation, timeliness is as crucial as the
magnitude of aid. In this regard, it is not common knowledge that
translating pledges of aid into commitment and actual
disbursement takes time. Unless the amount pledged is already
authorized or appropriated by the donor country's
Parliament/Congress, a new appropriation law would likely be
necessary to commit and to eventually disburse that amount.

To commit the funds, paper work will be required to enable the
two parties to negotiate, agree, and sign the necessary
agreement. And to disburse the funds for procurement of necessary
goods and services for relief, rehabilitation and reconstruction,
certain conditions would need to be met to ensure that the funds
are used for their intended purpose and in a transparent and
competitive way.

All these would take time as they have to go through the usual
bureaucracies. If recent history is to serve as basis, e.g. the
1990 earthquake in Iran, a good part of the amount pledged will
likely be committed and disbursed late or not at all, unless the
donors take extraordinary measures to expedite translation of aid
pledges into disbursements. It is in this light that the offer
of debt relief by rich countries becomes more significant.

Debt relief essentially takes two forms: Moratorium
(suspension) and forgiveness (cancellation). Debt relief is
hardly useful for emergency relief as it will be too late before
any debt relief arrangement could be successfully negotiated for
any emergency. But it can be a useful and appropriate source of
funds for medium-term rehabilitation and reconstruction and
longer-term development.

At the recently concluded Special ASEAN Leaders Summit, the
initiative of creditor countries to declare a moratorium on debt
repayments as part of their assistance to the disaster-struck
countries was warmly welcomed. The details of this initiative
were to be sorted out at a meeting of the Paris Club of creditor
countries on Wednesday.

As the most heavily affected country, Indonesia should ask for
debt cancellation so that the debt service burden now and in the
near future will be permanently reduced, thereby liberating funds
that could immediately be used for rehabilitation, reconstruction
and longer-term development of the affected communities. Rather
than passively awaiting the results of the Paris Club meeting, it
should proactively pursue a debt swap arrangement with its
creditors whereby the amount of debt canceled would be matched by
an equivalent amount to be budgeted for rehabilitation and
reconstruction of damaged public infrastructure and other
facilities critical for restoring the livelihood of the victims.

It should offer assurance to its creditors that the amount of
debt canceled would be in addition to the amount of domestic
resources that it would have budgeted otherwise for Aceh
rehabilitation, reconstruction and development. It could even go
as far as offering a transparent monitoring system to ensure that
additional budgetary resources were indeed added rather than
simply substituted and that they were expended for their intended
purpose.

While a debt moratorium will postpone debt repayment into the
future and liberate funds that would otherwise be used for debt
servicing now, the amount liberated may only substitute rather
than add to the amount that the debtor government would have
budgeted from its own resources for reconstruction and
rehabilitation. Often, re-scheduling is confined to principal
payments while the interest is to be repaid as originally
scheduled. And to top it all, a moratorium on debt repayments
will only postpone the inevitable into the future.

Once the moratorium expires, the amount paid for debt
servicing will still reduce the amount that would otherwise be
used for medium-term rehabilitation and longer-term development
of the tsunami-affected communities.

It would do well for the Paris Club of creditor countries to
consider debt forgiveness or cancellation for countries that
suffered heavily from the tsunami catastrophe, especially
Indonesia and Sri Lanka, considering their heavy official debt
service burden and the huge amount needed for rehabilitation and
reconstruction of private property and public infrastructure.

Even with the so-called non-discriminatory policy across
debtor countries, debt forgiveness could be justified by the
magnitude of the disaster that befell these two countries.

Debt relief through debt forgiveness rather than mere
suspension of debt repayment for rehabilitation, reconstruction,
and longer term recovery and development of the heavily affected
communities would certainly be a more meaningful gesture of
sympathy and support from rich creditor countries.

In addition, it would be much more appreciated by the poor
debtor countries devastated by this awful natural disaster as it
eliminates rather than merely postpones the additional pain of
debt servicing.

The writer is Senior Adviser, ASEAN-UNDP Partnership Facility.
The views expressed herein are personal and do not necessarily
reflect those of ASEAN, its Member Countries, or UNDP.