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.