Fiscal aspects of developing countrydebt problems and debt and debt-service reduction operations: a conceptual framework

Peter Montiel

No 1073, Policy Research Working Paper Series from The World Bank

Abstract: The causes and implications of the developing country debt crisis - as well as its solution - all have an important fiscal dimension. The crisis was triggered by the widespread perception that the public sectors in many heavily indebted countries were effectively insolvent in the international environment of the early 1980s. The actual fiscal response to the resulting liquidity crisis involved increased reliance on domestic financing, the inflation tax, and the curtailment of public investment. This created adverse adjustment incentives for policymakers and resulted in credit rationing, capital flight, assumption of private external claims by the public sector, and poor domestic investment performance. Solutions involve restoring fiscal health through a combination of debt relief and efficient fiscal adjustment, aimed at mitigating the burden associated with public sector debt service and minimizing the liquidity problems facing the indebted public sector. The debt and debt-service reduction (DDSR) programs implemented so far under the Brady Plan have provided only partial solutions, closing without eliminating the gap between the face value of the external debt and the present value of prospective public sector debt service. They have done so partly by reducing the former and partly by increasing the latter. Their contribution toward easing the immediate liquidity problems of the debtors has not been encouraging. The amount of debt relief embodied in Brady Plan programs enacted so far has not in itself been sufficient to restore fiscal solvency. Better-quality fiscal adjustment could greatly help improve the situation. The most important potential contribution of such programs, then, may have been the reduction - through the policy conditionality associated with resources provided by the international financial institutions - of the secondary burden associated with the internal transfer of resources to the public sector.

Keywords: Banks&Banking Reform; Public Sector Economics&Finance; Environmental Economics&Policies; Economic Theory&Research; Strategic Debt Management (search for similar items in EconPapers)
Date: 1993-01-31
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