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Overcoming Debt, Generating Growth

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The COVID-19 pandemic and related disruptions have intensified the debt crisis facing many developing countries. As of the end of 2021, the external debt of developing economies more than doubled from a decade earlier to $9 trillion. The situation is even more dire among the poorest countries — which slows growth and blocks progress on education, health, and climate action.

Slowing global growth and rising interest rates in response to inflation are worsening the situation, pushing more countries into debt crises. Meanwhile, efforts to defuse the crisis have proved insufficient. Debt transparency remains inadequate, delaying and obstructing restructuring, and nondisclosure provisions have proliferated.

The panel discussion, moderated by World Bank Group President David Malpass, covered issues ranging from the urgency of more debt transparency and faster workout agreements to the urgency of reforms that would equip countries to manage debt more effectively, freeing resources for investment in key areas. Ethiopia’s Minister of Finance Ahmed Shide and Jamaica’s Minister of Finance and the Public Service Nigel Clarke spoke about the experiences in their countries.

00:00 Welcome

01:09 Opening remarks by David Malpass, World Bank Group President

PANEL DISCUSSION
02:54 Debt context for the world
09:00 Debt restructuring process in Ethiopia
14:00 Debt Sustainability Analyses / Financing assurances
19:41 The case of Jamaica in tackling debt
28:43 Debt restructuring process: How to make it go faster
35:21 Monetary and fiscal policy in Ethiopia
41:04 Investments and rating agencies
44:33 Innovative tools in financial interaction / Diversifying risk
49:31 Live Q&A: Inflation and debt / The impact of climate change

58:28 Closure

[Paul Blake]

Hello and welcome to the 2023 Spring Meetings of the World Bank Group and IMF. My name is Paul Blake. I'll be guiding you through the next hour as we discuss avoiding debt crises and generating growth. Now remember, you can share your thoughts on these topics at any time using the #ReshapingDevelopment and can use the QR code to post your questions online. And if you're joining us online, you can head over to live.worldbank.org and join the chat there. Now I'm pleased to introduce you to our president here at the World Bank Group, David Malpass. His Excellency Nigel Clarke, Jamaica's Finance Minister and Minister of Public Service. Tina Vandersteel, Lead Emerging Debt Portfolio Manager at GMO, a US based global investment firm, the University of Chicago's Raghu [Raghuram] Rajan and His Excellency Ahmed Shide, Minister of Finance from Ethiopia. Thank you all for being here. David, over to you.

[David Malpass]

Thank you, Paul. Welcome to the 2023 Spring Meetings of the World Bank Group and the IMF. Under the theme “Reshaping Development for a New Era,” we'll be discussing how to unlock growth and poverty reduction around the world. We start the week off with debt sustainability. That's a topic that is key for growth and development. Around 40 low-income countries and a dozen middle-income countries are at high risk of debt distress or in debt distress. In addition, slowing global growth and higher interest rates globally are putting additional pressure on developing countries. The World Bank has advocated strongly for solutions to the mounting debt challenge facing developing countries. We've been providing fresh grants and highly concessional resources to countries in debt distress, often when no one else is providing financing. Along with the IMF and India, as the G20 president, we are co-chairing the global sovereign Debt Roundtable. It brings together a wide range of stakeholders and aims to bring consensus and recommend measures to accelerate debt relief. The in-person meeting of the Roundtable is tomorrow. Progress on debt has been stalled and it's urgent that we move forward promptly. Countries need to achieve transparent and sustainable debt burdens in order to restart investment which has slowed to a standstill. Today, we're bringing together this illustrious panel to discuss the latest difficulties in sovereign debt markets and possible solutions. I'll turn to Professor Raghu Rajan with my first question. And that's a general question. Professor, will you describe the debt context for the world and what the global context is of the challenge that we're facing now? Thanks.

[Raghuram Rajan]

Sure. Absolutely. Let me very quickly go through the obvious. Right. These are difficult times. Interest rates around the world have been rising. Hopefully, the Fed [Federal Reserve] doesn't have too much more to go. But clearly it seems as if the ultimate way inflation will be brought down is by a slowing of the economy in the United States, either because of higher rates themselves or because of financial sector credit contraction or some combination of the two. We are going to get slowing growth in this country, probably also in Europe where core inflation is still very strong and perhaps some slowing is necessary to bring those economies back on track, on the inflationary track. Of course, with higher interest rates, we've got higher real interest rates and on the cards, in times to come. For now, it's a little bit of a wash depending on what nominal interest rates are. But over time, we will have a period of higher real interest rates while we're trying to slow down the economy. Of course, higher real interest rates feed into the rest of the world's debt because they determine the rollover rates for the debt there and become a higher burden when you include to that credit spreads and so on. The risk of pattern in global capital is also concern for many emerging markets and developing countries in the sense that it becomes significantly harder to roll over debt. All this is stuff that, you know, stuff that you are cognizant of. What is more worrisome is the enormous spending needs that many emerging markets and developing countries now have. As you know they had a terrible pandemic. The lower middle class in many countries didn't have regular jobs certainly when there were lockdowns, many small and medium enterprises, certainly in my country, India, suffered tremendously during the pandemic. These months have been periods of slow recovery for large segments of the population, segments that didn't have regular employment and small and medium firms that didn't have regular business. In this time what we're seeing is an interrupted recovery as we have higher interest rates, difficulty in borrowing, interrupting the process of recovery. The bad pandemic is one source of concern and of course the bad pandemic leads to bad politics. One of the articles in the Financial Times today was how insurance companies are paying out more for unrest, for losses due to unrest. That's a feature that is emerging in many countries because the lower middle class is extremely upset with what they've been through over the last few years. That doesn't make for good politics. So, bad pandemic, bad politics and therefore bad often macro policies in a number of countries if already capital is a little worried that pushes capital even further away. We've also got interrupted development, the pandemic sort of slowed down development in a number of countries enormous development needs as we well know across the world. But add to that the concerns associated with climate change, the fact that farmers in Pakistan are still dealing with the consequences of the flood last year, that these are increasing catastrophes around the developing world that need to be dealt with. Often, they need quick spending, not so much on mitigation, but on adaptation and resilience, which are important for their continued wellbeing. All these imply enormous spending needs. Last point and I'll stop there, where's the available capital? With industrial countries basically having big spending needs of their own, both in terms of higher government spending through the pandemic, which will wind down slowly, but also the enormous new spending that a number of countries are contemplating on climate action. What is left is significantly smaller for the rest of the world. There's a crowding out happening, not so much of private capital, but about capital to the rest of the world. This is the environment. Hopefully. I've touched on the big themes in which we want to talk about the specifics of what's happening now.

[David Malpass]

Thanks. This is a huge problem of the absorption of, really, the whole world's capital by the advanced economies at a time when the developing countries need some kind of new investment in order to get over their spending needs and address the climate costs that are large. You didn't so much mention it, but we will be discussing it all week, is the debt restructuring that's so important. Because the countries are still paying so much for debts that were incurred over the last decade that it creates challenges for their spending side as well. Let's turn to Minister Shide. Ahmed, Ethiopia requested G20 Common Framework treatment a little over two years ago. It's still waiting to pick up steam. Tell us a little about the debt restructuring process. Why is that important? How does it affect your growth and your sustainability as a country? Thanks.

[Ahmed Shide]

Thank you, David. First of all, I would like to express my appreciation for the G20 initiative. This is a timely initiative and it is very important, particularly given the challenge we are undergoing as the developing countries like Ethiopia. But the process, as you have said, took more than two years since the initiative has been announced. We have applied it and the process was very, very slow, and that is one of the challenges. Ethiopia's macroeconomic imbalance has widened recently due to internal and external pressures and the shocks that have challenged us, the drought, the war in Ukraine, all have significant impact in terms of deteriorating external positions and declining of international reserve. That's why debt treatment and also additional reform measures are very fundamental to close the gap in terms of macro imbalance and to move to sustainable trajectory. I would like to note that also for the last four years, since the new government has been in place the last five years, we never had any borrowing when it comes to non-concessional borrowing. we have a very stringent requirement on non-concessional borrowing limits, and we have adhered to that one to make sure that we have a fiscal discipline. We are currently working with IMF and World Bank in restoring a macroeconomic imbalance through our own homegrown program reform program, which is very much important to address the Imbalance we are having. Ethiopia's situation, in terms of the debt situation is different from Chad, Ghana and Zambia because Ethiopia does not have any external payment areas so far. Our debt parameters are very clearer and more straightforward. We do not have any challenges that other countries do with questions about presidency and domestic debt holding as well. Ethiopia's biggest challenge is most of the repayment of the loan has to happen within the coming few years. 

[David Malpass]

The coming what? 

[Ahmed Shide]

The coming few years. We need to repay a lot of debts. Significant chunk of the debts is going to be repaid within the coming few years. That is going to put us in a very significant pressure given the export level which has to yet to grow. Therefore, debt service to export ratio is also deteriorating. The external imbalance, which is happening due to global food shock and other commodity price increase, has exacerbated our external positions. So, Ethiopia's challenge is not only internal, it's also an external challenge which has exacerbated, of course, the conflict and the drought and all has contributed also to the shocks we are enduring. That's why it could have been because of our reform measures that we built some level of resilience in our system. Even the situation could have been worse without the reform. The treatment we need in terms of debt treatment is not complex. What we need is for the decision to come through quickly. We had a fruitful discussion with IMF team recently for a potential program. We are continuing to discuss with both IMF and the Bank for a potential program and I expect the DSA should be shared with the creditor committee. But we need to move very quickly. The time is of urgency, and I think slowness in the Common Framework in the giving of DSA data to creditor committee. More coordination between the Bank and IMF and creditor committee as part of G20 Common Framework is very vital. Thank you, David. 

[David Malpass]

Yeah, thanks. You mentioned the DSA. The Debt Sustainability Analysis is a product jointly done by the World Bank and the IMF and gives some concept of what the financing needs are. Each country is quite different. Ethiopia has more of a liquidity problem. 

[Ahmed Shide]

We don't have a solvency problem. Mainly it's a liquidity, short term liquidity challenge. 

[David Malpass]

Short term liquidity challenge that would come out. So, one of the things we're pushing strongly for in the Debt Roundtable tomorrow is early sharing of the DSA with a more inclusive group. It's been kept private within the IMF and World Bank for all these years. When it's a vital document for all the creditors to think about. The country itself can benefit from looking at the debt sustainability analysis and the private sector. I'll come to Tina Vandersteel. Do you look at DSAs, Debt Sustainability Analyses, put out by the IMF and the World Bank? How do they affect your thinking on countries? And the bigger picture question what would be good for catalyzing new investment into poorer countries, into developing countries? We think a faster debt restructuring process would actually be helpful but what are your thoughts on the timing of a debt restructuring process, whether it's a good idea and then what documents would be helpful to get it done? 

[Tina Vandersteel]

Absolutely. Thank you for having me. To be clear about representing the private sector here, I work for an asset management firm. We represent savers of different varieties, including pension funds and endowments, sovereign wealth funds, that type of thing. Generally, when people think about the private sector, they're thinking about, well, how does the private sector think about lending to an emerging country in the first place? If you start at the highest level, the asset allocation level, they see emerging debt as an asset class like any other lending asset class. Corporate credit, either investment grade or in this case, sub investment grade. And what you're going to look for is a return that is in excess of expected credit losses. So, sovereigns have defaulted over time. We have a lot of history of sovereign defaults and so you can project some of those, and a DSA is a terrific way to socialize the IMF and World Bank’s thinking about the sustainability of the debt. Because if you think about it from a lender's perspective and you know that there's some chance that the country will run into trouble, it's good to know whether or not the IMF or World Bank thinks that. What are the assumptions that they're making? Because obviously, debt sustainability is a fluid concept conditional on the macroeconomic environment. Debts that were sustainable before the pandemic may not be after the pandemic, but unforeseen things can happen. So, for sure, as an anchor, it would be critical. From the point of view of transparency, which is of course a key theme in the Common Framework, investors would love at all stages, more transparency. More transparency lowers ex-ante debt interest expectations that we would have because we have a full picture of what's going on. 

[David Malpass]

Well, I'll ask a specific on that. Do you see the financing assurances that are given to the IMF and the World Bank as an IMF program is put together? Because that becomes a critical thing of what do the various creditor, the official creditors commit to doing over a period of time?

[Tina Vandersteel]

Well, so if I think about the last 15 years or so, how that has happened has evolved, right? Let's say the class of debtors that we're talking about right now are the ones that are very low income. They have a reasonable chance of debt distress. How, for example, the IMF's thinking on that evolved through Greece, was a pretty big change, right? It was “we will not lend into this kind of situation except in a systemic idea.” So, the policy changed through 2012 and then changed again through 2016 to say, “we won't lend, but we will allow others to lend other official creditors.” And so, for example, China and Saudi Arabia became big lenders in those situations. As investors, private sector investors, we have a very good history of understanding the seniority and the expectations of IMF-World Bank lending, but we don't have a good history and understanding of what either SOEs [State-Owned Enterprise] lending by the Chinese or swap lines extended, how that will be treated and whether we will be subordinate to that. All of those things play into the price we would expect for the debt ex-ante.

[David Malpass]

That raises a whole another round of questions. That's really good. For people's background, I guess, the way I think in really simplistic terms. In a bankruptcy process, there's debtor in possession, so after the bankruptcy is declared, then new lenders can come in and they have seniority over the old lenders because they're doing something useful. And it's agreed on by the group that they can come in and make extra loans. But there's not that kind of organized process with regard to sovereign restructuring processes. You don't know, at the various stages of a restructuring, whose credits are going to be treated as senior to the ones you've lent to. Well, that's interesting, and I hope at the Roundtable this week we can discuss things like that. We do have on the table the question of how are arrears going to be treated during the restructuring process. So that can at least give a little bit of a hook into that. Well, let me turn to Nigel, a very successful Finance Minister and senior government minister in Jamaica. You undertook reforms, and I don't know whether how early you started within this process, but Jamaica is notable in having tackled the debt problem earlier. We've encouraged and really encouraged countries to go, as soon as they see a problem, begin talking with people about how to get out of the problem, because otherwise they fall into a debt trap. It's not as if it's going to get better. Jamaica broke out of that starting in 2010 through 2013, and it had to do with domestic debt, which is an issue facing a lot of developing countries. The government may borrow from banks, domestic banks, and that itself creates its own set of problems. How did Jamaica break out of that? What lessons do you have for the group on debt restructuring? 

[Nigel Clarke]

Right, so Jamaica had an experience of about 50 years in a debt trap, right? For a very long time, we had high elevated levels of debt for a variety of reasons, which we won't get into here. We learned through that experience that ultimately; high debt introduces fiscal rigidity and chokes your ability to respond to crises. And as a result, crises last longer, they become more intense, they become deeper, and you don't have resources to invest in social expenditure and growth inducing capital expenditure. 2010, we made a stab at it to restructure domestic debt and to engage in a suite of reforms, it got interrupted and we went again in 2013 and again did a domestic debt. 

[David Malpass]

That means you recapitalize banks, or what does that mean? 

[Nigel Clarke]

No, we didn't have a banking sector issue in 2010. We had a banking sector issue in the 90s, and the cost of intervening was 40% of GDP. It was socialized borne by the government. In this, let's say this last 25 years or 30 years of our debt experience is inextricably linked with the banking sector failing in the 1990s. For your audience, by comparison, the financial sector crisis here in the United States in 2008 to 2010 was about 9% of GDP. 40% of GDP. And it wasn't a market solution. The government took it on, and we just never worked that debt off, and it brought us into crisis. We look at the period 2010 to 2023 as sort of one period, but we look more closely at 2013 to 2023, because in 2013, Jamaica was on its knees. If I were to summarize, I would say, in the context of social consensus about the need for reform, government can't do it alone. But broad societal consensus, unions, business, academia, government opposition, Jamaica resolved to move in a different direction, and a combination of laws, institutions, and principled decision making underpinned by higher levels of fiscal transparency. Just briefly, on each of those. Laws, passed a series of laws on revenue administration, laws that reform public. The public pension system was reformed in 2017, which led to contributory pension arrangements, laws to do with moving from direct to indirect taxation and so forth. Institutions we would have brought into being, institutions like an independent fiscal commission, which is in the pipeline, deepening fiscal transparency, and given it an institutional structure apparatus, we made our Central Bank independent. Jamaica is characterized by huge levels of fiscal dominance, where the Central Bank didn't have any choice but to pursue monetary policy that allowed the government to keep borrowing. We dismantled that, and that sent huge signals to the private sector. As far as laws are concerned, we instituted fiscal rules that the government, over the past ten years, governments have followed that targeted a fiscal balance each year that's consistent with a medium-term debt objective. But you can't just put an institution in place or enact some laws and then say, hey, my work is done. What you need is active principled decision making, because the events, dear boy, events, as the former Prime Minister of England said, that come your way can't be predicted, and you have to apply principal decision making to maneuver through those events. Take what happened over the last three years. Jamaica got its debt down from 147% of GDP all the way down to 94% of GDP over a seven-year period. And then… COVID-19 comes, a contraction by 10%, debt goes back up to 110. Alarm bells go off, because before we went to 147, the train stopped. Before that it was 115%. So, at 110%, are we going to go back? No, we escaped from our fiscal rules, but our policy approach was targeted and temporary, unlike what we saw in many parts of the world where it wasn't targeted, everybody got, so to speak, and it wasn't temporary. Targeted and temporary allowed us to maneuver through the COVID-19 crisis and maneuver through the inflation crisis that followed, with policies that were carefully calibrated and as a result of principled decision-making, supported by fiscal transparency, social consensus, institutions and laws. Jamaica has the distinction, as at the end of 2022, of being, with the exception of Guyana that discovered oil, the only country in the Western Hemisphere that can say the following three things. One, economic output in real terms is higher in 2022 than it was prior to the pandemic. Two, unemployment is lower in 2022 than it was prior to the pandemic. And a few people can say that, but no one can say those two. Plus, the third, our debt, as of 2022, was lower than prior to the pandemic. Our debt to GDP ratio lower than prior to the pandemic. It's a combination of those that I just described very succinctly that would have allowed us to achieve such an outcome. 

[David Malpass]

I'm glad you mentioned subsidies. We see worldwide the high cost of subsidies that are not targeted and also ones that persisted much longer than they'd been intended. That's a core of the fiscal challenges facing many countries. Did investors come back? So, after the 2013 crisis, did investors take notice?

[Nigel Clarke]

Well, it took a long time for people to believe. Important signals had to be sent. Prior to 2013, Jamaica missed its fiscal target every year in the previous ten years. Every year, with exception of probably one year. Since 2013, we have hit our fiscal targets every single year, right? 

[David Malpass]

22, 23 goes up. 

[Nigel Clarke]

Confidence eventually goes up because the signals that are being sent and we know, we saw earlier this year in other parts of the world, how important signals are. Let's talk about this recent period of COVID-19. The signals that the government sent about being targeted and about being temporary escaping from the fiscal rules, but going right back after the storm had passed and not waiting too long when the Ukraine— Sorry, the inflation crisis came. Resisting the temptation to implement policies that are characterized by huge amounts of fiscal leakage because instead of targeting to the bottom half of the country where the need is greatest, everybody has needs. But it's about prioritizing where the needs are greatest. Those signals were sent to investors, that this country is serious. We are not only putting institutions and laws, but we're being principled in our decision making. That allowed for the economic unemployment results I just described. 

[David Malpass]

Thanks much, Tina, short answer. Do you invest in Jamaica? 

[Tina Vandersteel]

We certainly do. 

[David Malpass]

And in Ethiopia? 

[Tina Vandersteel]

We certainly invest in Ethiopia. 

[David Malpass]

Interesting. We'll come back to that. Raghu, comment on anything you've heard specifically or if you want on the debt restructuring process, anything that you think should be done to make it go faster. 

[Raghuram Rajan]

Well, let me just start with the debtor in possession idea that's floating here. Clearly, countries that are in desperate need and don't have a program in place would benefit from something which allows them access to finance in the short run, prevent a lot of damage to their people, prevent the political upheaval that usually emerges at such times. There are two issues there, however, right? One is you don't want the debtor in possession financing to be invoked to get financing, which prolongs the old problem, that they got into trouble because they overinvested in grand projects which led nowhere. They spent a lot on that. You don't want those to be completed off the backs of people who are suffering. What you want is that to be stopped while money is flowing in the right direction. It does mean a certain kind of targeting of the resources that are raised through debt and possession financing. how do you get that? That's very important. Second, I do think that the time for debt and position financing is when you lose access. The sooner it is to that point of lost access, the better it is. How do you determine whether the country has lost access? That's the other issue we need to think about. But I think it's a great idea. It does raise the overall question of whether priority structures over and above the preferred status of the IFIs is something we need to be thinking about. It does open a whole new set of issues. Do countries sort of dilute previous lenders by giving new lenders higher priority? Does this become then a process which is not credible? 

[David Malpass]

Aren't we already doing so? That's the swap line point that was made. If an external creditor comes in with a central bank swap line, doesn't it take precedence over even IMF and World Bank in terms of the credits, the capital stack? 

[Raghuram Rajan]

Absolutely. I think what you're asking for is we need to bring order to this. What is the structure of priority? Under what circumstances does a particular line get priority over the others and how does this affect the overall resource envelope? That's something that needs to be discussed. Of course. At the back of it is also what's the restructuring process? How does that take into account all these different priorities? That, as you know, is a big fraught issue. 

[David Malpass]

This is one of the themes for the Roundtable tomorrow, is the predictability of the process has value to quite a few of the participants. Tina raised it, the private sector is happy to consider and analyze situations if there's some predictability in what will happen. You're describing it as “we don't know yet how that will all work out.” 

[Raghuram Rajan]

Right. Trying to figure that is important. Two other small points. One is we talked about targeting and temporary and targeted. What is disappointing is how we've lost track of that in industrial countries, the temporary and targeting aspect of it. And part of I think the reason why that is happening is because the politics in industrial countries have become so much more fractured. The consensus that “Here's how we approach this particular problem” has sort of broken down because there are different constituencies who benefit. Instead of saying we targeted to this constituency and not to that now, the answer is we target it to everybody. Of course, that implies much greater spending. I mean, think for example, about how we are approaching climate action, because it's so hard to get carbon taxes in this country. It's all about subsidies. But clearly that implies an enormous amount of spending from the government to incentivize something which could be done more cheaply through taxes on the private sector. That's a place where resources, probably, are being used in less than efficient ways. Last point, we absolutely need to think about what happens post the restructuring, right? As you said, lots of developing countries in deep stress. But we also know that there were a lot of countries in deep stress 20 years ago, and we did the debt forgiveness, which created space. Some countries used that space very well, others did not. The question is, at a time where political buy-in for this kind of restructuring is difficult from the government side, of course, the private sector side doesn't want this to continue happening, otherwise it loses interest in financing. How do we get countries to commit to a process by which, post the restructuring, there is sensible spending going forward? What are the institutional structures that need to be built with the country itself? Keeping control over the process by which debt rises, especially given the frequency of catastrophes will probably increase, spending will be needed, but you need to still keep buffers for future events. 

[David Malpass]

This is a really important point of, okay, if we could resolve the debt, the past debt crisis, how could we create an environment into the future where more borrowing could be done on a safer or on a more sustainable basis? We are strongly advocating transparency, which was missing. You referred to the previous debt, the HIPC Initiative, the Highly Indebted Poor Countries Initiative, which then was supposed to create an environment that it wouldn't happen again in, and yet it didn't work. We want to strongly encourage more transparency in the new lending that comes on stream. Also, within IDA, we have the SDFP, the Sustainable Developing Finance Policy, which encourages countries to have a sustainable relationship in their new debt. Ahmed already mentioned Ethiopia has not been doing non-concessional borrowing, which was at the core of the post HIPC environment. The idea was you were not supposed to borrow on a non-concessional basis after getting debt relief and that would make you more sustainable into the future. Ethiopia is trying that now. But he was very careful to say that that's part of the new government of Ethiopia is trying not to do concessional borrowing. Let me turn to you, Ahmed. There have been quite a few points made. One is the need for targeted subsidies. Can you do that? Then, I'll also mention the fundamental separation that was done in Jamaica of monetary from fiscal policy in order to create a sustainable whole. Can Ethiopia do that? You have a heavily mixed monetary and fiscal policy where the monetary policy subsidizes fiscal and has a dual exchange rate. But the question really is what kinds of reforms do you envision as new international resources come to bear in Ethiopia? 

[Ahmed Shide]

Thank you very much. First, our approach is that since the new government has been in place the last four years, we have been doing our own homegrown economic reform program. Its fundamental objective was to sustain growth within the macroeconomic balance framework. We have analyzed the problem of inflation, the forex challenge, rising debt risk as a binding constraint for the economy at large and for attracting private sector investment. We have been rebalancing the role of the state in terms of the economy. We have been creating more space for private sector led growth, which is very important. On subsidies, for example, we are downsizing the wasteful fuel subsidies, which we have been giving generally to the whole public. Now we are moving toward a targeted fuel subsidy. For the first few years of the reform, for example, in terms of monetary finance, to call fiscal policy, we have fundamentally constrained the National Bank borrowing to the government, and it has been significantly reduced. But due to multiple challenges of domestic conflict, drought and desert locust, and also international food shock, and also commodity price increase, we have to somehow finance these growing needs. Even now, the need for the reconstruction and recovery requires a significant amount of financing, which has to be both domestic and international. That's why our partnership with Oil Bank and IMF is very important and critical in this time in our history where we are moving toward bold reform, but at a time where these multiple challenges require us to spend more on basic development and social spending as well. I think the G20 Common Framework are very commendable, but the process took much longer, and we have been penalized as a result of applying for it. We pay the cost. For example, our Eurobond price speed has increased, and we have been downgraded by rating agencies. This has been huge cost to the economy and therefore, yet the benefit of the G20 Common Framework has yet to come. I think the issue is flexibility for the countries is very important. One size fits all shouldn't have to be applied. Our data are very transparent we have few major creditors, it's very clear. DSA calculation should not take even much more time. It's very easy process. Our situation is different from other countries’ situations. Each country's specific context has to be dealt with specifically. Therefore, real time coordination between IMF, World Bank and G20 Common Framework Secretariat and the Creditor Committee are very important in terms of sharing the DSA data, and also treating countries differently according to their problems is very important. There has to be also time-bound clarity over when this process is going to deliver. Therefore, I think this is very important. Ethiopia is committed to address the macro imbalance, particularly the exchange rate reform is very important. The current exchange regime is not sustainable as well as it is distortionary to the economy. We need to boldly address it. But we will continue with our discussion with IMF team, with World Bank in terms of how boldly to move forward. But Ethiopia also needs significant support both on fiscal front, on financial sector modernization, so that we can lay the foundation for sustainable private sector led growth. Thank you. 

[David Malpass]

Yeah, thank you. We heard the context from Nigel of 25 years falling into the deep debt trap. Then it took some years of confidence building and we're trying to accelerate as much as possible in Ethiopia, that confidence building period. Also, your point is of interest to everyone, as the interest rates go up, one of the phenomenon in the world is several currencies have been weakening and that digs the debt trap deeper as the currencies weaken. So, breaking out of that is a critical part of that steps forward. To Tina I'll ask, Ahmed was mentioning the bold reforms and the Eurobond downgrading. Tell us any of your thoughts. What do you want to invest in? Do you look at rating agencies when they downgrade? He's raised this problem that if you declare for the Common Framework, the downgrade is rather quick coming out of it because there's not certainty in the process and it may take years and years. So, the downgrade comes, the investors go away. Any reflections on that for us? What should we do? I mean, that's an important point. 

[Tina Vandersteel]

Actually, to me, it's fascinating the contrast between Jamaica and Ethiopia in a number of different respects. Mostly the debt path dependency. So, Nigel's described this hump and coming back down. So, by the time you were borrowing the last Eurobonds, the 25s and the 48s, back in 2015, you're single B-rated and you're paying about 500 basis points of sovereign spread. Ethiopia had its debts wiped out under HIPC early in the years later comes to market at a single B rating, roughly at a sovereign spread of 435. Right? Jamaica now at 300. A lot of fiscal discipline. You're starting with very high debt coming down, you're starting with very low debt coming up. Right. Jamaica takes the opportunity to pre-finance upcoming liabilities. So, the 25 I think are mostly paid off at this point. So, this debt cliff, that probably in 2018, 2019, nobody was too worried about, but you throw in a couple of giant shocks, and then suddenly a rollover of one big looming maturity, December of next year seems like a big deal. Nobody could have forecast that it would have gone this way. From the point of view of an investor, we're only kind of interested in the credit rating. 

When I say that, that's because a credit rating is designed to tell investors the probability of there being an event, but it doesn't tell you the severity of the event. So, in your case, because you face a rollover challenge, you don't have very high debt levels, then any preemptive type restructuring that other countries have done, in fact, Jamaica did itself back in 2013 or so. A preemptive restructuring can end up with relatively high NPVs, such that investors are fine to keep going. That's how we would see it as investors. 

[Ahmed Shide]

The process being slowed, as part of G20 Common Framework with the creditor countries, is also affecting, for example, how to restructure the upcoming, the big payment we have to face in 2024 in terms of $1 billion Eurobond. Time is an urgency of essence. In terms of G20 Common Framework. 

[Tina Vandersteel]

Yes, I would agree. 

[David Malpass]

And do you think a Eurobond rescheduling is possible just to put you on [Crosstalk] 

[Tina Vandersteel]

Sure. It happens all the time. 

[David Malpass]

It happens all the time, okay. 

[Tina Vandersteel]

If I think about Uruguay, there have been some very useful preemptive restructurings. 

[David Malpass]

Let's spend a minute, if we can, on tools. One was mentioned. Jamaica has pre-funded its 2025, I heard Tina say. Then I have a note here that PetroCaribe debt, you were one of the first to buy it back at a discount. You also, I know, working with the World Bank, you've done a catastrophe bond. Any reflection? Do you have any other tools that you're contemplating? The world wants to be innovative in terms of its financial interaction. You've done that. Are there more things in line that could be done? 

[Nigel Clarke]

Good question. Jamaica is very proud of being an innovator. Those are two very good examples. The PetroCaribe buyback, we were one of the first country, if not the first country, to actually engage in such a transaction. We became last year, the first small independent country in the world to independently sponsor a catastrophe bond with World Bank assistance. Jamaica is comfortable with taking a leadership position, has a self-confidence to go forward, even where no other country in our region is happening to do the same thing. We do believe that there are other areas in which we could continue to innovate. One of the things that we're trying to work on is to get other countries in our region interested in a catastrophe bond. Instead of Jamaica doing it on its own, and we did this for the demonstration effect, we have been having dialogue with the World Bank's assistance with other countries in the region. If we could, in this era where climate change has gathered such attention and focus, if we were to go to the market with a single catastrophe bond that covered the region, the pricing would be better, the coverage would be higher, and that would be an innovation in that particular space. 

[David Malpass]

Yeah. As people know, if you can spread the risk, then it improves the pricing. So diversifying risk is a key part of this. We've pushed strongly for infrastructure as an asset class that would be diversified. I see Paul coming on, but Raghu last word, and then we'll go to Paul. 

[Raghuram Rajan]

Just from this last point about innovative financing, I wonder if entities like the World Bank, the IMF, goes out to try and raise money when there's a catastrophe, worldwide catastrophe, and that's when it's the hardest to raise money from its shareholders and so on. Could you create a buffer fund where you take commitments in good times? Everybody's willing to lend, just like private equity raises a fund. You raise a fund, but you don't spend it. It claims on endowments, private funds, etcetera, which you draw down in bad times, because, then, there are needs and there also in the private sector may be very real financing opportunities, but now you have the fund which you were raised in good times. It means a certain amount of private sector involvement, but it does move you away from having to rely on governments and trying to raise all the money in bad times. 

[David Malpass]

Yes, and certainly we do that. IDA itself issues a massive amount of bonds on international markets, 10 billion dollars so far. But that number is going up rapidly. And then it can front load in the event of a crisis, as we regularly do. Also, I'll mention the Cat DDO instrument, the Catastrophe Deferred Drawdown Option, that we really encourage countries to do. That means they basically arrange a line of credit in advance with the Wor0ld Bank. Then, if there's an earthquake or if there's a tsunami, they are able to get very fast disbursement. We recently did one in the Pacific Ocean in a matter of five days after the crisis hit. So, there are various mechanisms to do that, but certainly we could and should expand those dramatically. We're working to do regional instruments that diversify the risk. And as I mentioned, on infrastructure, one of the big opportunities for the world is just recognizing that there are trillions of dollars of profitable assets that are distributed that if you could put them into a pool, there would be a way to finance it less expensively. But I know Paul is going to cut us off. Go ahead, Paul. 

[Paul Blake]

Don't intend to cut you off. We do have a couple of questions that have come in online. While all of you are speaking, the first question comes from Carlos, and he is asking about the situation today and how it compares to the 1980s when inflation and debt were out of control. How is the situation better or worse today? And he follows on to ask, why can't countries and organizations learn from the past to avoid going through the same today? 

[David Malpass]

Okay, the 80s and we could broaden it to also in 1997, as the dollar was strengthening, currencies were getting weaker. It fell into the Asia crisis, which then spread to the whole world. How do we avoid that? But we try to look at history and then write reports that say, “let's not fall into this again.” The lesson on debt restructuring is to do it early, as early as you can see the problem. The frustration is, it's taking years to actually get through the process. That's the point of the Debt Roundtable tomorrow. Raghu, any comment on the 80s versus 90s? Does this history rhyme? Does it look like something in the past? 

[Raghuram Rajan]

I mean, it does rhyme, right? We're getting into trouble in the same way as we got into trouble with the S&L [Savings and Loan] crisis. Borrowing short, investing long. But we learn and we don't do the same thing. It doesn't happen in exactly the same way. There are reasons to be positive about the outlook. Technology has come a long way. There's much more interconnections in the world. The reasons to be pessimistic relative to those times. I think it's important, as you said, to learn from the past, but it never is exactly the same. 

[David Malpass]

I'll add, we've never had a point in history where interest rates were zero for a long period of time. We also haven't had a situation in history where central banks were buying bonds, meaning the duration mismatch was gigantic in the advanced economies. Both of those are overhanging into the future. So, in those two fundamental ways, this is completely different from the previous crises that also weren't fully anticipated enough. That's a point for caution going forward. But also, the world is richer in total. There's more capital, so we could hope to have a faster workout from this debt crisis. Paul? 

[Paul Blake]

One more question. This comes from Heidi, and she's asking countries that are affected by floods, droughts resulting from climate change will have more and more difficulty financing their needs because they're increasingly riskier borrowers. But they will be the countries that will need the most help. How to address this problem? 

[David Malpass]

Yeah. Does anyone have thoughts? Yeah, Ahmed. 

[Ahmed Shide]

For example, in our case, we had a peace agreement to sustain our peace, and the government is very committed in consolidating peace. We need to move to recovery and reconstruction, and we need to also address the macro imbalance, and particularly given the multiple shocks we have undergone in recent years, the challenge is bigger, but the government commitment in terms of both reform is very stronger. So, getting the right balance in terms of moving forward is fundamentally important. I think the World Bank and IMF and other development partners has to proactively support this unique reform in the context of the current time, where we need also additional support in terms of financing for the construction recovery, and so for sustaining social protection. To address these multiple challenges are fundamentally very important. I think, David, you should suggest something on this one. 

[Nigel Clarke]

What we are doing in Jamaica, just on that question, over the last couple of years, is putting together a suite of financial instruments. The first thing to recognize that, as we all know, on the quadrant of severity and frequency, you want to make sure you can cover various points of that quadrant. So, we have put together a menu of financial instruments, each geared to a different point on that quadrant. On the lower end, we are capitalizing a natural disaster fund, where we have taken resources and set aside, that can be drawn down on certain triggers. We're going to legislate what those triggers ought to be and how the funds can be used. A layer above that, we have parametric insurance that's regionally based through an entity known as the Caribbean Catastrophe Reinsurance Facility. Then, we have a layer above that, which is a credit contingent claim, where we have the financing on standby, already approved. The trigger for drawdown would be if there is an event, and then on top of that, a catastrophe bond where the payout is very transparent, the triggers are observable, everybody can observe, and so there's no basis risk, no mismatch. When we put it all together, we've assembled quite a good amount of resources that can be deployed in the event of a big event. Now, the thing to remember is you will never be able to insure for the entire stock of damage. But what you want to do, and what we are trying to do, is to make sure you have enough resources to take care of the emergency expenditure. It is the emergency expenditure, the unavoidable expenditure, that can set the fiscal off track. I like to give an example in Jamaica that when we had our last major, very big hurricane in 1988, Hurricane Gilbert, it was so ferocious, sorry, it was such a direct hit, that it took a plane at the airport and it heaved the plane into the air with the wings over a willow tree. If you Google it, you can see that photo today. My recollection is that, well, the reason why there's a photo is that the plane stayed there for what seemed like weeks, could have been even months, because it was not an emergency. The emergency, you have to repair the road that connects to vital communities. You have to put the roof on a hospital. There are certain expenditures that you must do, and it is essential to put financial instruments in place that can release resources that can attend to those emergency expenditures. That's what we have done in Jamaica over the past few years and something that we'll continue to build on and to improve. 

[David Malpass]

Yeah, great point. Tina, last word on any of the topics risk or instruments? 

[Tina Vandersteel]

What I would say I'm very pleased to hear these kinds of ideas coming out. There have been soft movements in the sort of academic sphere to try to roll these kinds of ideas into standard sovereign debt instruments. And I would suggest for everybody involved that you try to avoid that. Because, people, we're trying to [Crosstalk] yeah, they're priced totally differently. You don't want to intermingle those things. It's not good for the borrower and it's not good for the lender. 

[Nigel Clarke]

I absolutely agree. I mean, sorry, I'm a borrower. 

[David Malpass]

We’re referring to this push to try to put out a sovereign debt and you're saying not a good idea. Why not do a laddering process and a parametric insurance process that gets at the emergency fund? 

[Nigel Clarke]

Yes, they're different products, and it's like in capital markets where you get the best value, not in a conglomeration, but where there's focus. Similarly, you have a financial product that's focused on providing credit, right? And that's over here. And you have financial products that are focused on risk management and you keep them separate, you get a better result. The problem with embedding is that these are special and the ability to analyze the risk metrics don't lie in the sovereign credit team. 

[Tina Vandersteel]

That's correct. 

[Nigel Clarke]

So, what's going to happen to countries like us is that our sovereign debt is going to be mispriced. Usually if it's mispriced, it's not going to be mispriced in my favor. Especially with the kind of reforms that we're doing, implementing fiscal transparency, building institutions, putting laws in place, having a medium-term debt objective, we're very clear on what we're doing, and we want that to be priced properly. 

[David Malpass]

Thank you very much. Tina [Crosstalk] 

[Nigel Clarke]

And then separately, we will go and price our risk insurance.

[David Malpass]

Tina, anything else?

 

[Tina Vandersteel]

No.

[David Malpass]

OK, super thanks. 

[Paul Blake]

And David, any final thoughts as we close out the session and look ahead?

[David Malpass]

This was great. I want to really express appreciation to the panel. There's lots of the Spring Meetings yet to go this week and these topics are all on people's minds. Each part of this is under discussion and it's critical and maybe come back to the people in developing countries need better prospects and all of these techniques are part of trying to achieve that. Thanks everybody.

[Paul Blake]

Thank you to you, David, And thank you to our esteemed panel. If you'd like to watch this back, live.worldbank.org, thank you very much.

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