Bolivia still chained by debt
New report by Fundación Jubileo reveals that despite partial debt relief, Bolivia is still burdened by an external and internal debt that forces it to divert valuable resources from public investment to paying back interest payments.
Romper la cadena: La deuda pública de Bolivia
Fundación Jubileo (Bolivia), Noviembre 2005
Bolivia is once again one of the world’s most heavily indebted countries. Adding to the chains of external debt are increasing levels of domestic debt slavery. To put it in figures, Bolivia owes both external and domestic creditors around US$7.6bn. Despite debt restructurings during the 1980’s and debt relief during the 90’s, the country is still caught in an unsustainable debt trap. At the same time, two thirds of the population lives below the poverty line and approximately 35% of fiscal income is dedicated to public debt service payments.
This form of dependency reduces the country’s capacity to invest in human development. In 2004 for example, Bolivia paid about US$800mn in capital and interest payments to service domestic and external debt obligations. In the same year, it was able to dedicate only US$531mn to public investments.
The scarce income the state is able to collect is the principal reason why new loans are taken-on. These loans, during recent years, have been increasingly granted on commercial terms with high interest rates and relatively short repayment periods. The picture then becomes even more critical with domestic debt which is also not on favourable terms.
It is not only the present at stake. If we look to the future, our hopes of development are also mortgaged if we do not take immediate action. It is essential to break the vicious circle of public indebtedness – the credits taken-on today imply a significant debt service burden tomorrow which will limit focus on the most important needs of the population (this is worse if the loans are not well used). If we add to this the conditions imposed on new finance coupled with unequal international relations and an unjust exchange regime, the situation is even more complicated.
How do we break the chains? In this document, Fundación Jubileo presents a number of alternatives that don’t claim to be the final word. They do however aim to put on the table some ideas which would allow for increased income generation, taking from those who have most and creating fairer rules in an international context. The medium term objective would be less dependency on credit and greater autonomy in the design and implementation of policies oriented towards the common good, i.e. putting life before debt.
Fundación Jubileo (Bolivia)
Summary of the report in English below (full report available in Spanish at: http://www.jubileobolivia.org/paginas/publicaciones.html:
External debt:
1. The 1970’s was the period of credit expansion in Latin America. In Bolivia, between 1970 and 1985, public external debt increased over 6.3 times, and debt with private external banks by at least 75 times.
2. During the 1990’s, Bolivia’s external debt stock increased from US$4bn to approximately US$4.8bn by the middle of the decade, falling slightly to US$4.3bn by 2002 due to HIPC Initiative debt relief. It then reached a historic high in 2003 at US$5bn, falling slightly to US$4.8bn by June 2005.
3. The debt held by multilateral creditors as a percentage of the total has risen sharply from 49% in 1990 to 92% by June 2005. On the other hand, the portion of debt held by bilateral creditors has fallen from 45% in 1990 to 0.01% in 2005. Private debt was already very limited in the 1990’s and by 2005 had fallen to 0.01%.
4. In line with the increasing debt stock, external debt service (interest and principal) grew in the first half of the 1990’s reaching more than US$400mn (without HIPC) in 1998. With the application of HIPC-1 from 1998 onwards, and then HIPC-II from 2001, debt service stabilised in the range of US$250-280mn.
5. In 1998, Bolivia qualified for the HIPC Initiative (HIPC-1). In the framework of this initiative, the country was promised relief of US$788mn in nominal terms. This sum will be delivered until 2045.
6. In June 2001, Bolivia reached completion point under the enhanced HIPC Initiative. Relief granted by the sum of Bolivia’s creditors amounted to approximately US$1.78bn until 2045, which represents a reduction of about 40% of the country’s debt stock at end-2001.
7. Debt relief in the framework of HIPC-II represents about US$1.14bn, up until 2017. This means an average annual reduction of US$70mn. According to the “Law on National Dialogue”, agreed in July 2001, the resources freed-up from this relief must be used within the Bolivian Poverty Reduction Strategy (EBRP).
8. In 2002, the large bilateral creditors decided to cancel 100% of Bolivia’s remaining bilateral debt stock. This amounted to US$650mn. In accordance with the decision of the Bolivian Government, these funds (called “Beyond-HIPC”) need not be assigned to municipal local governments to be used in the fight against poverty.
9. The disbursement of new credits has increased incredibly over the past three years. Between 1998 and 2001, the figure stood at between US$300 and 400mn annually rising to around US$600mn on average between 2002 and 2004. 90% of these disbursements came from multilateral institutions.
10. One particularly worrying aspect is the increased involvement of CAF (Corporación Andina de Fomento) in the contracting of new debts. The proportion of new loans from this organisation as a percentage of total public external debt doubled from 7.6% in 2001 to 16% in 2005. Given that CAF loans are on commercial terms, the degree of concessionality of Bolivia’s external debt burden has been significantly reduced.
11. Continuing this trend, amongst loans contracted in 2004, only a quarter (24.5%) were contracted on concessional terms, the rest being more onerous credits. Over 40% of new contracts are under commercial conditions which means that the future debt stock will have a less concessional character than that of 2004.
12. The definition of external debt sustainability must have a human development focus and as a result must not be based on capacity to pay considerations (defined more or less arbitrarily) but on the availability of sufficient financial resources to ensure a minimum level of human development; for example as defined in the MDGs.
13. The G-8 initiative for external debt cancellation is insufficient for Bolivia. It will mean – in debt service reduction – on average only about US$64mn per year between 2006 and 2015. This amounts to approximately 23% of total debt service paid in 2004 (after HIPC).
Domestic debt
14. Public sector domestic debt involves above all Treasury bonds held by the private sector; most being held by the AFP (Administradora de Fondos de Pensiones). A lesser amount by the Banco Central de Bolivia.
15. Total domestic debt stock has doubled over the past five years, going from US$1.3bn in 1999 to US$2.73bn by end-2004.
16. As a symptom of the strong growth in domestic debt, interest has also rocketed, growing from US$71mn in 1999 to US$155mn in 2004. During the same period, debt service increased from US$270mn to US$520mn.
17. With regards the structure of the domestic debt stock, about 40% of the total is held by the two Administradoras de Fondos de Pensiones (AFP). The rest is held by the private sector (25% of the total), whist debt with Bolivia’s Central Bank amounts to 36%.
18. The main reason for the high level of growth in domestic debt during the last four years is the excessive deficit in the fiscal accounts of the Bolivian Government. Although part of this is due to exceptional reasons, the most important factor has been reform of the pensions system, whose costs represent around three quarters of the deficit over the last five years.
19. Comparing domestic debt service to fiscal income, we note that in 1998 the payment of principal and interest represented only one tenth of the state income. This had risen to 22% by 2004.
Public debt
20. Bolivia’s public debt in its entirety (external and domestic) has grown steadily over the past five years, going from US$5.9bn in 1999 to almost US$7.7bn by end-2004.
21. All debt indicators are on the rise over the past three to four years, with some reaching unsustainable levels. Given the proportionally high payments (interest and principal) on domestic debt, the Bolivian State, over the next ten years, will have to devote almost one third of its income to servicing public debt which is clearly unsustainable.
Proposals
22. Given this analysis, we propose the following:
Fundación Jubileo (Bolivia), Noviembre 2005
Bolivia is once again one of the world’s most heavily indebted countries. Adding to the chains of external debt are increasing levels of domestic debt slavery. To put it in figures, Bolivia owes both external and domestic creditors around US$7.6bn. Despite debt restructurings during the 1980’s and debt relief during the 90’s, the country is still caught in an unsustainable debt trap. At the same time, two thirds of the population lives below the poverty line and approximately 35% of fiscal income is dedicated to public debt service payments.
This form of dependency reduces the country’s capacity to invest in human development. In 2004 for example, Bolivia paid about US$800mn in capital and interest payments to service domestic and external debt obligations. In the same year, it was able to dedicate only US$531mn to public investments.
The scarce income the state is able to collect is the principal reason why new loans are taken-on. These loans, during recent years, have been increasingly granted on commercial terms with high interest rates and relatively short repayment periods. The picture then becomes even more critical with domestic debt which is also not on favourable terms.
It is not only the present at stake. If we look to the future, our hopes of development are also mortgaged if we do not take immediate action. It is essential to break the vicious circle of public indebtedness – the credits taken-on today imply a significant debt service burden tomorrow which will limit focus on the most important needs of the population (this is worse if the loans are not well used). If we add to this the conditions imposed on new finance coupled with unequal international relations and an unjust exchange regime, the situation is even more complicated.
How do we break the chains? In this document, Fundación Jubileo presents a number of alternatives that don’t claim to be the final word. They do however aim to put on the table some ideas which would allow for increased income generation, taking from those who have most and creating fairer rules in an international context. The medium term objective would be less dependency on credit and greater autonomy in the design and implementation of policies oriented towards the common good, i.e. putting life before debt.
Fundación Jubileo (Bolivia)
Summary of the report in English below (full report available in Spanish at: http://www.jubileobolivia.org/paginas/publicaciones.html:
External debt:
1. The 1970’s was the period of credit expansion in Latin America. In Bolivia, between 1970 and 1985, public external debt increased over 6.3 times, and debt with private external banks by at least 75 times.
2. During the 1990’s, Bolivia’s external debt stock increased from US$4bn to approximately US$4.8bn by the middle of the decade, falling slightly to US$4.3bn by 2002 due to HIPC Initiative debt relief. It then reached a historic high in 2003 at US$5bn, falling slightly to US$4.8bn by June 2005.
3. The debt held by multilateral creditors as a percentage of the total has risen sharply from 49% in 1990 to 92% by June 2005. On the other hand, the portion of debt held by bilateral creditors has fallen from 45% in 1990 to 0.01% in 2005. Private debt was already very limited in the 1990’s and by 2005 had fallen to 0.01%.
4. In line with the increasing debt stock, external debt service (interest and principal) grew in the first half of the 1990’s reaching more than US$400mn (without HIPC) in 1998. With the application of HIPC-1 from 1998 onwards, and then HIPC-II from 2001, debt service stabilised in the range of US$250-280mn.
5. In 1998, Bolivia qualified for the HIPC Initiative (HIPC-1). In the framework of this initiative, the country was promised relief of US$788mn in nominal terms. This sum will be delivered until 2045.
6. In June 2001, Bolivia reached completion point under the enhanced HIPC Initiative. Relief granted by the sum of Bolivia’s creditors amounted to approximately US$1.78bn until 2045, which represents a reduction of about 40% of the country’s debt stock at end-2001.
7. Debt relief in the framework of HIPC-II represents about US$1.14bn, up until 2017. This means an average annual reduction of US$70mn. According to the “Law on National Dialogue”, agreed in July 2001, the resources freed-up from this relief must be used within the Bolivian Poverty Reduction Strategy (EBRP).
8. In 2002, the large bilateral creditors decided to cancel 100% of Bolivia’s remaining bilateral debt stock. This amounted to US$650mn. In accordance with the decision of the Bolivian Government, these funds (called “Beyond-HIPC”) need not be assigned to municipal local governments to be used in the fight against poverty.
9. The disbursement of new credits has increased incredibly over the past three years. Between 1998 and 2001, the figure stood at between US$300 and 400mn annually rising to around US$600mn on average between 2002 and 2004. 90% of these disbursements came from multilateral institutions.
10. One particularly worrying aspect is the increased involvement of CAF (Corporación Andina de Fomento) in the contracting of new debts. The proportion of new loans from this organisation as a percentage of total public external debt doubled from 7.6% in 2001 to 16% in 2005. Given that CAF loans are on commercial terms, the degree of concessionality of Bolivia’s external debt burden has been significantly reduced.
11. Continuing this trend, amongst loans contracted in 2004, only a quarter (24.5%) were contracted on concessional terms, the rest being more onerous credits. Over 40% of new contracts are under commercial conditions which means that the future debt stock will have a less concessional character than that of 2004.
12. The definition of external debt sustainability must have a human development focus and as a result must not be based on capacity to pay considerations (defined more or less arbitrarily) but on the availability of sufficient financial resources to ensure a minimum level of human development; for example as defined in the MDGs.
13. The G-8 initiative for external debt cancellation is insufficient for Bolivia. It will mean – in debt service reduction – on average only about US$64mn per year between 2006 and 2015. This amounts to approximately 23% of total debt service paid in 2004 (after HIPC).
Domestic debt
14. Public sector domestic debt involves above all Treasury bonds held by the private sector; most being held by the AFP (Administradora de Fondos de Pensiones). A lesser amount by the Banco Central de Bolivia.
15. Total domestic debt stock has doubled over the past five years, going from US$1.3bn in 1999 to US$2.73bn by end-2004.
16. As a symptom of the strong growth in domestic debt, interest has also rocketed, growing from US$71mn in 1999 to US$155mn in 2004. During the same period, debt service increased from US$270mn to US$520mn.
17. With regards the structure of the domestic debt stock, about 40% of the total is held by the two Administradoras de Fondos de Pensiones (AFP). The rest is held by the private sector (25% of the total), whist debt with Bolivia’s Central Bank amounts to 36%.
18. The main reason for the high level of growth in domestic debt during the last four years is the excessive deficit in the fiscal accounts of the Bolivian Government. Although part of this is due to exceptional reasons, the most important factor has been reform of the pensions system, whose costs represent around three quarters of the deficit over the last five years.
19. Comparing domestic debt service to fiscal income, we note that in 1998 the payment of principal and interest represented only one tenth of the state income. This had risen to 22% by 2004.
Public debt
20. Bolivia’s public debt in its entirety (external and domestic) has grown steadily over the past five years, going from US$5.9bn in 1999 to almost US$7.7bn by end-2004.
21. All debt indicators are on the rise over the past three to four years, with some reaching unsustainable levels. Given the proportionally high payments (interest and principal) on domestic debt, the Bolivian State, over the next ten years, will have to devote almost one third of its income to servicing public debt which is clearly unsustainable.
Proposals
22. Given this analysis, we propose the following:
- Full cancellation of Bolivia’s external debt beyond the G8 initiative;
- Monitoring of new external loans which should ensure that Bolivia obtains concessional finance and that these resources are used for productive investments;
- Redefining the concept of debt sustainability so that it takes into account human development issues, with sights firmly set on making available sufficient resources to help meet the MDGs;
- Implementation of an International Arbitration Tribunal on debt, which will be independent of both creditors and debtors and will analyse what levels of debt service jeopardise poverty reduction and MDG expenditures;
- Adoption of forceful measures to ease the Treasury’s heavy burden in pension payments. Pressure needs to be put on the IFIs to finance part of the cost with grants and highly concessional loans, the register of retired persons needs to be cleaned up to prevent fraudulent claims;
- Secondary reforms which ensure the Treasury has longer-term sustainability in its income, and that its base is more equal;
- Limiting expenditure on personal services and subsidies to universities which have grown over the past ten years;
- A system of “blind” subsidies, such as those granted to hydrocarbon products needs to be replaced with a system much more oriented towards the poor, with programmes and projects for poverty reduction;
- Debt service on public internal and external debt amounted to US$800mn in 2004, a sum much higher than spending on education and health combined during the same year (excluding university level). These expenditures amounted to US$750m.
Goni case - next steps
