Download Public Debt and Its Determinants in Market Access Countries 1

Public Debt and Its Determinants in
Market Access Countries1
Results from 15 Country Case Studies
March 2005
The World Bank
1
This report is the results of a collective effort by a World Bank Team, led by Nina Budina and Norbert
Fiess. Major contributions were made by Augusto Clavijo, Guatam Datta, Viktoria Hnatkovska, Karlygash
Kuralbayeva, Gaobo Pang, Brian Pinto, Malvina Pollock, Artur Radziwill, and Shinsuke Tanaka. We
would further like to thank Michael Corlett, Joost Draaisma, Vicente Fretes-Cibils, Conrado GarciaCorado, Indermit Gill, David Gould, Alejandro Guerson, Erika Soler Hampejsek, Jim Hanson, Marketa
Jonasova, Sanjay Kathuria, Ali Mansoor, Bhaskar Naidu, Daniel Oks, Zeinab Partow, Anand Rajaram,
Christoph Ruehl, Sergei Shatalov, Lucas Siga, Monica Singh, Ricardo Tejada, Mark Thomas, Mathew
Verghis, Marina Wes, and Farah Zahir for invaluable help with data, comments and suggestions.
1
Table of Content
SUMMARY .................................................................................................................................................. 6
I.
Introduction................................................................................................................................. 6
II. Trends in Public Debt.................................................................................................................. 6
III. Public Debt Decomposition ............................................................................................................ 8
IV. Summary of Lessons...................................................................................................................... 15
1.
ARGENTINA .................................................................................................................................... 23
1.1. Debt Trends.................................................................................................................................. 23
1.2. Debt Decomposition..................................................................................................................... 24
1.3. Further Analysis........................................................................................................................... 26
2.
BRAZIL............................................................................................................................................ 30
2.1. Trends in Public Debt .................................................................................................................. 30
2.2. Debt Decomposition.................................................................................................................... 32
3.
CHILE .............................................................................................................................................. 38
3.1. Debt Trends.................................................................................................................................. 38
3.2 Public Debt Decomposition .......................................................................................................... 38
3.3. Further Analysis........................................................................................................................... 40
4.
INDIA .............................................................................................................................................. 44
4.2. Public Debt Composition ............................................................................................................. 45
4.3. Analysis........................................................................................................................................ 47
5.
INDONESIA ...................................................................................................................................... 50
5.1. Trends in public debt................................................................................................................... 50
5.2. Public Debt decompositions........................................................................................................ 51
5.3. Further Analysis........................................................................................................................... 52
6.
JAMAICA ......................................................................................................................................... 55
6.1. Trends in Public Debt .................................................................................................................. 55
6.2. Public Debt Decompositions........................................................................................................ 55
6.3. Debt and Growth Analysis ........................................................................................................... 57
7.
KOREA ............................................................................................................................................ 61
7.1. Trends in public debt................................................................................................................... 61
7.2. Public Debt decompositions......................................................................................................... 62
7.3. Further Analysis........................................................................................................................... 63
8.
LEBANON ........................................................................................................................................ 65
8.1. Trends in Public Debt .................................................................................................................. 65
8.2. Public Debt Decomposition ......................................................................................................... 66
8.3. Debt and Growth Analysis ........................................................................................................... 67
9.
MALAYSIA ...................................................................................................................................... 71
9.1. Trends in Public Debt ................................................................................................................. 71
9.2. Public Debt Decompositions....................................................................................................... 72
9.3. Debt and Growth Analysis ........................................................................................................... 74
10.
MEXICO...................................................................................................................................... 78
10.1. Debt Trends............................................................................................................................... 78
10.2. Public Debt Decompositions..................................................................................................... 79
10.3. Further Analysis......................................................................................................................... 81
11.
PAKISTAN................................................................................................................................... 87
11.1 Trends in Public Debt ................................................................................................................ 87
11.2 Debt Decomposition................................................................................................................... 87
11.3 Further Analysis.......................................................................................................................... 89
12.
PHILIPPINES ................................................................................................................................ 94
12.1. Trends in Public Debt ............................................................................................................... 94
12.2. Public Debt Decompositions..................................................................................................... 94
12.3. Debt Analysis ............................................................................................................................. 96
2
13.
POLAND ................................................................................................................................... 100
13.1. Trends in Public Debt .............................................................................................................. 100
13.2. Public Debt Decompositions.................................................................................................... 101
13.3. Poland’s Debt Restructuring Process ...................................................................................... 103
14.
RUSSIA ..................................................................................................................................... 105
14.1. Trends in Public Debt. ............................................................................................................. 105
14.2. Public Debt Decompositions................................................................................................... 105
14.3. Debt Analysis and Debt Restructuring..................................................................................... 107
15.
TURKEY ................................................................................................................................... 110
15.1. Trends in Public Debt ............................................................................................................. 110
15.2. Public Debt Decompositions................................................................................................... 110
15.3. Debt Analysis and Debt Restructuring..................................................................................... 112
Post-crisis Management and Institutional Reforms .......................................................................... 116
16.
APPENDIX 1: DERIVATION OF DEBT DECOMPOSITION DYNAMICS............................................ 124
17.
APPENDIX 2: SELECTED ECONOMIC INDICATORS ..................................................................... 128
18.
APPENDIX3: DATA SOURCES …………………………………………………………… 139
3
Tables
Table 0-1 Cumulative debt decomposition for 21 MACs................................................. 12
Table 1-1. Argentina: Cumulative public debt decomposition......................................... 24
Table 2-1. Brazil: Cumulative public debt decomposition ............................................... 32
Table 3-1. Chile: Cumulative public debt decomposition, percent of GDP ..................... 39
Table 4-1. India: Public Debt Decomposition .................................................................. 45
Table 4-2. India: Fiscal Adjustment Dynamics, 1985/86-2001/02................................... 48
Table 5-1. Indonesia: Cumulative public debt decomposition ......................................... 51
Table 6-1. Jamaica: Cumulative Public Debt Decomposition .......................................... 56
Table 7-1. Korea: Cumulative public debt decomposition ............................................... 62
Table 8-1. Lebanon: Cumulative Public Debt Decomposition......................................... 66
Table 9-1. Malaysia: Cumulative public debt decomposition .......................................... 72
Table 10-1. Mexico: Cumulative public debt decomposition........................................... 79
Table 11-1 Pakistan: Public Debt Decomposition, Percent of GDP................................. 87
Table 11-2. Pakistan: Public Debt Burden Dynamics ...................................................... 90
Table 12-1. Philippines: Cumulative public debt decomposition..................................... 94
Table 13-1. Poland: Cumulative public debt decomposition.......................................... 101
Table 14-1. Russia: Cumulative public debt decomposition .......................................... 106
Table 15-1. Turkey: Cumulative public debt decomposition ......................................... 111
Table 15-2. Turkey: Central government consolidated public sector balances.............. 114
Figures
Figure 1. Average Public Debt Trends for 31 MACs ......................................................... 7
Figure 2. Trends in Public Debt (percent of GDP) ............................................................. 9
Figure 3. Public Debt Dynamics of 21 MACs.................................................................. 11
Figure 4. Implicit Real Interest Rate (%).......................................................................... 12
Figure 5. Argentina: Public and Private External Debt (% of GDP) ............................... 23
Figure 6. Argentina: Public Sector Debt (% of GDP) ...................................................... 24
Figure 7. Argentina: Public Debt Dynamics..................................................................... 26
Figure 8. Brazil: Public Sector Debt (net, % of GDP)...................................................... 31
Figure 9. Brazil: Total external debt, growth, and net non-debt creating flows ............... 31
Figure 10. Brazil: Public Debt Dynamics ........................................................................ 33
Figure 11. Brazil: Domestic debt composition (% of total)............................................. 35
Figure 12. Brazil: Exchange Rate and Interest Rate Impact............................................. 36
on Change in Debt Stock on a Monthly Basis .................................................................. 36
Figure 13. Chile: Public sector debt (% of GDP) ............................................................. 38
Figure 14. Chile: Public Debt Dynamics (% of GDP)...................................................... 40
Figure 15. Chile: Total external debt, growth, and net non-debt creating flows .............. 41
Figure 16. Chile: Actual, adjusted, structural balance and total cyclical budget
components (% of GDP)........................................................................................... 43
Figure 17. India: Public sector debt (% of GDP).............................................................. 45
Figure 18. India: Public Debt Dynamics........................................................................... 47
Figure 19. Indonesia: Public sector debt (% of GDP) ...................................................... 50
Figure 20. Indonesia: Public Debt Dynamics ................................................................... 52
4
Figure 21. Jamaica: Public sector debt (% of GDP) ......................................................... 55
Figure 22. Jamaica: Public Debt Dynamics...................................................................... 57
Figure 23. Jamaica: Public Debt 1992/93-2003/04........................................................... 58
Figure 24. Jamaica: Inflation and Average Real Interest Rate (%) .................................. 59
Figure 25. Korea: Public sector debt ( percent of GDP)................................................... 61
Figure 26. Korea: Public Debt Dynamics ......................................................................... 63
Figure 27. Lebanon: Public sector debt ( percent of GDP)............................................... 65
Figure 28. Lebanon: Public Debt Dynamics..................................................................... 67
Figure 29. Lebanon: GDP growth and inflation ............................................................... 68
Figure 30. Lebanon: Fiscal Balance 1990-2003 ( percent of GDP) ................................. 69
Figure 31. Lebanon: Gross Domestic Savings and Workers’ Remittances ...................... 70
Figure 32. Malaysia: Public sector debt ( percent of GDP).............................................. 71
Figure 33. Malaysia: Public Debt Dynamics .................................................................... 73
Figure 34. Malaysia: Federal Government Fiscal Operations .......................................... 73
Figure 35. Malaysia: Total external debt, growth, and net non-debt creating flows ........ 75
Figure 36. Mexico: Public sector debt ( percent of GDP) ................................................ 78
Figure 36. Mexico: External public and private debt ( percent of GDP)......................... 79
Figure 37. Mexico: Public Debt Dynamics....................................................................... 80
Figure 38. Mexico: Total external debt, growth, and net non-debt creating flows........... 83
Figure 39. Mexico: Reserves as percentage of GDP ........................................................ 84
Figure 40. Mexico: Net Public sector debt ( percent of GDP), augmented and
conventional definition ............................................................................................. 85
Figure 41. Pakistan. Public Sector Debt ( percent of GDP).............................................. 87
Figure 42. Pakistan: Public Debt Dynamics ..................................................................... 88
Figure 43. Philippines: Public sector debt (% of GNP) .................................................... 94
Figure 44. Philippines: Public Debt Dynamics................................................................. 95
Figure 45. Philippines: External debt, real GNP growth and non-debt creating inflows . 97
Figure 46. Poland: Public sector debt (% of GDP)......................................................... 100
Figure 47. Poland: Public Debt Dynamics...................................................................... 102
Figure 48. Poland: Total external debt, growth, and net non-debt creating flows.......... 104
Figure 49. Russia: Public sector debt (% of GDP) ......................................................... 105
Figure 50. Russia: Public Debt Dynamics ...................................................................... 107
Figure 51. Turkey: Public sector debt (% of GNP) ........................................................ 110
Figure 52. Turkey: Public Debt Dynamics ..................................................................... 112
5
Summary
I.
Introduction
Public debt dynamics are a key determinant of a country’s macroeconomic environment
and private investment climate. The objective of this paper is to provide a better
understanding of public debt dynamics for market access countries for the last 10 plus
years. It breaks down changes in public debt-to-GDP ratios into components attributable
to primary fiscal deficits, real GDP growth, real interest rates, the capital gain/loss on
foreign currency denominated debt as result of exchange rate changes and fiscal costs
associated with contingent liabilities such as bank bailouts. The analysis draws upon 31
market access countries (MACs), for 15 of which detailed case studies are done.
When interpreting the public debt decompositions, it is important to remember that this is
to a large extent a mechanical accounting exercise. In particular, it ignores the fact that
all the factors contributing to the changes in the level of debt are simultaneously
determined and influence each other. Hence, the case studies attempt to link changes in
debt-to-GDP ratios to episodes of marked policy change or structural factors. We
conclude by extracting lessons from the aggregate debt analysis and individual country
debt decompositions.
II.
Trends in Public Debt
II.1.
Levels
The average public debt-to-GDP ratio for MACs declined during the first half of the
nineties before climbing back to its 1990 level of about 70 percent by 2002 (see Figure
1). The aggregate debt-to-GDP ratio of 70 percent obscures large variations among the 31
countries in the sample (see Figure 2, which presents countries in descending order of
2002 public debt-to-GDP ratios). It is useful to group countries into categories according
to their debt-to-GDP ratios: In 2002, 15 out of the 31 market access countries had ratios
below 60 percent. Within this group, 8 countries reduced their debt-to-GDP ratios,
Mexico’s 2 debt-to GDP ratio remained unchanged and 6 countries (Brazil 3 , China,
Korea 4 , Ukraine, Thailand and Colombia) saw an increase in indebtedness. Chile 5 ,
Russia6, Poland and Hungary experienced impressive debt reductions. 11 MACs fall into
the 60 – 100 range. Of these countries, 6 (Bulgaria, Ecuador, Jordan, Malaysia, Morocco
and Panama) lowered their debt ratios relative to 1990; on the other hand, Croatia, India,
2
Mexican public external debt fell substantially throughout the 1990s, but total public debt remained at
about 50 percent, largely as a result of the recognition of contingent liabilities related to the resolution of
the banking crisis in the mid-1990s.
3
Brazil reports public external debt in net terms.
4
Korea’s debt tripled from 15 to 45 percent of GDP during 1996 and1998, but has been on a decline since.
5
During 1990-1998, Chile’s public debt-to-GDP ratio fell from 43% to less than 15 percent of GDP, and
has increased since then by about 3 percent of GDP.
6
Russia’s public debt peaked at 90 percent in 1999, but has since then dropped to about 30 percent of GDP.
6
Indonesia, the Philippines and Turkey witnessed substantial increases in their
indebtedness.
Figure 1. Average Public Debt Trends for 31 MACs
Public External Debt
Public Domestic Debt
80
70
60
50
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Five countries had public debt-to-GDP ratios of over 100 percent in 2002: Argentina,
Jamaica, Lebanon, Pakistan and Uruguay. In all these cases, the ratio rose relative to
1990. While Jamaica, Lebanon and Pakistan started in the 1990’s with high indebtedness,
Argentina and Uruguay are outliers in the sense that their debt-to-GDP ratios exploded
from less than 50 percent in 1990 to above 100 percent in 2002.
II.2.
Composition
While the average public debt-to-GDP ratio in 2002 returned to its level in 1990, the
share of domestic debt in 2002 almost doubled compared to 1990. Nevertheless, the
share of external debt increased in Argentina, Croatia, Lebanon, Pakistan, Thailand,
Turkey and Uruguay. Furthermore, countries like Argentina, Brazil, Jamaica, Lebanon,
Philippines and Turkey, which experienced upward trends in public debt, have a debt
structure skewed towards external, indexed, and short-term debt. This makes these
countries particularly vulnerable to negative external shocks. At the same time, there are
countries such as Indonesia7, Malaysia8 and Pakistan9 where the public debt-to-GDP ratio
is high, but has been falling during the past few years, and where debt structure is skewed
in favor of domestic, non-indexed and longer-term debt. These developments have made
them less vulnerable to external shocks. While in India public debt (measured by the
7
In Indonesia public debt-to-GDP ratio has nearly quadrupled between 1997 and 2000 (from 24 to 95
percent of GDP), but since then significant progress in debt reduction has been achieved.
8
In Malaysia, public debt is close to 70 percent of GDP in 2003, but given a prudent fiscal stance and an
increase in reserves as a share of GDP, Malaysia seems to be less vulnerable to external shocks.
9
Pakistan’s public debt-to-GDP ratio has reached 110 percent in 2001, but this ratio has declined since
then, largely as a result of favorable debt restructuring, improved economic prospects and fiscal discipline.
7
consolidated debt of the Central and State governments) is high and has been rapidly
increasing for the past five years, with low currency and interest rate exposure.10
Figure 3 shows that countries have reduced their vulnerability to shifting market
sentiment by substantially lowering their short-term external debt to reserves ratios when
we compare 1990 and 2002, with only three exceptions, Ecuador, Costa Rica and South
Africa. This conforms to a growing trend of self-insurance by MACs.
III. Public Debt Decomposition
III.1. Framework
We analyze public debt trends between 1990 and 2002 (2003 in some country cases) by
decomposing past changes in public debt-to-GDP ratios into a number of explanatory
factors. Equation (1) is the difference equation for d, the public debt-to-GDP ratio,
derived in annex 1:
d
π
α (π * −π )
g
iˆ
]
∆d t = pd t −
d t −1 + t −1 [
−
−
(1 + g )
1 + g 1 + π 1 + π (1 + π )(1 + π *)
(1)
d t −1
RXR
−α
+ otherfactors
(1 + π *)(1 + RXR) 1 + g
where d t is the public debt-to-GDP ratio, pd t is the primary deficit as a share of GDP, g
is the real GDP growth rate, iˆ is the weighted averages of domestic and foreign interest
rates11, π is domestic inflation rate (the percentage change in GDP deflator), π* is the US
inflation rate (the percentage change in US GDP deflator), α is the share of foreign
currency denominated debt in total public debt, and RXR is the change in (bilateral, US
dollar per local currency unit) real exchange rate12.
Equation (1) forms the basis for decomposing the change in the public debt-to-GDP ratio
into the components attributable to the four factors shown in Table 1: (i) the primary
fiscal balance net of seignorage; (ii) real GDP growth; (iii) the implicit real interest rate;
(iv) the real exchange rate; and (v) other factors. The last term, “other factors”, is
obtained as the actual change in the debt–to-GDP ratio minus the sum of (i) to (iv). It
includes the recognition of contingent liabilities net of privatization proceeds, the impact
of debt restructuring, grants and measurement errors. Below, we provide findings from
the aggregate debt decomposition based on equation (1) for 31 market access countries
and from more detailed case studies for 15 market access countries (MACs).
10
Public debt-to-GDP ratio reached nearly 90 percent of GDP in 2003.
11
(1 − α )id + αi f (1 + s t ) = iˆ is average nominal interest on public debt. Practically it is calculated as
ratio of interest payments on debt divided by the previous period stock of debt.
12
RXR is defined by
(1 + st )(1 + π *)
1
with RXR>0 denoting a real exchange rate appreciation.
=
1 + RXR
1+ π
8
Figure 2. Trends in Public Debt (percent of GDP)
180
External Public Debt
Domestic Public Debt
160
140
120
100
80
60
40
20
2002
1990
2002
1990
2002
1990
2002
1990
2002
1990
2002
1990
2002
1990
2002
1990
2002
1990
2002
1990
2002
1993
2002
1990
2002
1993
2002
1990
2002
1995
2002
1992
2002
1990
2002
1995
2002
1992
2002
1990
2002
1996
2002
1993
2002
1990
2002
1990
2002
1994
2002
1990
2002
1990
2002
1992
2002
1995
2002
1990
2002
1990
0
-20
LBN ARG JAM URY PAK MAR PHL
IND
IDN TUR JOR MYS PAN ECU HRV BGR BRA HUN CRI MEX THA COL PER POL ZAF KOR VEN RUS UKR CHN CHL
Note: Countries in this figure are sorted by total debt – to – GDP ratios in 2002.
Turkey, Jordan and Brazil debt on net basis.
9
III.2. Data
One of the big challenges for a study on public debt dynamics is the quality of data.
Significant effort was used to construct a database consistent over time and across
countries (See Box 0-1). This was, however, not an easy task. The main concern lies in
the coverage and definition of public debt.
To allow for meaningful comparisons across countries, it is important to apply a uniform
measure of public debt. Ideally, this measure is expected to cover the national
government, subnational governments, and public enterprises. In reality, however, there
is tremendous heterogeneity in the data coverage. Some countries report central
government debt only, while others have data available for the consolidated public sector
including the central bank. A related statistical issue is the matching and comparability of
public debt report with the reporting of fiscal deficits. Some countries report
comprehensive gross public debt figures, including public guarantees and pension
liabilities, while others report debt on a narrower net basis, e.g. Brazil and Turkey.
Further, long series of debt data are not widely available for a large number of countries.
Information on external public debt is generally more readily available than domestic
debt. It is also difficult to merge datasets from different sub-periods on a consistent basis.
And conflicting debt figures may be found despite identical coverage and definition.13
Box 0-1 Data for the Market Access Countries
Our study considers the public debt in 31 market access countries (MACs) . The debt data use most comprehensive measure
of public sector when available. The sample includes data from 1990 to 2003 (with some observations unavailable for some
MACs). Total public debt is constructed on a gross basis (with the exception of Brazil and Turkey on net basis) as the sum of
two separate series for external and domestic public debt. The sources for public debt include IMF World Economic Outlook
(WEO), various IMF Country Reports, World Bank Live Database (LDB), and the internet sources from the countries’ central
bank and treasury.
Data on public sector fiscal balances (primary and overall) and interest payment are from IMF WEO, various IMF Country
Reports, and World Bank LDB. GDP, GDP deflator, and nominal exchange rate are from IMF WEO, IMF IFS, and World
Bank LDB. Data on privatization and recognition of contingent or hidden liabilities are compiled from IMF Country Reports
and the related literature. Readers are referred to the statistical annex in the case studies for detailed information on data
sources.
The 31 market access countries include: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Croatia, Ecuador,
Hungary, India, Indonesia, Jamaica, Jordan, Korea, Lebanon, Malaysia, México, Morocco, Pakistan, Panama, Peru, Poland,
Philippines, Russian Federation, South Africa, Thailand, Turkey, Ukraine, Uruguay, and Venezuela
Note: For more detailed information about data used in our case studies see Appendix 2.
13
See also IMF (2003a), which reports similar problems with debt data.
10
III.3. Aggregate public debt decompositions for 21 MACs
We have used simple averages to calculate the aggregate debt decompositions for the
MACs group. However, to ensure consistency, we only compute the averages for 21
MACs, for which all data are available for all the years (1991-2002). Our results show
that (Figure 3): (i) primary fiscal surpluses and real GDP growth have contributed
towards a reduction in the average public debt-to-GDP ratio throughout the whole period;
(ii) there was a shift in the contribution of the real interest rate and the real exchange rate
– while these factors contributed towards lowering the aggregate debt ratio during the
first half of 1990s, they had contributed in a major way towards its increase during the
rest of the period; and (iii) other factors had a strong and positive contribution to public
debt accumulation throughout the period.
Figure 3. Public Debt Dynamics of 21 MACs
10
8
6
4
2
0
-2
-4
-6
-8
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Primary balance
Real growth
Real Interest
RXR appreciation
Other Factors
Total change in debt ratio
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
11
Table 0-1 Cumulative debt decomposition for 21 MACs
Public Debt Decomposition
Total Change in Public Debt
Primary Fiscal Balance
Real GDP Growth Rate
Real Interest Rate
Real Exchange Rate
Other Factors
O/w recognized liabilities
Percent of GDP
1991-1996
-13.8
-6.7
-14.5
0.4
-3.5
10.1
0.4
1997-2002
26.6
-5.2
-7.8
19.4
8.6
9.1
2.4
1991-2002
12.7
-11.9
-22.3
19.8
5.1
19.2
2.8
The aggregate cumulative debt decomposition for the first half of the 1990s (Table 0-1)
show that real growth and primary surpluses had the largest impact on debt reduction (a
combined impact of close to 22 percent of GDP). Real exchange rate appreciations and
negative interest rates also contributed to debt reduction (3.5 percent of GDP).
In the second half of the period, the combined contribution of the real growth rate and the
primary balance was smaller than in the previous period, but still worked towards debt
reduction (13 percent of GDP). The biggest difference during the second period was in
the combined impact of the real interest rates and real exchange rates (27 percent of
GDP). These two factors acted now as major drivers towards public debt accumulation
Indeed, the average real ex-post interest rate for 9 crisis MACs has increased significantly
since mid 1990s, which worsened debt dynamics significantly (Figure 4).
Figure 4. Implicit Real Interest Rate (%)
7
6
5
4
3
2
1
0
-1
-2
-3
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Note: The 9 Major crises countries are Argentina, Brazil, Korea, Malaysia, Mexico, Turkey, Russian
Federation, Thailand and Indonesia.
To understand what drives the fairly large share of other factors throughout the period,
we look at regional debt decompositions, and we find that these factors are especially
12
large in the case of the ECA countries, as well as in the case of Brazil during the hyperinflation period of 1992/1993. Many ECA countries had started their transition from
centrally-planned to a market economy at the beginning of 1990s. As most of them had
price and exchange rate liberalization, the result was high inflation and large exchange
rate devaluations, necessary to correct distortions in the relative prices.14 Given this, the
margin for error when using data from the beginning of 1990s is high, which means that
including them will introduce a large measurement error in “other factors”.
Table 0-2 Cumulative debt decomposition for 7 ECA countries
Public Debt Decomposition
Total Change in Public Debt
Primary Fiscal Balance
Real GDP Growth Rate
Real Interest Rate
Real Exchange Rate
Other Factors
Percent of GDP
1991-1996
-24.9
6.1
16.4
-32.6
-49.7
32.8
1997-2002
-8.6
-3.2
-10.2
8.1
5.1
-8.4
1991-2002
-33.5
2.8
6.2
-24.5
-44.7
24.5
To account for the fact that when using annual data for highly volatile inflation and
exchange rates we may end up possibly overestimating the real interest and real exchange
rate contribution, we also present debt decomposition results starting from 1994. Indeed
our results show that the share of other factors is now much smaller during 1994-1996.
Table 0-3 Cumulative debt decomposition for 21 MACs
Public Debt Decomposition
Total Change in Public Debt
Primary Fiscal Balance
Real GDP Growth Rate
Real Interest Rate
Real Exchange Rate
Other Factors
O/w recognized liabilities
Percent of GDP
1994-1996
-3.7
-4.1
-6.9
3.0
-3.5
7.6
0.2
1997-2002
26.6
-5.2
-7.8
19.4
8.6
9.1
2.4
1994-2002
22.8
-9.3
-14.8
22.4
5.1
16.7
2.7
III.3. Case studies
Our fifteen individual case studies15 show that most countries experienced episodes of
sharp increases and reductions in debt-to-GDP ratios during 1990 through 2003. Based
on the case studies, we identified 10 episodes of large debt reductions and 13 episodes of
large debt increases. Tables 0-4 and 0-5 rank the most important factors contributing to
changes in debt ratios during these episodes.
For the episodes of large debt reductions (ranging between 10 and 60 percentage points
of GDP) we find that: (i) all episodes involved GDP growth as one of the main
14
For stylized facts of transition economies see Balcerowicz (1993).
The case studies are Argentina, Brazil, Chile, India, Indonesia, Jamaica, Korea, Lebanon, Malaysia,
Mexico, Pakistan, Philippines, Poland, Russia, and Turkey.
15
13
contributing factors, (ii) two-thirds involved primary surpluses (only one country,
Lebanon, reduced debt ratios while running a primary deficit), and (iii) two-thirds of the
debt reduction episodes also involved real exchange rate appreciation.
For the episodes of large debt accumulations (ranging between 16 and 130 percentage
points) we find that: (i) all episodes involved high real interest rates or real exchange rate
depreciations or both; three-quarters of the episodes involved high real interest rates and
half involved a real depreciation; (ii) half of the episodes involved "other factors" such as
financial sector bailouts; and (iii) in half these cases, debt accumulation occurred despite
primary surpluses; only in three cases (India, Korea and Lebanon) did countries run
primary deficits.
Table 0-4 Public Debt Reduction Episodes in Emerging Markets, 1990 to 2003
Country, Time
Period
Chile, 1991-1998
Total Change
(% of GDP)
-30.2
Initial level
(% of GDP)
42.7
Main Contributing Factors
(Reducers; % of GDP)
GDP growth (–15.6)
Primary surplus (–11.5)
Main Contributing Factors
(Increasers; % of GDP)
None
Indonesia, 2001-2003
-22.3
90.3
GDP growth (-9.5)
Primary surplus (-8.3)
Real exchange rate (-4.8)
None
Lebanon, 1991-1993
-48.5
98.4
Real Interest rate (-45.5)
GDP growth (-33.4)
Other factors (18.6)
Primary deficit (15.8)
Malaysia, 1991-1996
-41.4
91.4
GDP growth (-37.3)
Primary surplus (32.3)
Other factors (17.8)
Interest rate (16.5)
Mexico, 1991-1993
-22.8
50.2
Primary surplus (-12.9)
Real exchange rate (-5.9)
GDP growth (-3.9)
None
Pakistan, 2000-2003
-9.5
109.1
GDP growth (-16.5)
Primary surplus (-11.1)
Interest rate (14.8)
Philippines, 19941997
-25.3
93.5
Primary surplus (-22.4)
GDP growth (-15.1)
Real exchange rate (-7.5)
Interest rate (13.0)
Other factors (8.2)
Poland, 1992-2000
-42.8
86.7
GDP growth (-25.5)
Privatization (-11.7)
Real Interest rate (-9.5)
Real exchange rate (-9.0)
Other factors (10.8)
Russia, 2000-2003
-55.2
88.7
Real exchange rate (-19.3)
Primary surplus (-16.7)
GDP growth (-15.4)
Privatization (-6.5)
None
Turkey, 2002-2003
-24.9
91.0
GDP growth (-11.3)
Primary surplus (-10.3)
Real exchange rate (-8.2)
Interest rate (8.9)
14
Table 0-5 Public Debt Increase Episodes in Emerging Markets, 1990 to 2003
Country, Time
Period
Argentina, 20012003
Total Change
(% of GDP)
95.3
Brazil, 1999-2003
16.5
India, 1997/982002/03
Terminal level
(% of GDP)
146.1
Main Contributing Factors
(Increasers, % of GDP)
Other factors (52.2)
Real exchange rate (41.7)
Real Interest rate (5.5)
Main Contributing Factors
(Mitigators, % of GDP)
None
58.7
Interest rate (23.7)
Debt indexation (10.8)
Contingent liabilities (6.5)
Primary surplus (-18.5)
Other factors (-7.2)
Real GDP Growth (-4.1)
21.8
87.0
Primary deficit (20.0)
Real Interest rate (20.0)
GDP growth (-21.2)
Indonesia, 1998-2000
70.8
94.6
Other factors (64.4)
Real exchange rate (8.2)
None
Jamaica, 1997/982003/04
66.8
144.8
Other factors (70.7)
Real Interest rate (51.6)
Real Exchange Rate (7.2)
Primary surplus (-56.4)
Real GDP Growth (-6.1)
Korea, 1997-1998
31.0
43.5
Other factors (20.6)
Real exchange rate (4.8)
Primary deficit (4.3)
None
Lebanon, 1994-2003
128.1
177.9
Interest rate (115.5)
Primary deficit (39.4)
GDP growth (-29.9)
Malaysia, 1997-2002
19.9
70.6
Contingent liabilities (26.2)
Real Interest rate (17.2)
Primary surplus (-32.0)
México, 1994-1996
28.0
55.4
Other factors (15.7)
Real Interest rate (12.5)
Debt indexation (10.9)
Primary surplus (-16.8)
Pakistan, 1996-1999
19.1
113.5
Real Interest rate (12.5)
Real exchange rate (11.6)
Other factors (5.0)
GDP growth (-10.5)
Philippines, 19982002
20.9
89.1
Other factors (15.9)
Real exchange rate (12.1)
Real Interest rate (10.3)
GDP growth (-11.9)
Primary surplus (-5.2)
Russia, 1998-1999
34.0
88.7
Real exchange rate (40.4)
Privatization (-4.1)
Turkey, 2000-2001
34.0
91.0
Real Interest rate (20.4)
Contingent liabilities (15.4)
Real Exchange Rate (6.4)
Primary surplus (-8.5)
IV. Summary of Lessons
Debt dynamics over that last 10 plus years show a high degree of heterogeneity across
market access countries, which underscores the importance of country-specific factors.
These include the composition and structure of the debt, the exchange rate system, the
15
fiscal stance, external shocks and debt management policies. This section attempts to
extract some lessons.
1. The Role of Country Specific Factors
While on aggregate the level of public debt- to- GDP ratio in 2002 is almost the same as
its level in 1990, there is a tremendous diversity across market access countries: 16
countries increased their debt ratios, of which 12 countries increased their debt ratios by
more than 50 percentage points compared to their levels in 1990; 15 countries saw a
reduction in their debt ratios, of which 5 countries reduced their debt ratios by more than
50 percentage points for the same period. This heterogeneity is further underlined by the
fact that even moderate debt-to-GDP ratios can often mask unsustainable debt dynamics
when a substantial portion of public debt is denominated in foreign currency and
exchange rate is overvalued, or when there is a large liquidity exposure and the country is
vulnerable to a roll-over risk.
Our individual case studies show that initial conditions and country specifics are
important. For example, while a sizeable real exchange rate appreciation will certainly
contribute towards lowering the debt ratio, what triggered the real appreciation and
whether it is sustainable is equally important for the debt analysis. If the appreciation
results in overvaluation, it may bring short term gains, but would be costly in the long run
to both economic competitiveness and debt sustainability (e.g., the case of Argentina and
Russia). However, if this appreciation results from substantial productivity gains and an
increase in potential output (Poland during 1990s and Chile), it will contribute to lasting
public debt reduction.
Finally, political consensus and commitment for responsible fiscal management at all
levels of government is essential to keep public debt in check. For example, large
productivity gains resulting from adjustment policies and better institutions will lead to
higher growth and higher savings, lowering the cost of borrowing and improving public
debt dynamics (e.g. Bulgaria, Chile, Korea, Hungary, Poland and Russia post 1998). On
the other hand, weak policies and institutions that discourage high saving rates will keep
the cost of borrowing high, with adverse impacts on the economy and on the debt
dynamics (e.g., the case of Argentina, Russia before 1998, and Turkey).
2. The Role of Fiscal Policy
The episodes of large debt-to-GDP reductions show that fiscal consolidation is a key
component of a credible debt reduction strategy. The individual case studies also show
that fiscal consolidation does not mean just higher primary surpluses, but rather should
also focus on the quality of the fiscal policy, which influences debt sustainability and
debt reduction via its impact on growth16. For example, during 1990-1997, the Malaysian
16
The primary fiscal balance is an imperfect measure of the fiscal stance, as it accounts for neither the
quality nor the durability of the fiscal effort, nor for its impact on growth. Ad hoc cuts in public investment
and social expenditure may result in temporary higher primary surpluses but may not be politically
16
government raised its revenue by broadening the tax base and increasing efficiency in tax
collection, and by robust economic growth, underpinned by structural reforms. As a
result, in the aftermath of the Asian crisis, Malaysia avoided drastic public expenditure
cuts, which supported economic recovery. In contrast, the failure to adjust the fiscal
stance to accommodate a short-fall in revenues causes fiscal deterioration. This has been
the case in Argentina, India and the Philippines during the late 1990s.
If fiscal policy is pro-cyclical, it may further inhibit growth during downturns, increasing
the public debt-to- GDP ratio.17 Our case studies indicate that some MACs have started
counter-cyclical fiscal policy in conjunction with a more flexible monetary policy to
dampen the effects of external demand shocks (Malaysia and Chile). In Malaysia, fiscal
policy was fairly tight when output growth was robust, while fiscal relaxation during the
Asian crisis, together with some monetary relaxation, helped support economic recovery.
Chile also has a strong fiscal position with counter-cyclical capacity. During 1987-1998,
a time of high and rising copper prices, the government ran consistent fiscal surpluses,
while in the late 1990s, when copper prices and the economy were on a downswing,
Chile run overall deficits, consistent with a fiscal structural surplus rule implemented in
2000.18 Most recently, with the advent of high copper prices since 2003, the government
has used the windfall to pay down external debt.
However, Malaysia and Chile might be the exception rather than the rule, as MACs
generally appear to have a limited ability to pursue counter-cyclical policies.19 If policy
credibility is low and the market’s assessment of default risk is high, then, running fiscal
deficits in bad times is not a viable option. Rather, countries might be forced to signal
fiscal sustainability through a tight fiscal stance. As an example, in response to recent
financial market volatility, Brazil achieved very large primary surpluses. This fiscal
tightening helped restore market confidence in Brazil, lowered credit spreads and
reopened the country’s access to international capital markets.
3. The Role of Institutions for Fiscal Management
The quality of fiscal management is also an important determinant of public debt.
Opaque, inefficient and complex institutional arrangements can compromises the
government’s ability to implement effective fiscal policy, to constrain policy
commitments, to manage liabilities and to control and limit fiscal risk. Such institutional
weaknesses include (a) non-comprehensive budgets and the lack of transparency in fiscal
reporting, (b) fragmented responsibility and poor coordination of fiscal management
sustainable and may inhibit long-run growth. Finally, a substantial amount of public expenditure maybe
off-budget, or in the form of “tax expenditures”.
17
Standard Keynesian models imply that governments should use counter-cyclical fiscal policy to offset the
impact of demand shocks At the other extreme, tax-smoothing models, inspired by Barro (1979), imply that
fiscal policy should be neutral over business cycle and respond only to the unanticipated changes.
18
This rule requires the central government to maintain a cyclically-adjusted surplus of 1 percent of GDP
(IMF 2004).
19
Using a cross-section of 11 emerging market countries Calderon and Schmidt-Hebble (2003) find that
only countries with high country risk spreads exhibit procyclical policies, while emerging markets with
better fundamentals are capable of counter-cyclical policies.
17
among different central agencies of government, (c) inability to ensure fiscal discipline
of subnational governments, (d) the failure to limit quasi-fiscal policies and guarantees,
resulting in unrecorded, “hidden” liabilities, (e) the absence of an institutional focus to
control fiscal risks, and (f) a weak budget-making process that fails to ensure that policy
decisions are fiscally sustainable and over-commits government expenditure.
In an effort to compensate for weak institutions and ensure fiscal discipline, many
emerging markets have recently turned to rule-based fiscal policies. The main aim of
fiscal rules is to establish fiscal discipline and credibility by removing discretionary
intervention, which is often associated with fiscal pro-cyclicality. Fiscal rules come in
many different forms. Rules may place limits on the government budget deficit, public
borrowing, and/or public debt. Further, they may target the federal government (e.g.
Argentina, India), subnational governments, or both (e.g. Brazil, Peru,). Rules may be
enshrined in the form of a Fiscal Responsibility Law (FRL) or simply as a policy
guideline (e.g. Chile). Finally, there may or may not be judicial or financial sanctions for
noncompliance.
Evidence with fiscal rules so far is mixed, as most have not yet passed the test of time.
Nevertheless, while design, implementation and enforcement are crucial for success20, in
the pursuit of fiscal discipline, policy rules are no substitute for commitment. As Kopits
(2004) points out, the main challenge for fiscal stability is the creation of a culture of
macroeconomic stability in the political elite and in the population of each country.21
Chile appears to be a good example of a country with a strong culture of macroeconomic
stability. It is noteworthy that Chile does not have a formal FRL. Brazil also is an
encouraging example, as the FRL has successfully survived one political cycle, marked
by a transition from the political right of the Cardoso government to the political left of
the Lula government. In other emerging market economies, including India, such
legislation has yet to find broader support by the electorate.22,23 At an extreme, the recent
Argentine experience illustrates the difficulty of attempting to impose fiscal rules in the
midst of a crisis.24
20
Webb (2004) finds that for subnational discipline, a single comprehensive FRL with top-down rules for
all level and branches of government (Brazil, Colombia) tends to work better than a partial system of FRL,
where the national government lacks the constitutional authority to enforce fiscal discipline at subnational
level (Argentina, India, Canada). The latter systems carry potential costs in terms of political capital and
fiscal bribes. See Webb (2004).
21
Koptis (2004).
22
Nigeria, a low income country with a FRL, is another example, where legislation yet has to find broader
support of the electorate.
23
In India, the adoption of the Fiscal Responsibility and Budget Management Act in 2003, which targets
the elimination of the current deficit, is a noteworthy achievement, which has already considerably improve
fiscal indicators at the center. Nevertheless, much remains to be done and the challenge is to continue the
implementation of the Fiscal Responsibility and Budget Management Act; reform the borrowing regime for
states; expand the volume of center-to-state transfers linked to reform and performance; and simplify
expenditure management.
24
The main reason of the failure of Argentina FRLs was the fiscal collapse that started at the national level.
In 2000-2001 the federal government found it increasingly difficult to meet its many binding spending
obligations, most notably debt service and subnational transfers denominated or linked to the dollar. This
made the targets of the FRLs ever harder to meet during the worsening recession (Webb, 2004).
18
It is often only amidst crisis that a wider consensus to push necessary reforms is forged.
Indeed, most fiscal rules, such as Brazil’s Fiscal Responsibility Law or Chile’s fiscal rule
where implemented in response to crisis to ensure future fiscal and debt sustainability.
Where fiscal institutions are weak and incapable of implementing fiscal rules, deeper
reforms to the policy and budget-making process may be required. The large number of
countries attempting medium term expenditure framework reforms reflect the effort to
strengthen fiscal institutions to strengthen fiscal discipline and improve allocative and
operational efficiency. Turkey provides an example of such an approach.
In Turkey, a fragmented political structure during much of the 1990s and until 2002
proved a major handicap for fiscal reform. The three party coalition that ruled Turkey
during the crises in 1999, 2000 and 2001 was often unable to take the collective decisions
necessary to ensure fiscal sustainability. At the same time, weak fiscal institutions further
undermined fiscal adjustment. While the 2001 crisis ultimately forced collective action
by the coalition government, it was political consensus within the single party
government that came to power in late 2002 that has continued strong implementation of
the fiscal reforms. Turkey has improved the transparency and comprehensiveness of its
fiscal information. A critical reform to be introduced in 2005 is the use of a Cabinet
endorsed medium term fiscal strategy to constrain the annual budget and to limit policy
commitments to what is affordable and consistent with the strategy. These reforms, if
fully implemented and sustained, are key for maintaining credibility, public debt
sustainability and lasting inflation reduction.
4. The Role of automatic debt dynamics
The public debt-to-GDP ratio can increase as a result of larger primary deficits; it can
also grow as a result of “automatic debt dynamics”, which are determined by the
difference between the real interest rate and the real economic growth rate. If a large
share of public debt is denominated in foreign currency, the public debt-to-GDP ratio can
also increase because of exchange-rate related capital losses. Our individual case studies
show that during the first half of 1990s, most countries had favorable debt dynamics:
positive real growth, low interest rates and exchange rate appreciation all worked towards
public debt reduction. However, mainly during the second half of the 1990s, higher real
interest rates and exchange rate depreciations worsened debt dynamics significantly and
contributed to debt accumulation.25 Our case studies demonstrate that the real interest
rate contribution to public debt accumulation has been substantial in Argentina, Brazil,
Columbia, Ecuador, Mexico, Malaysia, Philippines, Turkey, Russia. Prolonged increases
in interest rates, given the short maturity of public debt played a significant role in the
debt accumulation in countries like Turkey and Brazil.
While interest rates maybe partially affected by external shocks (e.g., changes in the
monetary stance in developed countries, commodity price shocks), these are sensitive to
25
In Mexico the debt accumulation started somewhat earlier (1994) and lasted till 1998, and in Lebanon
debt accumulation started in 1994 and it is still ongoing .
19
changes in the debtor’s fiscal stance. For example, an increase in the fiscal deficit may
increase the probability of default and lead to currency pressure. On the other hand, if
fiscal consolidation has a significant impact on market confidence, risk premia may
decline and the exchange rate may appreciate.26
Large increases in interest rates can also be a consequence of a lack of coordination
between fiscal and monetary policy, further weakening perceptions of macroeconomic
stability. For example, in Argentina, Russia and Turkey, using the nominal exchange rate
as an anchor for inflation reduction contributed to real appreciation incompatible with
loose fiscal policy. For Brazil, where monetary policy targets inflation, it may be difficult
to bring interest rates down without further fiscal adjustment. As a counter-example,
Malaysia, Chile, and Poland during 1990s, experienced large reductions in their public
debt based on fiscal consolidation, and policies geared towards maintaining low interest
rates, moderate inflation for long periods of time, and competitive economies, thus
creating favorable and sustainable debt dynamics.
5. The Role of Debt Structure
Public debt composition matters a great deal for debt dynamics. Our debt decompositions
reveal that real exchange rate depreciations were one of the key contributors to debt
accumulation in the second half of the 1990s. The exchange rate becomes crucial when a
high proportion of debt is denominated in foreign currency (Argentina, Indonesia,
Lebanon) or when a substantial share of debt is indexed to foreign currency (Turkey and
Brazil). A high proportion of debt denominated in foreign currency implies that the
domestic value of the debt increases if the domestic currency depreciates; dollarindexation of domestic debt can further increase vulnerability of countries to a sharp
depreciation of the exchange rate.
Brazil’s case study shows that debt dynamics can be adversely affected if a large portion
of domestic debt is indexed to short-term interest rates. An important lesson from Brazil’s
experience with debt indexation is that, unlike other factors, it never worked in the
direction of debt reduction. It was introduced to establish market confidence, but debt
indexation sharply built up debt stocks in turbulent years, as was seen in 1993-95 and
1999-2001. For instance, along with the collapse of Brazil’s exchange rate peg in 1999,
the debt ratio increased 4.5 percentage points because of dollar-indexation.
Further, the maturity profile of public debt also can crucially impact debt dynamics. A
combination of rising interest rates and short maturity played a significant role in the debt
accumulation in countries like Turkey and Brazil. 27 A short-term debt structure with
frequent rollovers makes the public finances vulnerable to shifting market sentiment that
could raise interest rates. Floating rate debt and the short term maturity of public debt
makes Brazil’s public debt dynamics highly sensitive to interest rate increases.
26
Note that in some cases, where credibility is lacking, e.g. Brazil and perhaps Turkey, the markets may
require sustained fiscal surpluses, to build sizeable forex reserves, to restore their credibility.
27
Given the short term maturity structure of debt in Turkey, and the significant part of domestic debt,
indexed to short-term (SELIC) interest rate in Brazil, high real interest rate was an important factor behind
debt accumulation.
20
Finally, Mexico’s experience during the 1994 Tequila crisis and Russia’s experience
during the 1998 crisis show that financial engineering cannot be a substitute for strong
macroeconomic fundamentals; it needs to be a part of wider fiscal and structural reform
agenda. In the case of Mexico, the decision to switch from short-term peso denominated
debt (Cetes) to short-term dollar index debt (Tesobonos) in 1994 in an effort to stem the
speculative attack on the peso and delay necessary macroeconomic adjustments has
proven disastrous as it brought the country closer to financial crisis and, after an
inevitable devaluation of the peso, substantially increased Mexico’s foreign debt burden.
Mexico’s post-crisis experience, however, shows that well designed changes to public
debt management, underpinned by sound economic policies, can effectively reduce
exchange rate, interest rate and roll-over risk. The Mexican government gradually
improved the composition of its debt through a proactive debt management strategy that
focused on increasing the average maturity of its public debt, reducing the vulnerability
of public finance to interest and exchange rate shocks, and promoting the development of
domestic securities markets.
6. The Role of Contingent/Hidden liabilities
Past, current, and prospective hidden deficits, due to the realization of contingent
liabilities, can quickly and dramatically raise public debt. Contingent liabilities are
financial obligations that only become a direct liability for the government if a certain
event occurs. A country’s financial system is often considered as its most serious
contingent liability, as markets expect government support far beyond legal obligations to
ensure financial stability (World Bank, 1998).28 Indeed, the banking crisis of the 1990s
and their subsequent bail-out through the public sector account for a significant increase
in government debt in the years following the banking crisis. Easterly (1998) estimates
the costs of banking bailouts in the countries that experienced the Asian crisis ranged
from 20 to 60 percent of GDP.
Data on contingent/hidden liabilities are extremely poor and for that reason are likely to
be underestimated in our analysis, as most countries identify their contingent liabilities
only ex-post, e.g., the costs associated with banking failures are acknowledged only in
the aftermath of a banking crisis. Although some countries (Brazil, Chile, India, The
Philippines, and Poland) are tracking contingent liabilities, they do not include provisions
for probable losses from contingent liabilities in the fiscal accounts. Most countries also
do not account for implicit direct liabilities like pension and social security obligations.
Given the serious fiscal implications of contingent/hidden liabilities, efforts are needed to
record and track information on fiscal risks in a comprehensive fashion.
7. The Role of political economy
28
The World Bank (1998),and Brixi and Shick et al. (2003).
21
Finally, many of our case studies fit well within the political economy explanation of
public debt build-up: borrowing to postpone difficult economic reforms, or to promote
the interests of groups well-connected to those in power.
The quick economic recovery in Russia post-1998 suggests that economic crises can also
have a positive impact despite a high immediate costs. The crisis in Russia ended up
presenting an opportunity to implement politically difficult reforms. The quick economic
recovery after the 1998 crisis suggests that loss of access to the international capital
markets had a positive impact on reform. The lack of financing served to impose hard
budget constraints. In turn this led to cutting loss-making activities which was both
growth-enhancing and helped ensure fiscal sustainability. In this regard, Russia’s
experience may suggest a political economy lesson: closing markets to borrowers that
fail to adjust could actually remove moral hazard and promote reform. Furthermore, the
Asian crisis presented a window of opportunity for Korea to address an important cause
of the 1997-98 crisis–moral hazard induced by close connections between influential
private businesses and the government--that caused the private sector to over borrow.
22
1. Argentina
1.1. Debt Trends
Prior to the 1991 Convertibility Plan, when the peso was pegged at par to the US dollar,
Argentina suffered through a long period of economic stagnation and instability. Debt
increased throughout the 1980s, with a spike in 1989, when a failure to control fiscal
deficits drove the country to its worst episode of hyperinflation. The 1991 Convertibility
Plan finally brought stability and large scale privatizations during the 1989-1992 period,
and, together with the 1992 Brady deal, brought a substantial reduction in Argentina’s
external debt burden. This reduction proved only temporary, however. Since the mid1990s, Argentina’s debt has once again been on the rise. Noticeably, the public sector
has played a significant role in this debt accumulation: the majority of external financing
went to the public sector, and the majority of public debt was accounted for by external
debt.
Argentina’s debt-GDP ratio started to deteriorate from 1995 onwards and, especially,
since 1999. The debt levels prior to the 2001-02 crisis, although on a rising path, were
still in a range not previously viewed as alarming. Nevertheless, the crisis materialized,
and with the end of the convertibility regime Argentina’s debt-to-GDP ratio jumped to
164 percent of GDP in 2002, an increase of more than 100 percentage points.
Figure 5. Argentina: Public and Private External Debt (% of GDP)
140
Government External Debt + IMF Credit
Private External Debt
120
100
80
60
40
20
23
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
Figure 6. Argentina: Public Sector Debt (% of GDP)
160
Domestic currency denominated debt
Foreign currency denominated debt
140
120
100
80
60
40
20
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1.2. Debt Decomposition
The debt decomposition results are divided into three sub-periods: the 1991-1994 period
when Argentina’s public debt-to-GDP ratio decreased; the 1995-2000 period, when the
debt to GDP ratio started to deteriorated; and the 2001-2003 crisis period.
Table 1-1. Argentina: Cumulative public debt decomposition
Public Debt Decomposition
1991-03
Change in public sector debt
Primary Deficit (- surplus)
Off-budget govt. expenditure (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
104.6
-3.8
11.8
-17.7
22.1
38.5
53.7
1991-94
1995-00
Percent of GDP
-10.5
19.8
-2.3
1.1
6.3
3.9
-10.7
-3.8
2.7
13.8
-5.9
2.7
-0.6
2.1
2001-03
95.3
-2.5
1.6
-3.2
5.5
41.7
52.2
During the period 1991-1994, Argentina was viewed as a star performer. The
Convertibility Plan in 1991 seemed to herald a new era of low inflation and high growth
in Argentina. Hyperinflation was successfully reined in. Annual real GDP growth
achieved 8.2 percent on average during 1991-94. The strong growth performance during
this period owes much to the fact that growth was recovering strongly from the
hyperinflation episode of 1989-90, when the economy was in crisis.
Public sector debt declined by about 11 percent of GDP during this period. Strong real
GDP growth contributed mainly to debt reduction (11 percent of GDP). Other factors
behind this decline were a real exchange rate appreciation (6 percent of GDP) and
primary fiscal surpluses (2 percent of GDP). During this period, off-budget federal
government spending, which consisted mainly of court-ordered compensation payments
24
following the social security reform in the early 1990s, accounted for a large portion of
the debt accumulation (6 percent of GDP net of privatization proceeds).29
During the period 1995-2000, the economy seemed to be performing well at first
glance, but vulnerabilities started to build-up, in particular after 1998. Argentina showed
considerable resilience to the 1994/96 Tequila crisis. After quickly regaining growth
momentum and strong growth in 1997, the economy slid however into depression in the
latter half of 1998. The downturn was triggered by a variety of factors, including a
cyclical correction, political uncertainty surrounding Menem’s re-election bid for an
unconstitutional third presidential term, and adverse impacts from the Russia (August
1998) and Brazil crisis (1998-1999).
During 1995 and 2000, public sector debt climbed from 31 percent of GDP at the end of
1994 to 51 percent of GDP at the end of 2000, an increase of 20 percentage points. While
off-budget expenditures played a key role for debt accumulation during the 1991-1994
period, real interest payments predominately contributed to the debt accumulation during
the 1995-2000 period (14 percent of GDP). Along with debt accumulation, Argentina
failed to implement a cautious fiscal policy. As a consequence, primary deficits also
contributed to the debt increase during this period.
The 2001-03 period is marked by a severe crisis in 2001, which lead Argentina to default
on its debt and end convertibility, with a subsequent economic recovery from the crisis.
Public debt to GDP skyrocketed to 165 percent of GDP in 2002 from 62 percent in 2001.
The real exchange rate depreciation made the largest contribution to the debt increase (42
percent of GDP). Real interest rates accounted for a moderate contribution
(approximately 6 percent of GDP), reflecting the fact that Argentina had largely defaulted
on its debt. The other factors explains the largest part of debt accumulation during this
period (53 percent of GDP) and most likely captures the impact of the issuance of
compensatory peso-denominated federal bonds (BODENS) after the 2002 default in
exchange for reprogrammed bank deposits (deposits trapped by the corralito or corralon),
and to banks in compensation for asymmetrical pesification.30
The economic recovery and growth following the crisis proved better than expected. In
2003, real GDP growth reached 8.4 percent, allowing for a debt-reducing contribution of
real GDP growth during this period (3 percent of GDP).
29
Figures for off-budget expenditures are taken from IMF (2003b). The figures consist of federal
government’s off-budget expenditures as well as estimated off-budget transactions by the provinces (see
Table 2 and footnote 6, IMF (2003b).
30
When the government forced banks to convert their dollar-denominated accounts and debts to pesos, it
mandated that deposits be converted at a 1USD = 1.4 peso exchange rate, but credits were converted at a
1USD = 1 peso rate. This asymmetrical conversion reduced the value of banks’ net worth substantially. The
Argentine government issued about 27 billion in compensation bonds (BODENS) to banks in 2002 and as
of September 2003, had compensated banks for 70-80 percent of their losses from asymmetrical
pesification.
25
Figure 7. Argentina: Public Debt Dynamics
100
10
80
60
5
40
0
20
0
-5
-20
-10
-40
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
P rimary Deficit (- surplus)
Off-budget go vt. expenditure (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Co ntributio n fro m debt indexatio n
Other Facto rs
Change in public secto r debt
1991
1992
1993
1994
1995
P rimary Deficit (- surplus)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real exchange rate change
Other Facto rs
1996
1997
1998
1999
1.3. Further Analysis
The severity of the Argentine crisis and its dire social costs came as a surprise to most
observers. Argentina outperformed most other economies in the region until 1997 in
terms of growth per capita, in spite of a short-lived interruption in 1995, when it suffered
severe contagion from the Tequila crisis. But after the major slowdown in growth in 1999
that affected the whole region, other countries in the region began a modest recovery,
while Argentina plunged into a protracted recession, eventually leading Argentina to
default on its public debt and to abandon its currency board in favor of a free float at the
end of 2001.
During 1992 and 2000, public sector debt increased by 20 percentage points. A large part
of this debt accumulation is a reflection of growing interest rate expenditures, in
particular during the 1995-2000 period. Interest payments on public debt rose from the
equivalent of 1.5 percent of GDP in 1993-94 to 3.5 percent of GDP by 1999 and more
than 4 percent of GDP in 2000-01. While the continued growth of the stock of public
debt during the 1990s partly is accounted by higher interest payments, the main
explanation lies in the interest-structure of Argentina’s Brady bonds. The government had
issued Brady-type bonds with low initial coupon payments that were scheduled to
increase during the 1990s. In addition, other government bonds issued at the beginning of
the 1990s had an initial grace period on interest payments during which said payments
were capitalized.31 The increases in the government’s interest bill were quite predictable
and should have been offset, however, Argentina failed to implement necessary
Porzecanski (2002)
26
2001
Off-budget go vt. expenditure (net o f privatizatio n)
Co ntributio n fro m real interest rate
Co ntributio n fro m debt indexatio n
Change in public secto r debt
Note: The interpretation of this chart is as follows: each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
31
2000
precautionary fiscal measures.32 A short-fall in revenues further led to a deterioration of
fiscal balances. Tax collections and other revenues net of privatization income peaked in
1994 (at 24.3 percent of GDP) and declined during the next five years, despite various tax
hikes. Argentina’s 1994 pension reform partly explained a decline in revenues as workers
were not longer contributing to a state-run pay-as-you-go system. Tax revenue further
deteriorated with the economic depression after 1998.
Political economy factors also played a significant role for debt accumulation towards the
end of the 1990s. In 1997, Menem announced political ambitions to secure an
unconstitutional third presidential term in the 1999 election. This met a lot of political
opposition and led to a public spending race between Menem and leading Peronist
provincial governors, which dealt a blow to fiscal austerity.33
Finally, the federal-provincial fiscal structure also hamstringed fiscal austerity.
Decentralized public expenditure, complex intergovernmental transfer system, and the
provinces' ability to borrow, not only impeded effective counter-cyclical policies, the Coparticipation Law, which regulates federal-provincial revenue sharing effectively
promoted spending at the provincial level.
It is now widely accepted that Argentina’s hard peg hid from public view a serious
deterioration in fiscal solvency and mounting financial stress. The collapse of the peg in
2002 revealed these latent problems in full force and made them much worse due to the
exchange rate overshooting and the disruption of the payments system derived from the
deposit freeze (the so-called “corralito”). Financial stress was amplified by the large
exposure of banks and Pension Funds to increasing government risk. Thus a vicious
circle of economic contraction, fiscal hardship and financial stress ensued, causing a
jump in Argentina’s debt-to GDP ratio.
32
The government had managed to register primary fiscal surpluses of 1.4 percent of GDP in the 1992-93
period, but in the period 1994-2000 it posted three years of primary deficits (1995, 1996 and 1999) and four
years of primary surpluses averaging a meagre 0.3 percent of GDP.
33
Eudardo Duhalde, which then was governor of the province of Buenos Aires launched a massive publicspending campaign in order to compete against Menem. The province of Buenos Aires went from a low,
below-average fiscal deficit in 1996 (7 percent of current revenues) to a huge and significantly aboveaverage deficit in 1999 (25 percent of current revenues).
27
Box: Argentina’s debt sustainability and the hard peg to the dollar
Prior to 1999, there was hardly any concern on Argentina’s debt sustainability. Perry and Serven
(2003) argue that, although fiscal discipline had been a concern for years, it is fair to say that
most analysts in investment banks and elsewhere did not begin to seriously question fiscal
solvency until then. Perry and Serven (2003) argue that Argentina’s hard peg to the dollar had a
major effect on debt sustainability, as it imposed a protracted deflationary adjustment to the
external shocks after 1997. This influenced debt sustainability perceptions through two channels:
first, the protracted deflationary adjustment reduced expectations for future growth; and second, it
made further fiscal adjustment more difficult and painful as the ratio of revenues to GDP
collapsed. In this context, further tax hikes (like the “impuestazo” in 2000) or expenditure cuts
(like those undertaken during the second half of 2001) aggravated the recession and the ensuing
social and political tensions.
Perry and Serven (2003) explore debt sustainability by performing historical debt sustainability
exercises on the basis of growth expectations formed exclusively on information available in each
year. They find that declining future growth projections (influenced by the deflationary
adjustment under the hard peg) may have been crucial in shaping perceptions about fiscal
sustainability. Assuming that markets assessed long-term growth potential based on a 3-year
moving average of past growth, their simulations indicate that by 2000, and certainly by 2001,
debt sustainability was clearly open to question, in the sense that the required primary balance of
the consolidated government approached or even exceeded 4 percent of GDP, a figure that looked
unlikely given Argentine fiscal history and institutions.
Perry and Serven (2003) further argue that the real exchange rate overvaluation that developed
after 1997 implied that measures of sustainability based on the observed ratio of public debt to
GDP understated by a considerable margin the public sector’s difficulties, as most public debt
was denominated in dollars while government assets (in particular its capacity to tax) were not.
Thus, a real depreciation restoring real exchange rate equilibrium would have raised public debt
ratios by a large amount – up to 20-30 percentage points of GDP in 2000-2001, as shown in the
Table below. It is important to note that this would have occurred irrespective of whether the real
depreciation was achieved under Convertibility through nominal deflation or through a nominal
devaluation and thus a collapse of the Currency Board. In either case, the real depreciation would
have eventually revealed the reduced capacity of the government to pay back its debt. The Table
below shows that once this is factored into a historic debt sustainability simulation, by 2001
government solvency would have required an additional primary surplus of about 2 percent of
GDP annually. The peg actually hid from public view the increasing precariousness of the fiscal
situation, and thus made it more difficult to summon political support for an adjustment while
there was still time for an orderly correction.
In the same vein, even if the Currency Board had not collapsed, households and firms in nontradable sectors would have suffered severe financial stress through the required real exchange
rate adjustment, as their capacity to repay dollar and peso debts would have been eroded through
the deflationary process. This would have had a major impact on the quality of bank portfolios,
and the government would have been faced with significant fiscal contingencies -- though
probably not as large as those that arose in fact after the nominal devaluation.
28
Table 1-3. Fiscal Sustainability and the Exchange Rate
Debt Output
Ratio
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
32.3%
26.1%
28.7%
30.9%
34.8%
36.6%
38.1%
40.9%
47.6%
50.9%
62.2%
Debt Output
Ratio
Adjusted
for RER
Misalignment
Consolidated
Gov. Primary
Balance
Sustainable
Sustainable
Balance
Balance
(av. growth rate
Adjusted
for RER
based on last 3
year observations) Misalignment
Percentage of
GDP
Percentage of
GDP
Percentage of
GDP
-0.4
1.4
1.2
-0.1
-1.0
-1.3
0.2
0.6
-1.6
0.3
-1.4
2.7
0.1
n.s.p.
n.s.p.
0.8
0.9
0.9
0.2
1.7
3.9
6.0
2.1
0.1
n.s.p.
n.s.p.
0.8
0.9
0.9
0.2
1.9
5.1
8.4
28.0%
23.9%
27.7%
29.1%
31.6%
34.9%
39.4%
46.2%
63.2%
70.6%
95.0%
Note:
n.s.p. means no sustainability problem.
Source: Perry and Serven (2003)
29
2. Brazil
2.1. Trends in Public Debt
Like Argentina, Chile and Mexico, Brazil experienced a massive build-up of debt in the
late 1970s. After years of painful muddling through with an unsustainable debt burden,
an outright default was declared in 1987. In 1994, a Brady deal restructured Brazil’s debt
to private creditors and helped Brazil return to international financial markets. At the
same time, a stabilization program (the Real Plan) successfully ended hyperinflation.
Although Brazil has not experienced an open debt crisis in recent years, concerns about
the sustainability of Brazilian debt continue to attract attention, as witnessed most
recently during the run-up to the 2002 presidential elections. Concerns about debt
sustainability in Brazil are at least partly linked to the fact that Brazil’s debt service
indicators are among the worst for emerging markets. According to World Bank statistics
(GDF 2004), Brazil’s debt-to-exports ratio was over 300 percent in 2002 and Brazil’s
debt service ratio was 68.9 percent. 34
Gross public debt, according to the Central Bank, stood at 79 percent of GDP in 2003,
having grown from 65 percent of GDP since 2000. In net terms - the commonly used debt
concept in Brazil - public debt, stood at 59 percent of GDP at the end of 2003 (see Figure
2-1). Public debt grew by nearly 30 percentage points from 30 percent of GDP at the end
of 1994 to close to 60 percent at the end of 2003. 35 The fastest debt accumulation
occurred during 1998 and 2000, when debt increased by nearly 10 percentage points.
Brazil external debt burden is largely private. Less then half of the country’s external
obligations are public or publicly guaranteed and public external debt has followed a
rather flat path over the last decade. Public external debt accounts for about 20 percent of
GDP.
34 In 1999, Brazil had reached a debt-to-exports ratio of 400 percent and a debt service ratio exceeding 100
percent. For comparison, Argentina in 2001, prior to its massive default, had a debt-to-exports ratio of 376
percent and a debt service ratio of 66 percent.
35
Net public debt has since fallen to about 53.7 percent (October 2004).
30
Figure 8. Brazil: Public Sector Debt (net, % of GDP)
70
Do mestic currency deno minated debt
60
Fo reign currency deno minated debt
50
40
30
20
10
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: Staff estimations
Figure 9. Brazil: Total external debt, growth, and net non-debt creating flows
-2
10
-4
0
-6
net non debt creating capital inflow s (%, GDP)
external debt (% of GDP)
real GDP grow th (%)
31
2003
20
2001
0
1999
30
1997
2
1995
40
1993
4
1991
50
1989
6
1987
8
60
1985
70
1983
10
1981
80
2.2. Debt Decomposition
The debt decomposition results are broken into three sub-periods. The pre-1994 period
covers Brazil’s experience with hyperinflation (1988-1994). The 1995-1998 period is
characterized by successful price stabilization following the 1994 Real Plan36 and the
post-Real Plan fiscal crisis of 1995-1996.37 The 1999-2003 period is marked by fiscal
adjustment.
Table 2-1. Brazil: Cumulative public debt decomposition
Public Debt Decomposition
1993-03
Change in public sector debt
25.6
Primary Deficit (- Surplus)
-18.4
Rec. of Contingent liab. (net of privatization)
13.5
Contribution from real GDP growth
-9.0
Contribution from real interest rate
20.5
Contribution from real exchange rate change
2.2
Contribution from debt indexation
22.7
Other factors
-5.8
Note: Data on indexed debt is only available from 1993,
1993-94
1995-98
Percent of GDP
-4.0
13.1
-0.5
0.7
0.0
7.0
-1.8
-3.1
-13.3
10.1
-1.8
-1.4
9.5
2.4
3.9
-2.5
1999-03
16.5
-18.5
6.5
-4.1
23.7
5.4
10.8
-7.2
Brazil’s debt decomposition indicates that primary fiscal balances and real GDP growth
have been the most significant debt-reducing factors between 1993 and 2003 (see Table
2-1 and Figure 10). Brazil’s primary fiscal balance, which has improved significantly in
the recent past, has provided the largest debt-reducing contribution, in particular since
1999. Real GDP growth was responsible for a debt decline of 9.0 percent of GDP over
the decade.
The debt decomposition also indicates a tremendous role that the real interest rate plays
in Brazil’s debt dynamics. Before 1995, the hyperinflation produced negative average
real interest rates, which could have eroded public debt. Since the elimination of
hyperinflation following the Real Plan, the fairly high real interest rate has led to a steady
increase of public debt.
The recent real depreciation of the exchange rate, especially in 2001-02, added to the rise
in debt ratios. This is in contrast with the real appreciation of 1994-95, resulting from the
fact that the nominal depreciation of the exchange rate was more then offset by
36
The Real Plan was instituted shortly after the Brady deal in 1994 and was aimed to break inflationary
expectations by anchoring the domestic currency (the real) to the US dollar. As a result, inflation decreased
to single digits, but triggered the real exchange rate appreciation. The peg was abandoned in January of
1999.
37
While the Real Plan was successful in ending hyperinflation, the post-Real Plan period (1995-1998) has
been characterized by a dramatic worsening of state governments’ budgets. One of the major structural
causes of the 1995-1996 fiscal crisis was the heavy reliance of Brazilian states on the inflation tax during
the high inflation period. Large increases in salaries were granted to state employees at the end of 1994, up
to 56 percent in real terms, without being covered by equivalent tax revenues. Despite efforts of the federal
government to control state level debt, Brazil’s fiscal stance deteriorated sharply during 1995-1998, which
shifted debt dynamics to an unsustainable path.
32
hyperinflation, which helped to reduce the debt burden in those years by 4 percent. The
effect of the devaluations was especially prominent in 1999-2003. This is not only due to
its impact on real depreciation, but also because a significant proportion of Brazil’s
domestic debt is indexed to the exchange rate and its principal value rises with
devaluation. Overall, debt indexation contributed 22.7 percent of GDP to the debt rise
during the past decade.
The recognition of contingent liabilities also played a major role in increasing the debt
stock. These so-called “skeletons” that had to be explicitly assumed were estimated to
have increased the net public debt ratio by 13.5 percentage points of GDP over 19922003 and this is with privatization keeping the debt from being higher than it would have
been otherwise.38
Figure 10. Brazil: Public Debt Dynamics
14
9
4
-1
-6
-11
-16
-21
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
P rimary Deficit (- Surplus)
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Co ntributio n fro m debt indexatio n
Other Facto rs
Change in public secto r debt
2003
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
38
Estimates for Brazil’s contingent liabilities are taken from Goldfajn (2002)
33
2.3. Further Analysis39
Brazil’s public debt burden is of great concern. For public debt, the domestic-to-external
ratio is almost 4:1. External gross public debt varies between 15 to 20 percent of GDP
and internal gross public debt is around 55percent of GDP. This is very different from
Argentina, where almost all debt prior to the recent default was external debt, or even
from Mexico, where the ratio of domestic-to-external debt is around 1.5:1. This makes
internal debt management a key issue when macro stability in Brazil is considered.
The composition and term structure of Brazil’s domestic debt played a significant role in
the rapid increase of public debt and the difficulties of its management. Brazil’s record of
high inflation and a succession of failed stabilization plans meant that there was great
reluctance on the part of the public to hold nominal debt, even after the Real Stabilization
Plan in 1994. The biggest category of government bonds is comprised of so-called “zero
duration bonds” 40 . Currently, about 60 percent of debt is held in this form. Another
9percent is indexed to the exchange rate (dollar denominated), 9percent is linked to the
price level and 16percent is in the form of nominal bonds (see Figure 11).41
A volatile macro environment has also implied that the tenor of the Brazilian domestic
debt is very short and tends to fall further in crisis times. In December 2003, the average
duration of debt of the Treasury and the Central Bank was 10.85 months (Annual Report
of the Central Bank). The average maturity of internal debt in the form of bonds was 30.8
months and the average maturity of the most common bond, the LFT, was 20.4 months
(Nota Para a Imprensa).
40
A zero duration bond, is a bond that is indexed to the short term interest rate (SELIC in Brazil). It is a
floating rate instrument sold at a discount and its face-value is corrected every day by the average daily
interest rate during its term. It is an instrument that is perfectly indexed against capital loss in the event of
interest rates going up and is a good hedge in times of uncertainty.
41
As credibility increased after the Real Plan, the share of nominal debt in domestic debt in the form of
bonds increased to a peak of 61% in end-1996. After this, with the outbreak of the Asian and the Russian
crises, the share of nominal debt fell to a low of 3.5% in December 1998. By the end of 2000 its share rose
back to 15%. However, with a renewed crisis in 2002, nominal bonds constituted only 2% of debt at the
end of 2002. Dollar linked bonds rose from about 10% of total debt in 1994-95 to 21% at the end of 1998,
prior to the first big devaluation in Brazil after stabilization. The experience of 1998-99 was repeated in
2002, with dollar indexed bonds accounting for 22% of the total at end-2002.
34
Figure 11. Brazil: Domestic debt composition (% of total)
80%
Selic Indexed
70%
Dollar Indexed
Fixed
60%
50%
40%
30%
20%
10%
0%
2000
2001
2002
2003
2004
Source: World Bank (2003d)
Indexation and the short duration of the debt make Brazil’s public debt dynamics highly
sensitive to changes in the price of money -- debt rises very rapidly in crisis periods when
interest rates increase or the domestic currency depreciates. This became apparent during
the run-up to the presidential elections in October 2002, when concerns about
macroeconomic stability and debt sustainability put downward pressure on the exchange
rate and upward pressure on interest rates (see Figure 12).
The composition of the debt also hamstrings policy making. Tightening monetary policy
by raising interest rates has a compound effect on debt service payments and puts
pressure on the fiscal deficit. A depreciating exchange rate similarly raises the cost of
domestic debt service.
35
Figure 12. Brazil: Exchange Rate and Interest Rate Impact
on Change in Debt Stock on a Monthly Basis
220000
180000
R$ millions
140000
100000
60000
20000
Oct.
2002
-20000
-60000
Interest Rate Effect
Oct.
2003
Exchange Rate Effect
Change in Debt Stock
Note: The interpretation of this chart is as follows. The column represent the contribution of the interest
rate and the exchange rate on month on month change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio.
While Brazil’s debt strategy has paid off in terms of avoiding any debt crisis and assuring
debt rollover over a ten year period, it has not been without cost to the economy. In the
case of Brazil, debt indexation never worked in the direction of debt reduction. It was
introduced to establish market confidence, but debt indexation sharply built up debt
stocks in turbulent years, as was seen in 1993-95 and 1999-2001. For instance, along with
the collapse of Brazil’s exchange rate peg in 1999, the debt ratio increased 4.5 percentage
points merely due to the dollar-indexation. High real interest rates have been crucial for
Brazil’s debt accumulation since 1994. Nominal interest payments as a proportion of
GDP have varied between 8 percent and 13.8 percent between 2000 and 2003 (Annual
Report of the Central Bank). This high interest burden most likely explains Brazil’s low
average rates of growth and investment. In the ten years since the Real Plan, the growth
rate has been below 3 percent. Per capita income in constant (2003) US dollars in 2003
was barely 6 percent higher than in 1994, when stabilization occurred. It is also worth
noting that the Brazilian strategy of pre-crisis and crisis management through bailouts of
the financial sector, high interest rates and bonds indexed to the interest rate and the
exchange rate has meant that, very often, profit earners in the private sector have been
protected. The profits of the Brazilian financial sector are very high, even in crisis years.
In spite of this, the investment rates (in constant prices) in Brazil during 1994 and 2003
have been low and varied between 22 percent and 19 percent - this is not significantly
higher than during the early nineties chronic inflation period and much lower than East
Asian levels.
36
Nevertheless, Brazil is in many ways is a success story. Brazil has not defaulted on or
restructured its debt involuntarily in the past ten years, since its economy stabilized.
Continuing a five year trend of running significant primary surpluses and given 2004
statistics, the government is well on course of meeting its primary surplus target of 4.25
percent of GDP. Improvements in the economy combined with some savings related to
pension reform should further benefit public debt dynamics. The government has also
made substantial progress in changing its debt decomposition in an effort to reduce
vulnerability. Dollar-indexed domestic debt in March 2004 accounted for 9.2 percent of
federal domestic debt compared to a peak of 33 percent in October 2001. Nevertheless,
SELIC-indexed debt remains substantial besides a modest decline since April 2003.
37
3. Chile
3.1. Debt Trends
In the early 1980s, Chile experienced a deep financial crisis, which led to a sharp drop in
real GDP and very high external indebtedness. Since then, Chile has followed a sound
and consistent policy framework, which has not only fostered growth and
macroeconomic stability, but also achieved an impressive debt reduction. In 2003,
Chile’s external gross debt stood at about 60 percent of GDP down from a high of about
112 percent of GDP in 1985; public debt of the Central Government had fallen to 16
percent of GDP (from 43 percent in 1990).42 In addition, between 1980 and 2003, Chile
was the fastest growing country in Latin America, with average annual per capita income
growth of 3.25 percent.
Figure 13. Chile: Public sector debt (% of GDP)
50
45
40
Domestic currency denominated debt
35
Foreign currency denominated debt
30
25
20
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
3.2 Public Debt Decomposition
The decomposition results are broken into two sub-periods, which are characterized by a
strong decline (1991-1998) and a modest increase (1999-2003) in Chile’s public debt-toGDP ratio.
42
Chile’s private sector external debt is quite high, at near 50 percent of GDP. The contingent liability
represented by this debt are however quite low, as over half of private sector external debt corresponds to
foreign-owned companies lending to their Chilean subsidiaries.
38
Table 3-1. Chile: Cumulative public debt decomposition, percent of GDP
Public sector debt decomposition
Change in public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
1991-03
1991-98
1999-03
-27.3
-7.3
0.0
-17.4
-4.7
-0.7
2.7
-30.2
-11.5
0.0
-15.6
-4.6
-1.8
3.3
2.9
4.3
0.0
-1.8
-0.1
1.1
-0.6
During the period 1991-1998, Chile’s public debt-to-GDP ratio declined by about 30
percentage points. The main factors behind this impressive decline were sizeable and
consistent primary fiscal surpluses (11.5 percent of GDP) and a significant contribution
from real economic growth (15.6 percent of GDP). Capital gain on external debt due to
some real exchange rate appreciation (2 percent of GDP), and relatively low interest rates
(4 percent of GDP) also helped with debt reduction during this time.
During the period 1999–2003, Chile’s public debt-to-GDP ratio has increased slightly
(by about 3 percent of GDP). As a result of an economic recession in 1999, the real
growth contribution during this period was much smaller (1.8 percent of GDP).
Furthermore, Chile was following counter-cyclical fiscal policy, which meant fiscal
loosening to support economic recovery. This contributed modestly towards public debt
accumulation (4.3 percent of GDP). Finally, a real exchange rate depreciation has also
contributed to public debt accumulation (1 percent of GDP).
39
Figure 14. Chile: Public Debt Dynamics (% of GDP)
2
0
-2
-4
-6
-8
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
P rimary Deficit (- Surplus)
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Co ntributio n fro m debt indexatio n
Other Facto rs
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
3.3. Further Analysis
Chile has pursued an aggressive debt reduction strategy. Chile experienced a deep
financial crisis in the early 1980s. Coming out of the crisis, Chile had accumulated about
17 billion dollars of external debt, making it one of the most indebted countries in the
world. In the following years Chile implemented a debt reduction program that decreased
debt by about 9 billion dollars. Two mechanisms were created for this purpose. One,
known as Chapter XVIII, was a system of private sector debt buybacks, which allowed
private holders to purchase secondary market debt43. The other, known as Chapter XIX,
was a debt-for-equity swap mechanism. Overall, the debt swaps allowed Chile to
exchange $3.6 billion of external debt for equity in Chilean businesses and buy back $7.5
billion (about 33 percent of GDP) worth of debt. There were investment subsidies built
into these deals, and almost 90 percent of FDI was channeled through these debt-equity
swaps. Chile has since been rewarded with a sharp rise in capital flows in the 1990s:
annual average inflows rose from $1 billion in the 1980s to $3 billion in the 1990s. The
43
While foreign exchange had to be purchased in the market, the central bank strictly controlled the access
to this mechanism to avoid large shocks in the foreign exchange market. The discounts in the secondary
market were thus shared between the Central Bank and the debtors.
40
fiscal incentives for savings at the firm level, together with FDI incentives from the debtto-equity swaps, stimulated investment to rates way beyond 20 percent.
Chile’s successful pension reform has also been instrumental for debt reduction. Chile’s
pension reform not only lowered the implicit pension debt, it also helped keep interest
rates low and benefited economic growth through capital market development.44 The
pension debt was about 80–100 percent of GDP at the time of the reform (see Edwards,
1996). After the implementation of the pension reform, the implicit pension debt was
marked down by at least 25 percent. As the introduction of the new pension system was
fully-funded, it eliminated any further accumulation of implicit pension debt.
Figure 15. Chile: Total external debt, growth, and net non-debt creating flows
120
15
100
10
80
5
60
0
40
-5
20
-10
-15
0
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
net non debt creating capital inflow s (% of GDP)
external debt (% of GDP)
real GDP grow th (in percent)
Fiscal and macroeconomic policies have generally been sound in Chile. Chile is
pursuing a well-tested monetary policy in the context of a flexible exchange rate regime,
supported by a robust financial system. As a result, macroeconomic policies were
supporting low interest rates and moderate inflation for almost a decade. Inflation was
brought down only gradually, reaching single digits in late 1990s. Flexible exchange rate
and liberal trade policies, combined with impressive economic restructuring, helped
maintain economic competitiveness and growth.
44
In a comprehensive macroeconomic study, Corbo and Schmidt-Hebbel (2003) concluded that Chile’s
pension reform permitted the economy to grow by an additional one-half percentage point on average,
during the 21-year period between 1981-2001. Corbo and Schmidt-Hebbel identify deeper and more
efficient capital markets as one of the main channel through which pension reform contributed to faster
economic growth. Chile’s pension reform had a significant impact on capital market development. Pension
funds’ demand for financial assets not only contributed to deeper markets and greater variety of financial
instruments, the creation of a pension funds industry also led to improvements in financial regulation,
corporate governance and transparency.
41
Chile has further a strong fiscal position with counter-cyclical capacity. During
1987-1998, the time of high and raising copper prices, the government was able to run
fiscal surpluses. Perhaps the establishment of the Copper Stabilization Fund (CSF) may
have helped the government to resist expenditure pressures during upswings in copper
prices in the late 1980s and mid-1990s (see Davis et al. 2003). During 2000 and 2003
when copper prices and the economy have been in a downward cycle, Chile has been
running overall deficits, consistent with its fiscal structural balance rule – requiring the
central government to maintain a cyclically-adjusted surplus of 1 percent of GDP (see
Figure 16).45 Under this rule, the non-copper revenue is adjusted over the business cycle,
using an estimate of trend output, and copper revenue is smoothed out by assuming that
revenue above (or below) a reference price is cyclical.
This shift in fiscal policy was reflected in Chile’s debt decomposition. Between 1999 and
2003, primary deficits, real exchange rate depreciation and sluggish growth have been
contributing to a modest increase in Chile’s debt-to-GDP ratio, causing some concern
among market participants that Chile should revise its policy stance. With rising copper
prices and appreciating currency, this fear has abated, but nevertheless it shows that
developing countries might not always be able to benefit from a medium-term orientation
of fiscal policy. In fact, since 2003, given high copper prices, the government is prudently
using the resources accrued to the CSF to pay down debt, and in 2004, the government
has pre-paid US$ 335 million in debts to the Bank and the IADB.
45
More recently copper prices have reached record highs and Chile is projecting to run a 1.5% surplus in
2004.
42
Figure 16. Chile: Actual, adjusted, structural balance and total cyclical budget
components (% of GDP)
5
4
3
2
1
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001*
2002*
-1
-2
-3
structural balance
actual balance
total cyclical component
(values for 2001 and 2002 estimated).
Note: The total cyclical component measures the difference between the actual balance, after some
adjustments (see Fiess (2002)) and the structural balance. Cyclical fluctuations in the copper price account
for the largest part of the cyclical adjustment.
Overall, Chile’s aggressive debt reduction strategy has had very beneficial consequences
for growth and macro-management. For one, low debt levels have helped to insulate
Chile from external shocks. Chile’s growth decelerated between 2000 and 2003, but
access to international capital markets did not play a crucial role in this slowdown. Had
Chile been heavily indebted at this time, Chile, like most emerging market countries in
the region, would have likely experienced more severe capital flow retrenchments,
worsening the recession. Second, a thigh fiscal stance, required for lowering the debt,
enabled Chile to run a less tight monetary policy. This helped maintain a competitive
exchange rate. Finally, had debt levels been high, it would have been much tougher for
Chile, if not impossible, to run counter-cyclical fiscal, let alone monetary policy in the
early 2000s.
43
4. India46
Starting in 1980/81, India’s public debt grew almost uninterruptedly by 26 percentage
points of GDP in 10 years, to 72.5 percent of GDP in 1990/91, as shown in Figure 7.47
This was the year in which India experienced a balance-of-payments crisis, which pushed
it to the verge of default on its external debt. The crisis, which followed an acceleration
of growth during the second half of the 1980s, resulted from fiscal deficits of the order of
10 percent of GDP, which led to growing current account deficits. External debt almost
doubled from $35 billion at the end of 1984/85 to $69 billion at the end of 1990/91, with
commercial borrowing and remittances of Non-Resident Indians becoming increasingly
important as the size of current account deficits exceeded available financing on
concessional terms. By the end of January 1991, reserves had fallen to less than a billion
dollars and debt service payments were maintained only by an administrative squeeze on
imports and emergency financing from the IMF. The response to the crisis included a big
devaluation, an increase in interest rates and a program to implement a large cut in the
Center’s fiscal deficit. Equally important was an intensification of the process of
industrial delicensing and gradual trade liberalization (replacing quantitative restrictions
with tariffs) which had begun in the second half of the 1980s. There was a push to
drastically accelerate these reforms, with the focus then turning to tax reform, further
trade liberalization (including tariff reductions) and financial sector reforms.
By 1992/93, the first year of the Eighth Plan period, public debt had grown further to 76.5
percent of GDP, reflecting the effects of the crisis. But as a result of the fiscal consolidation
and structural reforms implemented in the wake of the crisis, growth accelerated during the
Eighth Plan period (1992/93-1996/97) and public debt fell to a low of 65 percent of GDP by
1996/97. This trend was reversed during the slowdown in growth and rising fiscal deficits
which marked the Ninth Plan period. By the end of the first year of the Tenth Plan period,
2002/03, public debt had reached 87 percent of GDP. One of the aspects of the 1990s was a
deliberate switch away from external debt to long-term rupee debt to minimize vulnerability.
As a result, the foreign currency-denominated portion of public debt fell from a peak of 22
percent of GDP in 1992/93 to 8 percent by 2002/03.
46
This case study draws liberally upon World Bank (2003) and Pinto and Zahir (2004).
“Public debt” refers to the debt of the general government, which is the consolidated debt of the Center
and States.
47
44
Figure 17. India: Public sector debt (% of GDP)
100
Domestic currency denominated debt
90
Foreign currency denominated debt
80
70
60
50
40
30
20
10
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
1994/95
1993/94
1992/93
1991/92
1990/91
1989/90
1988/89
1987/88
1986/87
1985/86
1984/85
1983/84
1982/83
1981/82
1980/81
0
4.2. Public Debt Composition
The decomposition results are broken into four sub-periods. The first is the five years
preceding the 1991 crisis, 1985/86-1989/90. The second is 1990/91-1991/92, which
captures the effects of the crisis and its immediate aftermath. The third period,1992/931996/97, is the period of rapid GDP growth and decline in public debt, which coincided
with the Eighth Plan period. The fourth period, 1997/98-2002/03, is the slowdown in
growth and substantial rise in public debt, which coincided with the Ninth Plan period
and the first year of the Tenth Plan period .
Table 4-1. India: Public Debt Decomposition
Public Debt Decomposition
Change in public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
Memorandum: Average annual growth rate
1985/86-89/901990/91-91/921992/93-96/971997/98-02/03
Percent of GDP
16.9
3.8
-9.3
21.8
26.4
7.4
10.4
20.0
0.0
0.2
0.6
0.3
-17.2
-4.7
-23.0
-21.2
-1.5
-2.6
3.8
20.0
0.9
8.1
-3.0
1.4
8.4
-4.6
1.9
1.3
5.9
3.4
6.7
5.3
It is evident from
Table 4-1 that the dominant factors driving India’s public debt dynamics for the first
three sub-periods, i.e., up to 1996/97, were primary deficits and growth. The first factor
45
caused public debt to go up, while the second acted as a brake. In fact, during 1992/931996/97, the growth spurt plus fiscal consolidation led to a sizable reduction in the debtto-GDP ratio. The contribution from the real interest rate was negative during the first
two sub-periods, but turned positive during the third and became an important factor
during the fourth sub-period, almost wiping out the debt-reducing effects of growth
during this period. The reason for this is the lagged effects of easing financial repression
as a result of introducing auctions for government securities in 1992/93, a general freeing
up of deposit and lending rates and a large reduction in the cash reserve ratio and
statutory liquidity ratio for banks. Larger primary deficits during and after the Ninth Plan
period relative to the Eighth Plan period, and the impact of higher real interest rates, has
placed public debt on a strong upward trajectory.
In contrast to countries such as Argentina, Brazil, Russia and Turkey, the real exchange
rate has not been a big factor in explaining debt-to-GDP movements in India except
during the crisis period; but even here, the magnitude is considerably smaller than those
witnessed during the ‘sudden stops’ associated with the capital account crises suffered by
the other countries. And unlike in East Asia, fiscal costs associated with financial sector
bailouts have been minor.
Thus, India’s debt dynamics are explained by the ‘classical’ factors, namely, large
primary deficits and real interest rates catching up with or exceeding real GDP growth
rates.
46
Figure 18. India: Public Debt Dynamics
40
30
20
10
0
-10
-20
-30
85/86-89/90
90/91-91/92
92/93-96/97
97/98-01/02
P rimary Deficit (- surplus)
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Change in public secto r debt
Other Facto rs
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
4.3. Analysis
The rise in the debt-to-GDP ratio after 1996/97 and the return of general government
fiscal deficits around 10 percent of GDP48 has become a source of concern, even though
there is widespread consensus that India is not vulnerable to another balance-of-payments
crisis (as in 1991) because of the build up of foreign exchange reserves, capital controls,
a flexible exchange rate system and widespread public ownership of banks. Nevertheless,
a fiscal adjustment is needed to bolster the chances of sustained high growth over the
long-run. Even though growth exceeded 8 percent during 2003-04, this was on the heels
of 4 percent growth in the previous year. The trend rate of growth remains at 6 percent 49
–below the 8 percent target mandated for the Tenth Plan (2002-03 to 2006-07), which is
considered necessary for achieving poverty reduction targets.
Moreover, with the wisdom of hindsight, the fiscal consolidation that followed the 1991
crisis has not been conducive to long-run growth even though it helped with the
immediate goal of stabilizing the macroeconomic situation following the 1991 BOP
48
49
Source: Reserve Bank of India and IMF country reports.
See World Bank 2004.
47
crisis. Table 4-2 presents changes in key fiscal variables for the general government over
the Eighth Plan (1992/93 – 1996/97) and Ninth Plan periods for illustration.
Table 4-2. India: Fiscal Adjustment Dynamics, 1985/86-2001/02
% of GDP
8th Plan (92/93-96/97)
versus
85/86-89/90
9th Plan (97/98-01/02)
versus
8th Plan
Revenues
-1.5
-0.9
Primary deficit
-3.2
+1.4
Debt
+8.0
+0.0
Interest
+1.3
+0.7
Capital expenditure
-2.8
-0.4
Fiscal deficit
-1.8
+2.1
Note: (based on period averages)
During the Eighth Plan period, revenues fell and interest payments rose relative to the
pre-crisis period, 1985/86-1989/90. This fall was ‘compensated’ by a big reduction in
capital expenditure, which happened even though growth was at a two decade high and
the primary deficit was reduced substantially. The fall in revenues and rise in interest
rates both stemmed from reforms: cuts in customs and excise duty rates to stimulate
efficiency, and a reduction in domestic financial repression. The net result was that
capital expenditure fell by over 3 percentage points of GDP by the Ninth Plan period.
And the sum of interest, administration and pensions rose by 3 percentage points of GDP
and a huge 22 percentage points of revenue, while developmental spending on health and
education stagnated and that on irrigation, power and transport declined (not shown in the
table).
Crisis proofing by accumulating foreign exchange reserves and switching towards longterm rupee debt for deficit funding in this environment meant high real interest rates for
the private sector for much of the second half of the 1990s. The key to improving fiscal
outcomes and raising public savings to a level consistent with the Tenth Plan
macroeconomic targets is to mobilize revenue by completing direct and indirect tax
reforms, and altering the composition of spending by reducing and redirecting subsidies
in the direction of rural infrastructure and agricultural R&D, because most of the poor
live in rural areas. A reform of the power sector is also important, for fiscal reasons and
helping industry and manufacturing, the most tax-buoyant sectors in the economy.
The adoption of the Fiscal Responsibility and Budget Management Act in 2003, which
targets the elimination of the current deficit, is a noteworthy achievement. Fiscal
indicators at the center have improved considerably, while capital spending is forecast to
increase substantially in the near term. The government also plans to rationalize and cut
key central subsidies, make further progress on collecting arrears, as well as measures to
simplify and improve tax administration. Nevertheless, much remains to be done and the
48
challenge is to continue the implementation of the Fiscal Responsibility and Budget
Management Act; reform the borrowing regime for states; expand the volume of centerto-state transfers linked to reform and performance (such as the Fiscal Reforms Facility
and the Accelerated Power Development Reform Program; the latter together with the
Electricity Act of 2003 is expected to give power sector reform a boost); and simplify
expenditure management -- in short, to strengthen fiscal institutions and improve the
quality of the fiscal stance. The Public Finance chapter of the Ministry of Finance’s
Economic Survey 2003-03 (released July 7, 2004), notes the seriousness of the situation:
“Growing deficits and public debt and the concomitant declining share of the private
sector in total credit have been preventing the economy from realizing its growth
potential. The unobserved cost of fiscal deterioration is the growth foregone.”
49
5. Indonesia
5.1. Trends in public debt
Before the Asian crisis of 1997, Indonesia was one of the best performing economies in
Asia. During 1989-1996, Indonesia’s economy grew at an average annual rate of about 8
percent. But when financial turmoil struck the region in 1997, Indonesia’s economic
achievements quickly unraveled and the country experienced the most severe downturn
of any of the East Asian crisis countries. Since 2000, growth has returned to Indonesia.
Between 1990 and 1997, Indonesia’s public debt-to-GDP ratio declined by about 15
percent of GDP. During the course of 1998, the year of the crisis, Indonesia’s public
debt-to-GDP ratio more than tripled, and by 2000 reached a peak of 95 percent. Over
the last three years, Indonesia’s public debt-to-GDP ratio has been declining, reaching 72
percent of GDP in 2003.
There have been significant changes in Indonesia’s public debt composition. Up to the
Asian crisis, Indonesian public debt was exclusively external, but since the Asian crisis,
Indonesia has increasingly started to issue debt in domestic currency, and by 2000
domestic public debt accounted for about half of the total public debt as a percent of
GDP. External public debt declined after a peak in 1998, which is also related to a debt
restructuring deal with the Paris club in 1998.
Figure 19. Indonesia: Public sector debt (% of GDP)
100
90
80
Domestic currency demoninated debt
70
Foreign currency demoninated debt
60
50
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
50
5.2. Public Debt decompositions
The decomposition results are broken into three sub-periods: the 1991-1997 pre-crisis
period, when economic fundamentals were strong and Indonesia’s debt to GDP ratio was
on the decline; the 1998-2000 period covers the crisis when public debt sharply
increased; and finally, the 2001-2003 post crisis period where significant progress in debt
reduction was made.
Table 5-1. Indonesia: Cumulative public debt decomposition
Public Debt decompositions
1991-2003 1991-1997 1998-2000 2001-2003
Change in public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
33.0
-24.6
n/a
-26.3
15.1
2.4
66.4
Percent of GDP
-15.5
70.8
-12.6
-3.6
n/a
n/a
-15.4
-1.3
8.8
3.2
-1.1
8.2
4.8
64.4
-22.3
-8.3
n/a
-9.5
3.1
-4.8
-2.8
During the period 1991-1997, Indonesia’s public sector debt-to-GDP ratio declined by
about 16 percent of GDP. The main factors behind this steady decline were sizeable
primary fiscal surpluses and economic growth. The contribution of real interest rates and
unaccounted factors, captured in the other factors, was negative50. During this period,
sound macroeconomic and fiscal fundamentals did not predict a pending crisis.
During the period 1998-2000, the public debt-to-GDP ratio jumped by 71 percent of
GDP. The bulk of public debt accumulation during the crisis period is explained by the
other factors, which captures the significant fiscal costs associated with a public bail-out
of depositors during the banking crisis51. Unlike the other two periods, the real exchange
rate contributed during the crisis period, especially in 1998, to an increase in Indonesia’s
debt/GDP ratio. However, the overall impact of the real exchange rate during this period
is relatively small compared to the fiscal costs of the banking crisis.
During the period 2001-2003, with economic recovery, Indonesia managed to reduce its
public debt-to-GDP ratio by 22 percentage points. Large primary surpluses, resumed
growth and a real appreciation of the rupiah all contributed positively to debt reduction.
50
Unfortunately, no information on contingent liabilities in Indonesia was available.
Rather than writing down depositors’ claims, Indonesian authorities injected recapitalization bonds into
the financial systems to replace non-performing loans that were transferred to asset recovery companies.
51
51
Figure 20. Indonesia: Public Debt Dynamics
55
45
35
25
15
5
-5
-15
-25
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
P rimary Deficit (- surplus)
Rec. o f Co ntigent liab. (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Other Facto rs
Co ntributio n fro m debt indexatio n
Change in public secto r debt
2003
Note: The interpretation of this chart is as follows. The colored segments of each column represent the
contribution of each factor in our debt decomposition to the year on year change in the debt/GDP ratio.
Items above the zero line contributed to an increase in the debt/GDP ratio, while items below the zero line
contribute to a reduction in the debt/GDP ratio. As an example, a negative sign for Contribution from real
GDP growth in a given year indicates that positive real GDP growth during that year contributed to a
reduction in the debt/GDP ratio. On the same token, a positive sign for the Contribution from real exchange
rate changes indicates that a real depreciation increased the debt/GDP ratio during that year.
5.3. Further Analysis
During the period 1989-1996, the Indonesian economy showed strong economic
performance: annual real GDP growth averaged 8 percent, the overall fiscal balance was
in surplus since 1992, and public debt was on the decline as the government used
privatization proceeds to repay a large portion of its foreign debt. Inflation was a little
higher than in other East Asian economies (close to 10 percent a year), credit growth was
strong, but not perceived as worrisome, and asset prices rose steadily during the 1990s
and kept rising until a peak in August 1997.
Against this background, the economy had a few sources of vulnerability: (i) large capital
inflows and the associated external debt; (ii) the fragile state of the banking system which
was linked to connected lending and other governance problems (see Box 2); and (iii) a
return to more interventionist policies that restricted market competition and created rentseeking behavior. The size of Indonesia’s short-term debt, the extent of the banking
sector weaknesses, and the level of cronyism and corruption were vastly underestimated
at the time.
52
The Asian crisis
The crisis began in July 1997 with contagion from Thailand, leading to a speculative
attack on the rupiah. The attack even continued after the Central Bank’s (CBI) decision
to widen the crawling peg bands from 8 to 12 percent and to tighten liquidity and raise
interest rates in an effort to defend the exchange rate.
Faced with persistent pressure on the rupiah, the CBI decided to float the exchange rate in
mid-August 1997. This was done with the support of further monetary tightening and
fiscal tightening. However, pressure on the exchange rate did not abate and, partly due to
monetary and fiscal tightening, the problem started to spread to the banking sector, where
distress was growing, as depositors and creditors started to loose confidence.
Despite these measures, the exchange rate continued to depreciate. A lack of political
commitment 52 to an IMF crisis management program, as well as the absence of a
comprehensive bank restructuring strategy, were seen as instrumental for these
developments. To keep the troubled banks afloat, the CBI instead injected more and more
liquidity into the banking sector, which eventually led to a loss of monetary control and
brought Indonesia to the brink of hyperinflation during the first half of 199853.
Crisis management finally delivered some results, after a political commitment to reforms
was ensured 54 . A reform plan to deal with the banking sector problems was finally
implemented and negotiation on debt relief for the corporate sector from foreign
creditors, as well as public sector external debt rescheduling with the Paris Club, got
under way. While this brought the economy back from the brink of hyperinflation and
achieved a significant appreciation of the rupiah, the progress with bank and corporate
restructuring was difficult, largely due to the continued influence of powerful vested
interests.
As a result of the banking crisis, private sector investment finally collapsed 55 . Thus,
starting from currency shocks and the rupiah crisis, through to banking distress and a
banking crisis, the end result was a total economic crisis, leading to an output drop of 13
percent. This was the most severe downturn experienced by any East Asian crisis
country.
52
Public confidence was undermined when President Suharto’s family publicly challenged the bank
closures and one of his sons effectively reopened his closed bank by transferring assets to another bank he
had acquired.
53
By end-November 1998, the build-up of inflationary pressures was significant.
54
Fuel price increases introduced in early May sparked civil unrest, which led to the resignation of the
President Suharto on May 21. Vice President Habibie took over the Presidency, in accordance with the
Constitution, and he maintained continuity by retaining the Economic Coordinating Minister, charged with
the implementation of the IMF program.
55
In 1998/99, private sector investment was reduced by 33 percent.
53
Box 2: Indonesia: Early Liberalization, Weaknesses Related to Political Connections
Indonesia liberalized early: in 1970, it gave up multiple exchange rates and exchange control, and in
1980 it freed interest rates, removed credit controls on banks, and eased directed credit rules after
falling oil prices increased the need for resources and a greater private sector role (Hanson, 2001). In
1988, it eased bank entry by allowing banks to set up with low capital and reserve requirements, but it
also strengthened prudential regulation by limiting banks’ exposure; in 1991, it set capital adequacy (8
percent to be reached by December 1993) and asset quality and provisioning standards (Cole and
Slade, 1998a).
The freeing of interest rates and easing of capital and reserve requirements contributed to
large deposit growth, as well as a doubling of the number of commercial banks (Hanson, 2001). By
1996, competition had reduced state banks’ share to about 45 percent of the system, mostly due to
expansion of 10 private banks that took advantage of the low capital and reserve requirements.
However, all banks were very weak (World Bank 1996, 1997). Despite the rules, state banks were
over-exposed to well-connected borrowers, private banks to their owners. State banks reported low
capital, and their high NPLs were actually understated by rolling over bad loans and other
maneuvers—at least 2 were insolvent. Loans were often inflated by “commissions” to loan officers.
Private banks reported better figures but weak supervision provided no check on them. Exposure
limits were not enforced and many small banks were bankrupt.
The spillover from the July 1997 Thai devaluation exposed these weaknesses and the
dependence of finance on the political regime. Rollovers of the large amount of short-term external
loans stopped and capital outflow developed, as investor concerns mounted and despite imposition of
limits on currency speculation. Monetary policy was loosened to ease borrowers’ problems. The
November IMF program brought little relief—runs on private banks and the currency sped up with the
closure of 16 banks (small depositors did not begin to be paid until January) and the December illness
of President Suharto. State banks that received shifts of deposits increased their loans to wellconnected borrowers. In January 1998, outflows increased with the poor reception of the 1998-99
budget, panic buying of goods, riots that frightened Indonesians of Chinese origin, and the possibility
of a currency board. The exchange rate fell to less than 1/7th of its pre-crisis level; massive central
bank liquidity support, often well in excess of banks’ capital and in some cases up to 75 percent of
banks’ assets, would have doubled the money base had reserves not fallen (Kenward, 2002, World
Bank 2000). Imposition of a blanket guarantee at end-January temporarily slowed outflows.
President’s Suharto’s re-election in March was followed by more riots, often directed against
Indonesians of Chinese origin and cronies. Capital outflows rose once again, as did liquidity support.
In May 1998, President Suharto resigned, but pressures on banks continued.
In sum, liberalization encouraged deposit growth and foreign inflows, but credit access
depended not on profitability but on political connections, including external loans from international
banks. (Corporations did much of Indonesia’s external debt borrowing directly; the state banks’
external borrowing was limited by policy.) Lenders and depositors looked at connections, not risk and
corporate leverage. The easing of bank licensing and the lack of enforcement of exposure limits
worsened these problems. Then, when political concerns developed, the well-connected tried to
convert their Indonesian assets into foreign exchange, as did middle-class Indonesian-Chinese. As a
result, the blanket guarantee stopped the bank runs only temporarily—total liquidity support was
nearly as large after the blanket guarantee was imposed as before (see figures in Enoch, et al, 2001)
Of the $20 billion liquidity support that went mostly to private banks, over 90 percent proved
unrecoverable and a substantial amount went into currency speculation, according to an ex post study
by the State Auditor. The crisis’ total cost is estimated at over 50 percent of GDP, about 55 percent in
the state banks, although they were only about 45 percent of the pre-crisis system. Bank Mandiri, a
merger of 4 state banks of which at least two were bankrupt before the crisis began, accounted for
about 30 percent of the crisis’ cost (over 17 percent of GDP). Over 70 percent of the state banks’
losses were in loans that had to be taken off their books; the loans’ poor quality is shown by the
eventual recovery rate of less than 30 percent, most of which was realized only 4-5 years after the
crisis.
54
6. Jamaica
6.1. Trends in Public Debt
Jamaica enjoyed rapid growth rates during the 1950s and 1960s as the bauxite industry
boomed. Real GDP growth averaged about 4.5 percent during these two decades. Since
1972 Jamaica’s economy has stagnated – real economic growth has been sporadic and
weak, and even negative at times. The two oil price shocks of the 1970s and a rapid
decline in the world bauxite market resulted in a series of macroeconomic problems
including high inflation, huge debt accumulation, and a financial crisis in the mid 1990s;
all of them have shaped Jamaica’s debt dynamics.
In 1996, the central bank adopted inflation targeting in an effort to achieve price and
exchange rate stability. Although the Central bank has largely achieved a stable inflation
rate of about 7 percent, this may have also been to the detriment of output over this
period.
Between fiscal years 1993/94 and 1996/1997, Jamaica’s debt to GDP ratio fell from 115
percent of GDP to 78 percent of GDP (see Figure 16). Since 1996/97, Jamaica’s debt
stock has increased sharply, reaching 145 percent of GDP in 2003/2004. The bulk of debt
accumulation occurred in domestic debt, accounting for an increase of 52 percent of
GDP.
Figure 21. Jamaica: Public sector debt (% of GDP)
160
Foreign currency denominated debt
Domestic currency denominated debt
140
120
100
80
60
40
20
0
1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04
6.2. Public Debt Decompositions
Jamaica’s public debt dynamics pose interesting questions: what are the main factors that
contributed to the rapid fall in public external debt between 1993/94 and 1996/97, and
what are the determinants of the fast increase in public domestic debt since 1996/97?
55
Table 6-1. Jamaica: Cumulative Public Debt Decomposition
Public sector debt
1994/95-2003/04
Change in public sector debt
Primary Deficit (- Surplus)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
Memo
Average Primary Deficit (-Surplus)
Average Overall Deficit (-Surplus)
29.5
-83.6
-6.7
61.7
-26.3
84.4
-8.5
6.1
1994/95-1996/97 1997/98-2003/04
Percent of GDP
-37.3
66.8
-27.2
-56.4
-0.5
-6.1
10.2
51.6
-33.5
7.2
13.7
70.7
-9.3
2.0
-8.1
8.4
During the period 1993/94–1996/97, Jamaica’s public debt-to-GDP ratio fell by 37
percent of GDP compared to its level in 1993/94. The main factors behind this decline
were real exchange rate appreciation (-33.5 percent of GDP), large cumulative primary
surplus (-27.2 percent of GDP), while the contribution from real GDP growth rate was
insignificant (-0.5 percent). Real interest rate and other factors were working in the
opposite direction, with strong contributions towards increasing the public debt-to-GDP
ratio.
During the period 1997/98 - 2003/04, the reduction in public debt over the previous
period was reversed, and the public debt-to-GDP ratio rose from 78 percent to 144.8
percent of GDP. The main contributors to this rapid increase were high real interest rates
(51.6 percent of GDP) and significant “other factors” (70.7 percent of GDP), which likely
captured the fiscal costs of the bail-out of the financial system following the 1995/1996
banking crisis. Real exchange rate depreciation (7.2 percent of GDP) also contributed to
public debt accumulation. On the other hand, considerable primary surpluses (56.4
percent of GDP) and real GDP growth (6.1 percent of GDP) worked towards debt
reduction.
56
Figure 22. Jamaica: Public Debt Dynamics
30
20
10
0
-10
-20
-30
-40
1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04
P rimary Deficit (- Surplus)
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Co ntributio n fro m debt indexatio n
Other Facto rs
Change in public secto r debt
Note: The interpretation of this chart is as follows. The colored segments of each column represent the
contribution of each factor in our debt decomposition to the year on year change in the debt/GDP ratio.
Items above the zero line contributed to an increase in the debt/GDP ratio, while items below the zero line
contribute to a reduction in the debt/GDP ratio. As an example, a negative sign for Contribution from real
GDP growth in a given year indicates that positive real GDP growth during that year contributed to a
reduction in the debt/GDP ratio. On the same token, a positive sign for the Contribution from real exchange
rate changes indicates that a real depreciation increased the debt/GDP ratio during that year.
6.3. Debt and Growth Analysis56
Jamaica’s public debt-to-GDP ratio showed a substantial decline during fiscal years
1993/94 -1996/97, but has been on the rise ever since and reached 150 percent in
2002/03.
The fall in Jamaica’s debt between fiscal years 1993/94 and 1996/97 largely reflects the
decline in external debt (97 percent of GDP, or 84 percent of total public debt in 1993/94
and 43 percent of GDP, or 55 percent of total public debt in 1996/97). Substantial
primary surpluses and real exchange rate appreciation over this period accounted for most
of the decline of the debt to GDP ratio. Paris Club debt restructuring agreements as of
1990, 1991 and 1993 also contributed to the rapid external debt reduction during the
same period. External public debt also declined because the government switched from
external to internal borrowing during this period. As a result, domestic debt was
increasing rapidly despite the fact that the public sector ran large primary surpluses.
56
This section draws on Chapter 2 from World Bank (2004, forthcoming)
57
By the end of 1996/97, Jamaica still had a relatively high public debt-to-GDP ratio (78
percent), out of which external public debt was about 55 percent, while domestic debt
was about 45 percent. Since 1997/98 onward, Jamaica’s public sector debt rose sharply,
largely as a result from financial crisis resolution, but also from increased non-interest
spending. Jamaica’s financial crisis, the seeds of which were sown in the early 1990s,
eventually cost the Government an estimated 44 percent of GDP - one of the most
expensive crises in the world.57 The Financial Sector Adjustment Company (FINSAC)
and its predecessor, took over financial institutions, merged or closed them, and covered
their liabilities with FINSAC debt, which was Government-guaranteed; over time, the
Government replaced the FINSAC bonds with its own bonds.58 Thus, from 1996/97 on,
public sector debt began to grow as a result of the crisis resolution and its own interest
dynamics. As shown in Figure 3, FINSAC debt added substantially to total debt.
High public debt in Jamaica lead to substantial interest costs of the public sector,
especially since interest rates remained fairly high, even in real terms (Figure 4). This in
turn calls on higher borrowing simply to cover the increased interest costs, which rose
from 8.6 percent of GDP in 1995/96 to 12.4 percent of GDP in 1998/99. There was a fall
of average real interest rate before 2001, which was due to the fact that interest on the
FINSAC related debt was capitalized until 2001. Hence the Government’s cash deficit
was not affected by the additional interest due on FINSAC debt. The difference between
the cash interest and the full interest including FINSAC was quite large.
Figure 23. Jamaica: Public Debt 1992/93-2003/04
Jamaica Public Debt 1992/93-2003/04
(percent of GDP)
160
160
Gov. + Finsac Debt
140
120
Finsac Debt
100
80
60
40
80
Internal Gov. Debt
External Gov. Debt
20
40
0
92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04
58
60
20
0
57
100
See Caprio and Klingebiel (2002) and Laven (2003).
For a brief summary of FINSAC operations, see World Bank (2003a).
58
Percent of GDP
Percent of GDP
120
140
Figure 24. Jamaica: Inflation and Average Real Interest Rate (%)
-2
0
Average real interest rate (Left Scale)
2003/04
10
2002/03
0
2001/02
20
2000/01
2
1999/00
30
1998/99
4
1997/98
40
1996/97
6
1995/96
50
1994/95
8
1993/94
60
1992/93
10
Inflation Rate (Right Scale)
The deterioration in the non-interest balance—the primary surplus—also contributed to
higher borrowing needs. To offset, at least partially, the rise in crisis-related debt, a
higher primary surplus would have been necessary. However, the primary surplus fell
from an average of about 10.5 percent of GDP in 1993/94-1995/96, to an average of
about 4.4 percent of GDP in 1996/97-1998/99. Rises in wages and salary costs and in
“other, non-capital expenditures” were a major factor in the deterioration. Since 1995/96,
the wage to GDP ratio increased from 7.7 percent of GDP to 12.4 percent in 2003/04.
Since 1999/2000, the government made a significant effort to reduce deficits and limit
debt growth. The average primary surplus increased to 10 percent of GDP in 2000/01 and
has since been increasing further to 12 percent. This improvement has reflected buoyant
fiscal revenues and a reduction in wages and salaries and “other” expenditures. Capital
expenditures, which had been reduced by over 2 percentage of GDP in 1998/99,
increased marginally and remained below 3 percent of GDP.
Jamaica has been sustaining high primary surpluses in a low growth scenario. This
combination has made debt sustainability a delicate balancing act which has not been
without costs for overall economic development. Interest rate expenditures have been
taking up an increasing share of public expenditure. This is of concern, particularly in
light of the needs for education and health, and the low levels of public infrastructure
spending, which accounts for less than 2 percent of GDP.
In terms of debt sustainability, the key question is whether Jamaica can continue to
maintain such high primary surpluses or if at some stage a primary surplus fatigue will
set in. Throughout the 1990s and continuing into the current decade, Jamaicans have
demonstrated that they tolerate very high central government primary surpluses.
Jamaicans are also very proud of their debt servicing record, and point to the
constitutionally-mandated senior claim that debt servicing has on government resources.
59
Thus, with double-digit primary surpluses, Jamaica can muddle along with low growth,
provided there are no significant shocks. However, this muddling along is not likely to
lead to any major reduction in debt to GDP levels in the near future, and it will imply
that the country would continue to be extremely vulnerable, with very little room for
maneuver, and its economic situation would remain grim. Moreover, it is important to
note that the current situation, in which the debt ratio has increased, occurred in the
context of low international interest rates and widening spreads for Jamaica. If world
interest rates start to rise, Jamaica is likely to face additional challenges.
60
7. Korea
7.1. Trends in public debt
During 1991-96, the Korean economy was characterized by a strong economic
performance, as real GDP grew at an annual average growth rate of 7 percent. Inflation
was low, the government budget was in balance and public debt in terms of GDP
remained below 15 percent. When financial turmoil struck the region in 1997, Korea
could not escape crisis. However, though the crisis was severe, it was also short-lived.
Prior to the Asian crisis, Korea’s public debt-to-GDP ratio was fairly constant, showing
even a small decline (2.6 percent of GDP) during 1994-96. In 1998, Korea’s public
debt-to-GDP ratio increased by three and a half times, reaching 44 percent of GDP,
compared to 13 percent in 1996. After a peak in 1998, Korea’s public debt-to-GDP ratio
declined to 39 percent in 2003.
The Asian crisis also brought a major shift in Korea’s public debt composition. During
the first half of 1990s, total public debt was almost evenly distributed between domestic
and external debt. Since 1998, the public debt composition has changed in favor of
domestic public debt. By 2003, the share of domestic public debt has increased to 85
percent of total public debt (see Figure 25).
Figure 25. Korea: Public sector debt ( percent of GDP)
50
45
40
Domestic currency demoninated debt
35
Foreign currency demoninated debt
30
25
20
15
10
5
0
1990
1991
1992
1993 1994
1995
1996
61
1997
1998
1999 2000
2001
2002
2003
7.2. Public Debt decompositions
The decomposition results are broken into three sub-periods: the 1991-1996 pre-crisis
period, when economic fundamentals were strong and Korea’s debt to GDP followed a
sustainable path; the 1997-1998 crisis period, when debt increased sharply; and the 19992003 post crisis period, when debt reduction resumed.
Table 7-1. Korea: Cumulative public debt decomposition
Public Debt decompositions
1991-03
Change in public sector debt
Primary Deficit (- surplus)
Privatization proceeds
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
24.0
-11.6
-1.8
-17.5
7.0
1.0
46.9
1991-96
1997-98
Percent of GDP
-2.6
31.0
-1.5
4.3
0.0
-0.1
-5.9
0.8
-0.6
0.5
-0.9
4.8
6.2
20.6
1999-03
-4.3
-14.4
-1.7
-12.4
7.0
-2.9
20.1
During the period 1991-1996, Korea’s public sector debt to GDP ratio was fairly
constant, registering a small decline of about 3 percent of GDP. The main factors behind
this development were robust economic growth and small primary fiscal surpluses. A
positive other factors indicates that unaccounted factors, such as the realization of past
liabilities, prevented the actual decline in Korea’s debt-to GDP ratio from reaching that
predicted by the determinants of the debt decomposition.
During the period 1997-1998, the public debt-to-GDP ratio jumped by 31 percent of
GDP. During this period, all the factors seemed to have contributed towards public debt
accumulation. Primary deficits and real exchange rate depreciation accounted together
for about 10 percentage points of the increase in the public debt-to-GDP ratio. The bulk
of public debt accumulation was, however, due to the large positive other factors, which
largely capture the fiscal cost of the crisis, i.e. the recognition of contingent liabilities
related to the bail-out of the banking and corporate sectors.
During the period 1999-2003: Large primary surpluses (14 percent of GDP), a strong
economic recovery (13 percent of GDP), and a real appreciation of the won (3 percent of
GDP) contributed substantially towards public debt reduction. This contribution,
however, was partially offset by the real interest rate (7 percent of GDP), and by still
sizeable recognitions of contingent liabilities, as evidenced by large other factorss (20
percent of GDP).
62
Figure 26. Korea: Public Debt Dynamics
25
20
15
10
5
0
-5
-10
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
P rimary Deficit (- surplus)
Rec. o f Co ntigent liab. (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Co ntributio n fro m debt indexatio n
Other Facto rs
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
7.3. Further Analysis
Between 1991 and 1996, the Korean economy showed a strong economic performance.
Real GDP grew at an annual average growth rate of 7 percent. Macroeconomic
fundamentals appeared to be sound, as the overall government budget was balanced,
inflation was stable and low, and public debt-to-GDP ratio was low and steady.
Against this background, the main source of vulnerability was rooted in the uneven pace
of capital account liberalization and banking sector weaknesses 59 . Further, the large
conglomerates (the Chaebol) that dominated Korea’s economy for decades were
extremely leveraged, mostly through borrowing from local banks, which in turn relied on
short-term external debt.
59
See IMF (2003a) for details on banking system weaknesses. Banking sector problems originated from the
fact that banks’ lending decisions had been heavily influenced by the policy choices of government
officials rather than by commercial considerations of risk and return. Furthermore, the lack of prudential
controls further contributed to the problems.
63
The Asian crisis
In early 1997, a shock to the country’s terms of trade (reflecting in part a drop in
semiconductor prices) led to a widening of the current account deficit, which was
financed by short-term debt. Several Chaebol went bankrupt in the early months of 1997,
culminating in the failure of the largest Chaebol, the Hanbo Group. Korean banks faced
increasing difficulties to roll over their short-term credit lines with international banks,
and in response, the Bank of Korea (BOK) provided advanced foreign exchange to their
overseas branches. As banking sector problems deepened and regional contagion from
Thailand was felt throughout the region, market confidence began to crumble and foreign
banks stopped rolling over Korea’s external debt. In response, in an attempt to provide
stability, the BOK provided a guarantee for foreign currency-denominated bank debt60.
In October 1997 the crisis broke as the Korean stock market index fell by more than a
quarter and the won came under increased pressure. The crisis was triggered by two
events: first, the bankruptcy and the subsequent government-supported debt rescheduling
of the Kia group (which was seen as politically motivated and excessively
interventionist), and second, the failed speculative attack on the Hong Kong dollar and
the dramatic decline in the Hong Kong stock market in the same month. Despite the
BOK’s foreign exchange interventions and interest rate increases, the won weakened
further, as more and more foreign banks stopped to roll over the short-term debt of
Korean banks and reduced their credit lines. The maturity of existing loans shortened
dramatically and long-term interest rates surged.
Crisis management gave some results only after ensuring the political commitment to
reforms61. This included a more aggressive timetable for the restructuring of the financial
system, supported by accelerated disbursement of funds and by a coordinated private
sector roll over of short-term debt. Shortly after, the banks agreed to exchange their shortterm claims for sovereign debt of between one and three years maturity. After successful
debt restructuring, which was supplemented by decisive financial and corporate reform
programs, Korea managed to issued US$ 4 billion in international bonds. This re-opened
Korea’s access to international capital markets in April 1998, shortly after the crisis. As a
result, growth quickly resumed, with the first signs of recovery by the end of 1998,
followed by a rapid rebound in 1999 (10.9 percent). Korea’s crisis turned out to be
severe, but short-lived.
60
This guarantee was not backed by any specific measures approved by the Parliament; as such its legal
status remained ambiguous.
61
After winning the presidential election on December 18, President-elect Kim Daejung announced his
determination to strengthen the economic reform program supported by the IMF. This entailed an
accelerated disbursement of funds and a more aggressive timetable for the restructuring of the financial
system.
64
8. Lebanon
8.1. Trends in Public Debt
Public debt dynamics has deteriorated significantly during the last 14 years. During
1990-1993, the aftermath of Lebanon’s civil war, public debt dynamics was affected
positively by the economic stabilization and postwar reconstruction. As a result, public
debt ratio halved, as compared with its 1990 level of nearly 100 percent. This reduction,
however, was short-lived, as public debt ratio has been rapidly increasing since 1994, and
reached nearly 180 percent by 2002 (about 3.5 times its 1993 level). In 2003 public debt
ratio remained at its 2002 level.
Another major development since mid-1990s was the large increase of the share of
external foreign currency denominated debt in total public debt. While during the first
half of the 1990s public debt was mostly domestic, during 1994-2003, external foreign
currency denominated public debt share in total public debt quadrupled (from 12 to 48
percent of total public debt). In terms of ratios to GDP, external debt saw a 10-fold
increase, from 8 to 86, while domestic debt increased from 62 to 92 percent during the
same period.
Figure 27. Lebanon: Public sector debt ( percent of GDP)
180
160
140
Domestic currency demoninated debt
Foreign currency demoninated debt
120
100
80
60
40
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
65
8.2. Public Debt Decomposition
Lebanon’s public debt dynamics showed a substantial reduction in public domestic debt
until 1993 and a fast increase in public domestic debt since 1994. Table 8-1 shows the
debt decompositions for these two sub-periods. The most striking finding about
Lebanon’s debt dynamics is the role of the real interest rate. While all other factors
affected debt dynamics in the same direction during the two sub-periods, the real interest
rate had a strong positive impact on debt reduction during 1991-1993, and a strong
negative impact during 1994-2003. This is linked to Lebanon’s exchange rate-based
stabilization program, which was implemented in late 1992.
Table 8-1. Lebanon: Cumulative Public Debt Decomposition
Public Debt Decomposition
1991-03
Change in public sector debt
Primary Deficit (- surplus)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
79.6
55.2
-63.3
69.9
-5.4
23.1
1991-93
Percent of GDP
-48.5
15.8
-33.4
-45.5
-4.0
18.6
1994-03
128.1
39.4
-29.9
115.5
-1.4
4.5
During the period 1991-1993, public debt declined by 48.5 percent of GDP. The main
factors behind this debt reduction were strong real GDP growth contribution (33 percent
of GDP), strong real interest rate contribution (45 percent of GDP), and capital gain from
the real exchange rate appreciation (4 percent of GDP). Real interest rates during this
period, were effectively negative as a result of high inflation. The main offsetting factors
were substantial primary deficits (16 percent of GDP) and other factors (19 percent of
GDP).
During the period 1994-2003, public sector debt sharply increased by 128.1 percent of
GDP. The main factors behind this public debt accumulation were real interest rate
contribution (115 percent of GDP), and primary deficits (40 percent of GDP). The reason
behind the large increase in real interest rates was the implementation of the exchange
rate-based stabilization program in 1992 – the estimated ex-post real interest rate
averaged about 10 percent, compared to –24 percent on average during the previous
period. While government finances registered primary surpluses since 2002, the overall
compounded contribution of the primary deficits during the period was huge and
explained about a third of the overall public debt accumulation.
66
Figure 28. Lebanon: Public Debt Dynamics
30
20
10
0
-10
-20
-30
-40
-50
1991
1992
1993
1994
1995
1996
1997
P rimary Deficit (- surplus)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real exchange rate change
Other Facto rs
1998
1999
2000
2001
2002
2003
Off-budget go vt. expenditure (net o f privatizatio n)
Co ntributio n fro m real interest rate
Co ntributio n fro m debt indexatio n
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
8.3. Debt and Growth Analysis
In the early 1990s, Lebanon faced the multiple challenges of post-war reconstruction and
economic stabilization after fifteen years of war and civil strife. The hostilities had left
massive destruction of infrastructure and housing, displacement of population and
weakened institutions. The government’s post-war reconstruction program launched in
1992 required huge financial resources – an estimated $13 billion over 10 years.
Post-war construction and stabilization program
The government-led reconstruction programs had some positive effects on economic
growth. Between 1991 and 1995, the average annual GDP growth rate was about 12.8
percent (see Figure 8). However, growth began to slow thereafter. In 1996 and 1997,
growth rates remained at 4 percent. Growth has stagnated since: the average annual
growth rate between 1996 and 2003 was only 2.3 percent, much lower than the pre-war
average of 6.2 percent. Despite the war in Iraq, the year 2003 showed a slightly positive
increase in GDP growth, due to growing demand for exports in services, including
tourism.
67
Inflation was extremely high at the beginning of the 1990s: 51.5 percent in 1991 and 120
percent in 1992. However, the exchange-rate-based stabilization policy, accompanied
with tight monetary policies, resulted in a real appreciation of the Lebanese pound (LL)
and led to a significant reduction in inflation (see Figure 9). Inflation rates kept falling
throughout the 1990s and reached 0.2 percent in 1999.
Figure 29. Lebanon: GDP growth and inflation
Real GDP grow h (%)
Inflation (%)
120
40
100
35
30
80
25
60
20
40
15
10
20
5
0
0
-5
-20
1991
1993
1995
1997
1999
2001
1991
2003
1993
1995
1997
1999
2001
2003
While the 1990s reconstruction and stabilization programs have brought some
achievements in terms of growth recovery and inflation reduction, they also led to
fiscal expansion and public debt accumulation. This rapid fiscal expansion resulted
from large post-war expenditures on reconstruction and security and high interest costs
associated with budget deficit financing. The government initially relied heavily on
borrowing in local currency in the domestic market for its overall financing requirements.
The domestic currency debt had average maturities of less than a year with high interest
rates as a consequence of the stabilization policies and the risk premia that investors
demanded. With high borrowing costs, the overall fiscal deficit expanded rapidly, despite
efforts to increase government revenues since 1993.
The overall fiscal deficit reached about 20 percent of GDP by the mid-1990s, with
interest payments absorbing about three-quarters of total revenues. During the latter part
of the 1990s, Lebanon entered into a cycle of rising deficits and debt, and lower growth.
With increasing concerns over rising fiscal deficits and levels of public debt, spreads on
this borrowing steadily increased. The steady rise in interest cost further accelerated the
increase in the level of fiscal deficits and debt. In 1997, the overall fiscal deficit
amounted to 25 percent of GDP, and after a temporary reduction, it widened again to
about 24 percent in 2000 (see Figure 30).
68
Figure 30. Lebanon: Fiscal Balance 1990-2003 ( percent of GDP)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
4
-1
-6
-11
-16
-21
-26
Primary Balance (- deficit)
Overall Balance
-31
The Government financed its deficit by domestic borrowing, tapping the significant pool
of financial savings, including those of the Lebanese Diaspora, in the domestic banking
system. Indeed one could argue, that given the sizeable flow of workers remittances in
the domestic banking sector, Lebanon can sustain a much higher public debt-to-GDP
ratio for two reasons: (i) remittances represent a cheap and stable source of funding for
the banks, which are also the main holders of domestic debt; and (ii) there is evidence
that remittances are countercyclical.62
Remittances have indeed more than offset the negative gross domestic savings and are
clearly helping public debt dynamics, by making it possible to sustain a much larger size
of domestic debt. However, looking forward, there are at least three reasons why such a
strategy is inherently risky. First, as figure 30 shows, the remittances today are much
lower than their level at the beginning of the 1990s; If this trend would continue in the
future, the required fiscal adjustment may be much larger and politically difficult to
sustain. Second, while the banks strategy of using these remittances to finance growing
public deficits helps sustain the larger public debt level, such a strategy crowds out
private investment and is detrimental for long term growth. Finally, this strategy
increases the vulnerability of the banks, as change in market sentiments, resulting in
massive deposits withdrawals would lead to banking and debt crises.
62
See Khartabil (2004).
69
Figure 31. Lebanon: Gross Domestic Savings and Workers’ Remittances
Gross Domestic Savings and Workers' Remittance
70
Percent of GDP
50
30
10
- 10
-30
-50
-70
1990
1991
1992
1993
1994
Gross national savings
1995
1996
1997
1998
1999
2000
2001
2002
Workers' remittances, receipts (BoP)
Given these vulnerabilities, the recent move of the Lebanese government towards
fiscal adjustment through expenditure restraint and increased revenues is a step in
the right direction. Improvements in public finances have been remarkable since 2000.
The overall fiscal deficit fell from about 19 percent of GDP in 2001 to about 15 percent
of GDP in 2003. The fiscal balance showed a primary surplus of 3 percent of GDP in
2002 and an even higher primary surplus in 2003 (3.6 percent of GDP). While these
fiscal outcomes are welcome, these did not result in public debt reduction; perhaps a
larger reduction in the overall fiscal deficit would be needed to reverse the debt dynamics
and to stimulate a more rapid economic growth in the future.
70
9. Malaysia
9.1. Trends in Public Debt
Between 1990 and 1996, Malaysia’s public debt-to-GDP ratio declined rapidly from
about 90 percent of GDP to about 50 percent of GDP. This trend was reversed with the
Asian crisis in 1997, when the public debt-to-GDP ratio started to increase, reaching 70
percent of GDP in 2001. Since 2002, Malaysia’s debt to GDP ratio has slightly declined.
An interesting feature of Malaysia’s public debt is a high domestic share throughout the
period. This is a reflection of the explicit policy choice to rely predominately on
domestic, non-inflationary financing as opposed to external borrowing. Nevertheless, the
share of external public debt in total public debt has increased somewhat since 199763.
Figure 32. Malaysia: Public sector debt ( percent of GDP)
100
90
80
Domestic currency demoninated debt
Foreign currency demoninated debt
70
60
50
40
30
20
10
0
1990
1991
1992
1993
1994
1995
1996
1997
63
1998
1999
2000
2001
2002
2003
Between 1990 and 1996, the period of rapid public debt reduction, external public debt reached on
average about 32 percent of total public debt. Since 1997, its relative share averaged about 40 percent.
71
9.2. Public Debt Decompositions
The decomposition results are divided into two sub-periods: the 1991-96 period, in which
public debt was declining rapidly; and the post-Asian crisis period (1997-2002), during
which Malaysia’s public debt-to-GDP ratio increased.
Table 9-1. Malaysia: Cumulative public debt decomposition
Public Debt Decomposition
Change in public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
1991-02
1991-96
1997-02
-24.4
-66.1
22.9
-51.4
35.3
5.6
29.3
Percent of GDP
-41.4
-32.3
-3.3
-37.3
16.5
-2.7
17.8
19.9
-32.0
26.2
-10.6
17.2
8.7
10.4
During the period 1991- 96, the public debt-to-GDP ratio declined by about 41 percent
of GDP. The two main factors behind this decline were sizeable primary fiscal surpluses
(32.3 percent of GDP) and strong real growth rate (37.3 percent of GDP). At the same
time, real interest rates (16.5 percent of GDP), and other non-identified factors (17.8
percent of GDP) - captured in the other factors - worked against debt reduction.
During the period 1997-02, the public debt-to-GDP ratio increased by about 20 percent
of GDP. In mid-1997, financial contagion, which affected most of the Asian countries,
also hit Malaysia. As a result, after a decade of rapid economic expansion, growth slowed
in 1997, and contracted further in 1998. Despite a fast economic recovery, real growth
made only a modest contribution to debt reduction during this period (11 percent of
GDP). While substantial primary fiscal surpluses also worked towards debt reduction (32
percent of GDP), growth and a tight fiscal stance could not offset the fiscal costs of the
crisis resolution, marked by the recognition of contingent liabilities (26 percent of GDP),
and a positive other factors (10.4 percent). Finally, capital losses linked to a real
exchange rate depreciation also contributed substantially towards debt accumulation (8.7
percent of GDP).
72
Figure 33. Malaysia: Public Debt Dynamics
20
15
10
5
0
-5
-10
-15
1991
1992
1993
1994
1995
1996
1997
P rimary Deficit (- surplus)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real exchange rate change
Other Facto rs
1998
1999
2000
2001
2002
2003
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real interest rate
Co ntributio n fro m debt indexatio n
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
Figure 34. Malaysia: Federal Government Fiscal Operations
6
4
2
0
-2
-4
Primary Balance
Overall Balance
-6
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
73
9.3. Debt and Growth Analysis
Malaysia, a former British colony enjoys a high degree of political stability, an efficient
government administration, an independent and effective judicial system, and a high
respect to law and order. In addition, the Malaysian state always had a quite active and
direct role in resource allocation, production and trade. Over time, Malaysia has
consistently pursued policies aimed at high economic growth and the reduction of
economic disparities and poverty.
As an emerging market economy, Malaysia is clearly a success story. Malaysia is a
spectacular growth performer, having sustained an annual average growth rate of 6.6
percent during 1955-2000. The Malaysian government has implemented a series of
medium- to long-term development plans during the last three decades. These national
development plans effectively shifted the economy from agriculture and mining to a
manufacturing- and export-oriented modern economy. Agricultural diversification and
natural resource exploitation also played an important role in Malaysia’s export-oriented
development strategy. Malaysia has grown at an annual average rate of 8 percent
throughout the 1970s, the strong growth performance was also assisted by a significant
increase in export earnings on the back of a commodity price boom64. Once commodity
prices dropped sharply in the early 1980s, Malaysia’s economic performance
deteriorated. The fall in commodity prices brought a negative shock to Malaysia’s terms
of trade, had a negative impact on growth, and domestic savings fell. With a shortfall in
fiscal revenues, Malaysia’s public investment strategy was increasingly financed through
foreign borrowing. As a result, by the mid 1980s, slowing growth was accompanied by
increased budget deficits and an unsustainable level of debt (see Figure 34).
64
Malaysia was exporting a number of commodities, such as rubber, timber, cocoa, palm oil, and also
discovered significant reserves of petroleum and natural gas in the eastern part of Peninsular Malaysia and
offshore Sabah and Sarawak, which the government started to extract and refine.
74
Figure 35. Malaysia: Total external debt, growth, and net non-debt creating flows
20
80
70
15
60
10
50
40
5
30
0
20
-5
10
0
-10
1981
1983
1985
1987
1989
1991
1993
net non-debt creating inflow s/GDP (left scale)
1995
1997
1999
2001
external debt as % of GDP (left scale)
real GDP grow th (right scale)
Given the threat to political and economic stability in the mid 1980s, the government
introduced a number of reforms, shifting the emphasis from state intervention to a greater
market orientation, with a private investment-led growth strategy at the center. As a
result, growth accelerated, the outstanding external debt was reduced, and a flexible
exchange rate helped bolster manufactured exports. To this end, the reforms involved a
gradual process of privatization and restructuring of state-owned companies65, and a firm
commitment to an open trade regime. Structural adjustments, including the expansion of
the export base and the liberalization of the financial system, further helped to transform
the country into a middle-income emerging market.
Finally, these market-oriented reforms were accompanied by a strong focus on
macroeconomic stability. During 1990-1997, the government managed to raise revenues
by broadening the tax base and by increasing the efficiency of tax collection. Together
with tight control over operating expenditures, fiscal policy resulted in mild overall
deficits or small surpluses, and corresponding sizeable primary surpluses. Given the
availability of non-inflationary domestic financing, the federal government was able to
reduce its external borrowing and pay back more expensive external loans.
65
By the mid-1990s, state ownership in manufacturing was limited to only some politically sensitive
ventures in car manufacturing, petrochemicals, iron and steel, and cement.
75
Capital Market Liberalization and Capital Inflows in the early 1990s
Along with accelerated economic growth due to strong domestic and external demand in
the early 1990s, Malaysia saw a rapid increase in both public investment and private
investment. As a result of capital liberalization, capital inflows surged in the early 1990s.
This accelerated private investment and contributed significantly to current account
deficits. Large capital inflows also resulted in a sizeable increase in foreign assets of the
banking system, which in turn led to a strong credit expansion, inflationary pressures, and
exchange rate appreciation. In response to capital inflows, the Central Bank tightened
liquidity by raising interest rates in an effort to curb rising inflation, but higher interest
rates attracted only a new wave of short-term capital inflows 66 . Malaysia introduced
controls on short-term capital inflows in 1994, which proved ineffective, as by 1996
short-term capital inflows had reached record levels, leading to a large accumulation of
foreign reserves.
The Asian Crisis and Economic Recovery
Prior to the Asian crisis, macroeconomic fundamentals in Malaysia appeared to be strong.
The overall fiscal balance was in surplus since 1993, public debt fell as a share of GDP,
inflation and unemployment rates were low, and international reserves were ample.
Against this background, there were also some vulnerabilities: (i) exports decelerated and
a large current account deficit developed in the context of a gradual appreciation of the
real effective exchange rate; (ii) while investment-led growth was successful in raising
output and income, there were signs of deteriorating investment quality; and (iii) the
above factors led to balance sheet weaknesses in the banking and corporate sectors,
exposing the economy to contagion from the Asian crisis.
The crisis began in mid-1997 with a speculative attack on the ringgit. The speculative
attack was accompanied by massive capital outflows, as foreign investors were
liquidating their portfolio holdings. By end-August 1998, Malaysia had lost about one
third of its reserves ($10.5 billion) through capital outflows, and the ringgit had
depreciated by about 65 percent against the US dollar. The initial policy response was to
break the link between domestic and offshore interest rates, by further raising domestic
interest rates, and imposing limits on ringgit nontrade-related swap transactions. This
response, however, was insufficient to correct external imbalances. The economic
contraction following the crisis were far worse than expected. Growth turned sharply
negative in 1998. Large portfolio outflows led to falling equity and property values,
which resulted in large losses and defaults in the corporate sector. As real estate and
equities were used as bank collateral, this also translated into bank liquidity problems and
caused overall financial distress.
66
This policy turned out to be self-defeating and costly as the resulting interest differential, combined with
the buoyant local stock market and expectations of a ringgit appreciation, further encouraged a surge of
short-term capital inflows; sterilization required the issuance of central bank bills at notably higher rates
than the return on foreign assets, thus creating quasi-fiscal costs.
76
Initially, Malaysia followed an orthodox stabilization program, namely, it tightened fiscal
and monetary policies, introduced measures to address balance of payment problems, and
floated the exchange rate. However, as the implementation of the stabilization program
did not improve the economic situation, Malaysia reversed its initial policy response and
adopted counter-cyclical measures to boost the domestic economy.
In September 1998, Malaysia introduced fiscal stimulus; relaxed the monetary policy;
stepped up corporate and financial sector reforms; imposed controls on capital outflows to
eliminate the offshore ringgit market; and pegged the ringgit to the US dollar at an
undervalued rate. There is no strong evidence that Malaysia’s capital outflow controls
had any substantial economic impact - this is probably partly explained by the fact that
capital flight had already abated by the time capital controls were put in place. On the
other hand, the relative under-valuation of the ringgit helped create large balance of
payment surpluses, and the progress in financial and corporate restructuring helped
restore market confidence. Economic recovery benefited also from counter-cyclical
policies that combined expansionary fiscal policy with a measured degree of monetary
easing (see Figure 35).67 As part of the fiscal stimulus program, the government stepped
up development expenditure in support of economic activity.
As a result of skillful macroeconomic management, decisive economic restructuring and
a favorable external environment, Malaysia’s post-crisis recovery was among the
strongest of the Asian crisis economies: annual real GDP growth averaged 4.6 percent
between 1999 and 2003; steady export growth has contributed to large current account
surpluses; and, unemployment and inflation have remained low. Nevertheless, as
Malaysia’s exports depend largely on electronics, the economy was significantly and
adversely affected by the global slowdown in 2001. In that year, private consumption and
investment slowed sharply, and real GDP growth fell to 0.3 percent. Since then,
economic growth has returned.
67
Since our debt decompositions are for the consolidated public sector, and the consolidated public sector
showed a primary surplus during 1998-2003 due to a significant surplus of non-financial public
enterprises, our debt decomposition results, unlike Figure 34, do not show a significant revision of the
fiscal stance in 1998.
77
10.
Mexico
10.1. Debt Trends
Mexico’s public debt68 to GDP ratio improved significantly since the beginning of the
1990s, with a sharp decline from 50 percent of GDP in 1990 to 27 percent in 1993.
However, after the 1993/1994 banking crisis, public debt increased to a peak of 56.6
percent in 1998. Public debt declined between 1998 and 2001, but has since increased
slightly, reaching 51 percent in 2003.
Mexico’s external public debt declined from 30 percent in 1990 to 20 percent in 1994.
External debt increased with the Tequila crisis in 1995, but has steadily declined since.
In 2003, public external debt reached about 18 percent of GDP - about one-third of total
public debt.
Figure 36. Mexico: Public sector debt ( percent of GDP)
60
50
40
30
20
10
0
1990
1991
1992
1993
1994
1995
1996
Foreign currency denominated debt
1997
1998
1999
2000
2001
2002
2003
Domestic currency denominated debt
The decline in external public debt has its reflection in a reduction of Mexico’s total
external debt burden, as total external debt is predominantly public (see Figure 36).
68
Traditionally in Mexico, public sector debt refers to financial obligations of the federal government, but
excludes the liabilities arising from the bank restructuring and debtor-support programs (including toll-road
concessions) and those associated with the PIDIREGAS projects. In our analysis, we use an augmented
public sector that includes these liabilities. This is in contrast to most other countries which do not
incorporate off-budget transaction into public debt statistics. Excluding off-budget transactions, Mexico’s
net public sector debt stood at 26 percent of GDP at the end of 2003 (see also Figure 10-3).
78
Figure 36. Mexico: External public and private debt ( percent of GDP)
90
external private debt (% GDP)
80
Government external debt + IMF credit
70
60
50
40
30
20
10
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
10.2. Public Debt Decompositions
The decomposition results are divided into four sub-periods: the 1991-1993 pre-Tequila
period, the Tequila crisis years of 1994-1996, the post Tequila economic growth years
during 1997-2000, and the 2001-2003 growth stagnation. .
Table 10-1. Mexico: Cumulative public debt decomposition
Public Debt decompositions
1991-03 1991-93 1994-96 1997-00 2001-03
Percent of GDP
Change in public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Contribution from debt indexation
Other factors
0.8
-40.0
0.0
-16.5
35.0
-5.3
14.0
13.6
-22.8
-12.9
0.0
-3.9
3.4
-5.9
0.2
-3.8
28.0
-16.8
0.0
-0.6
12.5
6.5
10.9
15.7
-6.2
-9.3
0.0
-11.1
14.7
-5.9
2.3
3.1
During the period 1991-93, the total public debt-to-GDP ratio declined by about 23
percentage points. Primary fiscal surpluses, a modest real exchange rate appreciation, and
economic growth contributed towards public debt reduction (22.7 percent of GDP). At
the same time, real interest rates slightly contributed to debt accumulation (3.4 percent of
GDP).
79
1.8
-1.0
0.0
-0.9
4.3
0.0
0.7
-1.3
During the period 1994-96, Mexico’s public debt-to-GDP ratio increased by 28
percentage points. The main contributing factors to debt accumulation during this period
were the fiscal costs associated with a bail-out of the banking sector following the
Tequila crisis (captured in the other factors in Table 10-1) and high real interest rates
(12.5 percent of GDP). Also important were a real exchange rate depreciation, and debt
indexation (10.9 percent of GDP). Significant primary surpluses and growth did not
offset this substantial debt accumulation.
During the period 1997-00, when the economy was recovering strongly, Mexico’s
public debt to GDP decreased by 6.2 percentage points. Growth (11.1 percent of GDP),
primary fiscal surpluses (9.3 percent of GDP), a real exchange rate appreciation (5.9
percent of GDP) contributed towards public debt reduction (22.7 percent of GDP). At the
same time, real interest rates substantially contributed towards debt accumulation (14.7
percent of GDP).
During the period 2000-03: The public sector debt to GDP ratio increased slightly by
1.8 percent of GDP. Modest economic growth and primary surpluses were not able to offset the adverse impact of high real interest rates (4.6 percent of GDP).
Figure 37. Mexico: Public Debt Dynamics
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
1991
1992
1993
1994
1995
1996
1997
P rimary Deficit (- surplus)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real exchange rate change
Other Facto rs
1998
1999
2000
2001
2002
2003
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real interest rate
Co ntributio n fro m debt indexatio n
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
80
10.3. Further Analysis
Debt restructuring
The debt crisis of the 1980s started with Mexico’s suspension of commercial debt
payments in 1982. Various attempts were made during the 1980s to solve the debt crisis.
The Brady plan and its initiative to restructure distressed commercial bank debt into
tradable public securities finally proved successful in resolving the crisis.69 Mexico was
the first country to enter debt restructuring under the Brady plan in 1989 and in 2003 was
the first to fully retire its Brady bonds.
Under the Brady plan of 1989, out of US$99.2 billion total external debt outstanding,
US$48.23 billion was debt eligible for Brady debt reduction. The face value of debt
reduction was US$6.80 billion (about 14 percent of eligible debt and 7 percent of total
external debt).
The Tequila Crisis and Recovery
The economic strategy of the early 1990s was based on budgetary and monetary
discipline, and the use of an exchange rate anchor as the basic anti-inflationary
instrument. The Mexican stabilization program achieved a reduction in inflation from
over 150 percent at the end of 1987 to 7 percent in 1994.
By December 1994, Mexico had increasingly relied on volatile short-term capital flows
to finance a large current account imbalance of over 7 percent of GDP, in the presence of
an appreciating real exchange rate. Also the government had increased issuance of
tesobonos, government bonds issued in peso but redeemed at the exchange rate of the
time of maturity, which offered investors an option to cover their exchange rate risk
exposure in exchange for a lower rate of interest.
A rigid exchange rate regime, combined with growing investor concerns about the
durability and direction of economic reforms, led to a 70 percent devaluation led to a 70
percent devaluation of the peso in December 1994. As a result, inflation jumped to 35
percent in 1995, from 7 percent in 1994. At the same time, GDP fell by 7 percent and did
not recover to the pre-crisis level until 1997.
The economic costs of the crisis included the large increase in the external debt, and the
large costs of restructuring the banking sector, estimated at 20 percent of GDP. A
69
The Brady plan of 1989, credited to former US Treasury Secretary, Nicolas Brady, created nearly
instantaneously a market for sovereign emerging markets bonds. With the establishment of this new Brady
bond market, investor confidence in developing countries started to recover gradually, and with a growing
demand for emerging market bonds, governments soon seized the opportunity to issue bonds outside the
Brady market; private issuers followed suit. Emerging market bond issuance increased from 4 billion U.S.
dollars in 1990 to a peak of 99 billion in 1997. Since the East Asian crisis of 1997-98, gross bond issuance
has averaged around 60 billion U.S. dollars per year (World Bank 2003). Since the mid 1990s, the Brady
bond market has been declining, as countries started to retire their Brady bonds. In 2003, Mexico was the
first country to fully retire its Brady bonds.
81
significant increase in the domestic stock of the debt was necessary to avoid a systematic
crisis in the weak banking sector.
Prudent macroeconomic policies in the aftermath of the 1994/1995 financial crisis,
combined with the impact of North American Free Trade Agreement (NAFTA) and other
structural reforms, boosted productivity and raised export shares. After a strong
performance during 1997-2000, output fell in 2001 in response to a downturn in the US
economy. While growth rebounded in the first half of 2002, it then slowed down and
reached only 0.7 percent in 2002. Nevertheless, growth increased in 2003 with 1.3
percent real GDP growth.
The overall public sector deficit declined and revenues increased as important steps were
taken to improve the efficiency of the tax system, though more work needs to be done.
Steps taken so far included measures to broaden the corporate income tax base, to
strengthen VAT collections, and to reduce tax evasion. The reform of the tax system also
aimed to raise non-oil revenues, in an effort to reduce the high dependence of public
finances on oil revenues. Currently, oil revenues account for about one third of
government revenues.
The government also adopted measures to strengthen the operating environment of the
banking system and to facilitate the recovery of the banking system. The definition of
regulatory capital has been significantly tightened, loan-loss provisions of credit card and
mortgage loans have been tightened and the supervisory authorities have made progress
in areas of banks’ internal controls, accounting procedures, and disclosers. Important
steps have been taken to advance the bank restructuring process, with preparations
underway for the Bank Savings Protection Institute (IPAB) to liquidate its assets
according to a specific timetable.
Debt Management Policies After the crisis
After the 1994-1995 crisis the government followed a proactive debt management
strategy that focused on increasing the average maturity of its public debt, reducing the
vulnerability of public finance to interest and exchange rate shocks, and promoting the
development of domestic securities markets - a strategy that has proven quite effective.
Given a more stable macroeconomic environment, the government has been able to
increase the size of the domestic debt market, while reducing its dependency on foreign
debt.
82
Figure 38. Mexico: Total external debt, growth, and net non-debt creating flows
80
10
70
8
6
60
4
50
2
40
0
30
-2
20
-4
10
-6
0
-8
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Net non debt creating capital inflow s (% of GDP)
Total external debt (% of GDP)
Real GDP grow th (%)
The Mexican government has been able to extend domestic market maturities and
develop a benchmark yield curve by successfully issuing three-, five-, ten-year and
twenty-year fixed coupon bonds. As a result, the proportion of fixed-rate bonds increased
to 31 percent of the total gross public debt stock in 2003 (from 5 percent at end of 2000).
The government gradually improved the composition of the domestic debt, depending
less on indexed (inflation or exchange rate) and floating rate securities, and more on
fixed-rate long-term bonds. Domestic debt issuance in local markets has further
channeled the large resources of institutional investors, particularly from pension funds,
into the domestic capital market.70
With inflation at about 4 percent (a 34 year low), and with short-term interest rates
bottoming out in June 2003 at less than 5 percent, Mexico has managed to develop a
market for domestic debt as an alternative source of financing. The development of a
yield curve for public sector bonds, created also a benchmark for private sector debt
placements. Thus, the domestic capital market has become a competitive financing
alternative for private-sector companies as well.
On the external front, the government has focused on extending the maturity of its
foreign debt by issuing long-term Global Bonds, including a 30-year bond and a Global
Floating Rate Bond. This facilitated the construction of United Mexican States (UMS)
yield curve of different maturities in the dollar capital markets.
70
The growth of the pension funds industry following Mexico’s 1997 pension reform has been important
for the development of Mexico’s capital markets. The pension reform brought a new class of institutional
investors with a steadily increasing stream of savings to be invested in the domestic market.
83
Two noteworthy developments with respect to Mexico’s foreign debt occurred in 2003.
First, Mexico was the first country to issue sovereign bonds with a collective action
clause (CAC) to facilitate debt restructuring in the event of debt difficulties. Second,
Mexico became the first country to fully retire its Brady Bonds by issuing new bonds at
better terms in the international capital markets. In addition to recovering its collateral,
this operation is estimated generated estimated savings of US$1.2 billion.
Another factor worth mentioning related to Mexico’s external debt is the Bank of
Mexico’s large international reserves. International reserves amounted to over US$50
billion at end-2003, covering almost 150 percent of estimated short-term external debt by
other factors maturity.
Finally, as of 2000, Mexico has employed an explicit ceiling on net external debt of zero.
This is to be replaced by a new ceiling of –500 million dollars by 2004.
Figure 39. Mexico: Reserves as percentage of GDP
12
10
8
6
4
2
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Mexico’s Contingent Liabilities
The Mexican authorities recently began to publish a more comprehensive definition of
the overall fiscal balance. This definition goes beyond the traditional budget measure by
including some quasi-fiscal operations that have been substantial in Mexico, being
mainly tied to the carrying costs of government debt instruments during the banking
crisis of 1994. These augmented fiscal balance and public sector debt concept includes
off-budget transactions related to the banking bail-out program (IPAB), the rescue of toll
roads (FARAC), off-budget investment projects in the energy sector (PIDIREGAS), as
well as budgetary adjustments (largely adjustment for inflation indexed debt) and
financial intermediation of development banks.
84
Mexico’s contingent liabilities increased due to PIDIREGAS and the resolution of the
banking crisis in the mid-1990s.
PIDIREGAS are public sector investment projects directly undertaken by the private
sector. This project-financing mechanism was developed to allow the government to
undertake productive priority investment projects by contracting them out to the private
sector, while deferring their registration as government expenditure in the budget. The
private sector provides the financing during construction and until the government
acquires the assets. While the information on the stock of PIDIREGAS liabilities is
publicly available, the public debt statistics do not consolidate this information. Each year
only the debt service for the following years are consolidated with the public debt, while
the remaining outstanding stock is classified as a contingent liability.
Regarding the above, it is necessary to make three notes. First, in our analysis above we
used the augmented public sector balance that consolidates bank restructuring, and
projects like PIDIREGAS. Second, PIDIREGAS borrowing was used to finance desirable
public infrastructure investment, and thus did not reduce public sector net worth. It is also
important that information on PIDIREGAS is publicly available, while there is a need to
account for other unmeasured government liabilities such as pension liabilities. Third, the
level of public investment in Mexico did not appear high by international standards, and
PIDIREGAS borrowing for public investment represented less than half of the difference
between the traditional and the augmented public sector balance.
Figure 40. Mexico: Net Public sector debt ( percent of GDP), augmented and
conventional definition
50
45
To ta l " a u g me n te d "
40
30
25
20
Do me s tic
Ex te r n a l
15
10
5
85
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
1990
% of GDP
35
Thanks to consistently strong public debt management and sustained policies of fiscal
(and monetary) restraint, debt issues do no longer dominate economic discussions in
Mexico. However, the level of public debt (in particular the augmented debt) continues to
expose the country to reversals in market sentiment. As such, a further reduction of
vulnerabilities of the country and its fiscal accounts to oil price, interest rate or exchange
rate shocks would benefit from a tax reform aimed at broadening the tax base.
86
11.
Pakistan
11.1 Trends in Public Debt
The burden of public debt rose from 56 percent of GDP in 1980 or 317 percent of total
revenues to 92 percent of GDP (505 percent of revenues) in 1990. Between 1990 and
1995, Pakistan’s public debt-to-GDP ratio remained high but relatively stable. But during
1996 and 2001 Pakistan’s debt to GDP ratio rose rapidly, exceeding 100 percent of GDP
(630 percent of revenue) in 1999 and peaking at 113.5 percent in 2001. Since 2001,
Pakistan’s debt to GDP ratio has been on the decline, falling to 95.2 percent in 2003 (see
Figure 41). The recent decline was largely driven by a reduction in foreign-currency
denominated public debt, a fall of nearly 10 percent of GDP during that period (domestic
currency denominated debt declined by about 4 percent of GDP).
Figure 41. Pakistan. Public Sector Debt ( percent of GDP)
120
100
Domestic currency demoninated debt
Foreign currency demoninated debt
80
60
40
20
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
11.2 Debt Decomposition
The debt decomposition results are broken down in three sub-periods. The pre-1995
period, when debt was high but relatively stable, the rapid increase in the debt-to-GDP
ratio during 1996 and 1999, and the subsequent period since 2001.
Table 11-1 Pakistan: Public Debt Decomposition, Percent of GDP
Public Sector Debt Decomposition
1990-2003 1990-1995 1996-1999 2000-2003
Change in Public Sector debt
3.5
-6.1
19.1
-9.5
Primary Deficit (- Surplus)
1.6
12.1
0.6
-11.1
Rec. of Contingent Liab. (Net of Privatization)
-2.0
-1.4
-0.1
-0.5
Contribution from Real GDP Growth
-46.5
-19.5
-10.5
-16.5
Contribution from Real Interest Rate
29.0
1.7
12.5
14.8
Contribution from Real Exchange Rate Change
10.1
-4.0
11.6
2.4
Other Factors
11.4
4.9
5.0
1.4
87
During the period 1990-1995, Pakistan debt-to-GDP ratio was high, but relatively
stable, averaging about 90 percent of GDP. The main contributors to the slight decline in
public debt (6 percent of GDP) include the strong economic growth (20 percent of GDP)
and real exchange rate appreciation (4 percent of GDP), while primary fiscal deficits
contributed towards public debt accumulation (12 percent of GDP).
During the period 1996-1999, Pakistan saw a rapid buildup of public debt, which
exceeded annual output in 1999, an increase of 19 percent of GDP during a short four
years. Real interest rate burden and real exchange rate depreciation contributed
substantially to debt accumulation (13 percent and 12 percent of GDP, respectively),
more than offsetting the reduction effect from real GDP growth (11 percent of GDP).
During the period 2000-2003, Pakistan’s debt-to-GDP ratio climbed up to the peak of
114 percent of GDP in 2001 and then declined to 95 percent of GDP in 2003. Real GDP
growth and primary surplus joined the force to contribute to debt reduction (17 percent
and 11 percent of GDP, respectively) while real interest rate worked in the opposite
direction (15 percentage of GDP).
Figure 42. Pakistan: Public Debt Dynamics
15
10
5
0
-5
-10
-15
1991
1992
1993
1994
1995
1996
1997
P rimary Deficit (- surplus)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real exchange rate change
Other Facto rs
1998
1999
2000
2001
2002
2003
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real interest rate
Co ntributio n fro m debt indexatio n
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
88
11.3 Further Analysis
The Build-up to the 1999 Crisis
Pakistan’s public debt problem, and the debt crisis of 1999, was in the making for
decades. The very high public debt level, including a heavy external debt burden, is the
consequence of several factors: large and persistent budget deficits throughout the 1980s
and 1990s, stop-go adjustment and reform programs, the imprudent use of borrowed
resources, a stagnation or real decline in government revenues and export earnings, and
the rising real cost of domestic and foreign borrowing. These combined to trap the
country into a spiraling public debt which by 1999 exceeded the economy’s total annual
production.
During the 1980s, the fiscal deficit averaged over 7 percent of GDP and was financed
largely through extensive controls on financial markets, relatively strong monetary
growth and external borrowing. In this period, the economy grew by an average of 6
percent per annum. But persistent fiscal imbalances served to lower national savings and
investment and to impede growth performance. By the early 1990s, the fiscal deficit had
increased to over 9 percent of GDP while annual average growth rates were less than 3
percent, barely exceeding the population growth rate. The government was forced to
borrow heavily from the banking system, pushing interest rates up to the 15-20 percent
range. Very high rates of interest were also offered under the National Saving Scheme,
the major source of government borrowing from non-bank sources.
The financing of Pakistan’s substantial current account deficit also compounded the debt
problem. In the period 1990-1999, current account balance-of-payment deficits totaled
over $25 billion (an average of 4.8 percent of GDP). And if foreign currency deposits
are treated as borrowing rather than earnings, the cumulative current account deficit is
closer to $32 billion (or an average of 6 percent of GDP). These deficits were financed
through borrowing from official and commercial sources, foreign currency deposits and
foreign investment in the energy sector with guaranteed price mechanisms for electricity
generation and sales. The rapid rise in the external debt burden led to a financial and
exchange rate crisis and was followed by a sharp decline in growth to around 2.5 percent
per annum. In the three years 1996-1999, the public debt burden, measured both in terms
of GDP and export earnings, rose more sharply than in the entire decade of the eighties.
By 1999 Pakistan’s debt situation had reached unsustainable levels and the authorities
were forced to restructure with all categories of external creditors.
Between 1980 and 1990, total external public obligations doubled to nearly $20 billion
and continued to rise, to a peak of $43 billion in May 1998. In terms of export earnings,
external debt rose from 200 percent in 1980 to 364 percent by May 1998. The ratio of
debt service due rose even more rapidly from 18.3 percent in 1980 to over 40 percent in
1998. This rise reflected a gradual hardening of terms particularly following the 1996
foreign exchange crisis, which led to large emergency borrowing of short duration.
89
Table 11-2 brings out the dynamics of public debt growth and clearly highlights two
problems: stagnant government revenues and the high cost of borrowing. The very high
rate of growth of public debt in the 1980s did not immediately lead to a sharp rise in the
debt burden because revenues were rising, development spending was high and growth
rates of both revenues and GDP were strong. But it sowed the seeds of future trouble,
and the unsound structure of taxation (which relies heavily on foreign trade taxes) and
debt service payments gradually began to cut into development outlays.
Table 11-2. Pakistan: Public Debt Burden Dynamics
1980s
1990-1995
1996-1999
2000-2004
Primary Fiscal
Real Cost of
Deficit (- Surplus)
Borrowing
% of GDP
(% per annum)
4.7
2.5
2.0
-0.5
-0.3
5.2
-2.5
4.4
Real Growth of Real Growth Real Growth of
Debt Stock
in Revenues
Debt Burden
(% per annum) (% per annum) (% per annum)
9.9
8.2
1.6
5.7
3.9
1.8
5.8
-0.7
6.5
2.7
6.8
-4.1
Note: Fiscal deficits measured before interest payments, excluding borrowing for off-budget purposes.
The sharp increase in the public debt burden between 1996 and 1999 occurred mainly
because growth in real revenue was negative. This was in contrast to real revenue growth
of 8.2 percent in the 1980s and 3.9 percent from 1990 to 1996. Public debt is now driven
largely by interest rate costs, as the primary fiscal balance is now in surplus. But the real
borrowing costs of government debt rose sharply to 5 percent per annum between 1996
and 1999, compared to historic levels of 1-2 percent, reflecting the combined effect of a
slowdown of both domestic and international inflation (although nominal interest rates on
borrowing fell only slightly) and a real depreciation of the exchange rate, which increased
external debt servicing costs. During this time, public debt service as a percentage of total
revenue rose from 11.6 percent in 1980 to 38 percent by 1990 and to 64 percent by 1999.
The public debt problem has been greatly aggravated by declining effectiveness of the
use of domestic resources and borrowed funds. This has several aspects. The balance
between development spending and other expenditures, including defense, has changed
radically. The share of development spending in total government spending was 40
percent in 1980, but fell to 25 percent by 1990 and declined to 13 percent by 2000.
Almost all of the increase in the share of interest payments has come at the cost of
development. While defense spending in constant prices more than doubled between
1980 and 2000, real development expenditure declined over the same period.
Government borrowing for consumption has also grown steadily over the last decade and
a half. Even if the level of the fiscal deficit had remained the same, the debt burden
would have been lower if the entire borrowing were used to finance public development
spending, as higher public investment would have contributed to higher GDP and growth
in government revenue.
90
Debt Restructuring
Following Pakistan’s May 28, 1998 nuclear testing, there was a loss of investor
confidence, a decline in private capital flows, the imposition of economic sanctions and
the suspension of new bilateral and multilateral disbursements beyond basic human
needs. The authorities found it impossible to meet debt service payments because shortterm debt could not be rolled-over. There was a serious threat of a run on foreign
currency deposits and the level of foreign reserves was extremely low. The government
took a number of measures to manage the balance of payments and sustain domestic
economic activity. On May 29, withdrawals in foreign exchange from residents’ and
non- resident foreign currency deposits were suspended to protect official reserves.
Foreign currency deposits and bearer certificates (amounting to $9 billion) held by
residents and the foreign currency deposits of non-residents (amounting to $2.4 billion)
were frozen. The authorities subsequently succeeded in rolling over $1.5 billion of nonresident funds. Other resident and non-resident investors were allowed to withdraw in
local currency or to exchange foreign currency deposits for special US bonds issued by
the Government of Pakistan.
On June 26, 1998, the rupee was devalued by 5 percent vis-à-vis the US dollar, and then
by a further 11 percent as a consequence of a move to a market-determined exchange rate
system, through the introduction of an exchange float in the inter-bank market in the
context of a dual exchange rate system.
In January 1999, Pakistan concluded an agreement with its Paris Club creditors. This
agreement restructured 100 percent of principal and interest falling due between January
1, 1999 and December 31, 2000 on loans contracted prior to September 1997. ODA loans
were restructured over 20 years, including 10 years grace at concessional interest rates
equivalent to or less than those applicable to the original loan. In December, 1999
Pakistan exchanged three Eurobonds worth $610 million on more favorable terms: 3
years grace, 6 years maturity and 10 percent coupon rate. In the same month, it also
reached agreement with eight commercial banks to restructure $415 million in medium
term commercial bank credits. In addition, the authorities succeeded in rolling over $300
million in short and medium term liabilities held by other central banks.
Since 2001, Pakistan public debt and external debt ratios have improved sharply, but they
are still very high. The overall public debt-to-GDP ratio is just below 90 percent,
compared to 110 percent in 2001. The external debt to-export ratio has declined from 408
percent to 257 percent and the debt service to export ratio in 2004 was estimated to be
less than half the 40 percent recorded in 1998. This improvement is a reflection of several
factors, including the government’s improved fiscal position, export growth, debt
restructuring and an active debt management strategy to pre-pay high interest rate debt
and lengthen the maturity profile. A very favorable agreement with the Paris Club in
December 2001 rescheduled $12.5 billion over 23 years for guaranteed commercial
claims and over 38 years for ODA loans. Subsequently, several bilateral creditors forgave
their concessional claims, in particular the US $1 billion. The improvement in fiscal
91
performance in recent years is, to some extent, also attributable to the external grants and
defense receipts post September 11, which are 2 percent of GDP in 2002 and 2.4 percent
of GDP in 2003.
The authorities have pursued an active debt management policy to pre-pay high interest
rate debt owed to private and official creditors. In addition, a large share of high interest
foreign currency deposits were paid, bonds held by residents and non-resident Pakistanis
were extinguished through rupee payments (for which the government paid a 5 percent
bonus), and conversion schemes permitted the private sector to substitute expensive
foreign exchange loans with rupee credits.
Total external debt (including foreign exchange liabilities) was $35.5 billion at end of June,
2003. Of this, 86 percent is owed to official creditors. Preferred creditors account for 55
percent of medium and long term external public and publicly guaranteed debt. Going
forward, the authorities have identified $9.9 billion of high interest rate external loans and
foreign currency liabilities carrying interest rates of 4.6 percent to 11 percent that they
intend to pre-pay. Priority is given to the Asian Development Bank and IBRD. Around $1.1
billion has already been pre-paid to the Asian Bank and an additional $3.5 billion is
scheduled to be retired by June, 2008. Part of the repayments are being financed by
domestic bond issues and the use of foreign currency reserves, but the government also
intends to refinance with international bonds.
In February 2004, Pakistan made a successful return to the international capital markets for
the first time since the country restructured all its euro-bonds and floating rate notes in 1999.
The $500 million, 6.75 percent, 5 year bond lead-managed by Deutsche Bank, JP Morgan
and ABN Amro Bank was priced at par to yield 370 basis points over US Treasury yields.
The transaction attracted strong demand from a diverse group of international investors,
reflecting a vote of confidence by the international investor community in Pakistan’s
economic policies and prospects. Some questions were raised as to the rationale for
borrowing this amount from capital markets at 6.75 percent when international reserves
were over $12 billion. The authorities argued that the issue was designed to put Pakistan
back on the radar screen of the international capital markets, to establish an international
pricing benchmark and to encourage stronger foreign portfolio and FDI flows. The proceeds
of the Eurobond were used to retire other high cost external debt.
Pakistan has come a long way in a short period: While in 1999, the country was at the
brink of default on its external debt, the public debt and external debt ratios have
improved sharply in the past three years. This improvement is a reflection of several
factors, including the government’s improved fiscal position, export growth, debt
restructuring and an active debt management strategy to pre-pay high interest rate debt
and lengthen the maturity profile. The situation has changed considerably thanks to the
improved policy management and adherence to an IMF program. Special circumstances
following the events of September 11, 2001, however, also worked to Pakistan’s
advantage. Concerns around asset seizing and international financial scrutiny led to a
surge of inward remittances that bolstered the balance of payments and provided the
central bank with a comfortable reserve position. Additional financial resources, and
92
generous debt relief from official sources, were secured by aligning the country with the
US-backed war on terrorism. Finally, the relaxation of trade restrictions on textile
imports into the European and U.S. markets bolstered economic recovery, which helped
the restoration of financial stability, spurred a stock market rally and enabled the country
to return to the international bond market.
93
12.
Philippines
12.1. Trends in Public Debt
In the early 1990s, the Philippines’s public debt to GNP ratio increased by about 15.5
percent of GNP (from 78 percent of GNP in 1990 to 93.5 percent of GNP in 1993). Since
then, however, the public debt to GNP ratio declined, reaching 68.5 percent of GNP in
1996. This trend was subsequently reversed again, as public debt reached more than 87.4
percent of GNP in 1999, and remained at this level afterwards. At the same time, external
public debt had been decreasing steadily until 1997, from 54 percent in 1990 to 32
percent of GNP in 1997. After jumping to 44 percent of GNP in 1998, and decreasing to
40 percent of GNP in 2000, the external public debt has since been relatively stable as a
share of GNP.
Figure 43. Philippines: Public sector debt (% of GNP)
100
90
80
70
60
50
40
30
20
10
0
1990
1991
1992
1993
1994
1995
Foreign currency demoninated debt
1996
1997
1998
1999
2000
2001
2002
Domestic currency demoninated debt
12.2. Public Debt Decompositions
These developments pose interesting questions: What determines the Philippines’
prevailing high public debt to GNP ratio? And, what can be done to reduce the burden of
the debt?
Table 12-1. Philippines: Cumulative public debt decomposition
Public Debt decompositions
1991-2002 1991-1993 1994-1997 1998-2002
Change in public sector debt
Primary Deficit (- surplus)
Privatization revenues
Contribution from real GNP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
11.2
-39.3
-6.8
-28.5
29.7
-1.0
57.2
94
Percent of GNP
15.6
-25.3
-11.8
-22.4
-5.0
-1.5
-1.5
-15.1
6.3
13.0
-5.6
-7.5
33.1
8.2
20.9
-5.2
-0.3
-11.9
10.3
12.1
15.9
During the period 1991-1993, primary fiscal surpluses, revenues from privatization,
some real exchange rate appreciation, and modest economic growth contributed towards
public debt reduction (24 percent of GNP). Nevertheless, the public debt to GNP ratio
increased during this period by 15.6 percent of GNP mostly as a result of other public
debt accumulation (e.g., hidden liabilities, such as the provision of implicit and explicit
guarantees by the Marcos government, by 33 percent of GNP), and a contribution from
the real interest rate (6.3 percent of GNP).
During the period 1994-1997, the public sector debt to GNP ratio declined by 25.3
percent of GNP. While robust real growth, sizeable primary surpluses, and capital gains
from a real exchange rate appreciation had contributed substantially towards public debt
reduction (46.5 percent of GNP), high real interest rate and other public debt
accumulation diminished this contribution by about 21.2 percent of GNP.
During the period 1998-2002, sizeable real economic growth and modest primary
surpluses contributed towards a public debt reduction of about 17 percent of GNP.
Nevertheless, the public debt to GNP ratio jumped by about 21 percent of GNP, as a
result of capital losses due to a real exchange rate depreciation (12 percent of GNP), the
real interest rate effect of 10.3 percent of GNP, and other public debt accumulation of
15.9 percent of GNP.
Figure 44. Philippines: Public Debt Dynamics
25
20
15
10
5
0
-5
-10
-15
-20
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
P rimary Deficit (- surplus)
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n from real GNP gro wth
Co ntributio n fro m real interest rate
Co ntributio n from real exchange rate change
Co ntributio n fro m debt indexatio n
Other Facto rs
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GNP ratio. Items above the zero line
contribute to an increase in the debt/GNP ratio, while items below the line contribute to a reduction in the
debt/GNP ratio. As an example, a negative sign for Contribution from real GNP growth in a given year
indicates that positive real GNP growth during that year contributed to a reduction in the debt/GNP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GNP ratio during that year.
95
12.3. Debt Analysis
During the first half of 1980s, the Philippines witnessed the collapse of the Marcos
regime (1965 to 1986), and ended up with a deep economic crisis. The crisis was
accompanied by an external debt crisis and a sequence of bank and corporate defaults.
The major contributor to the external debt build-up under the Marcos regime was the
public sector, as expansionary fiscal policies led to a large accumulation of public debt.
Furthermore, protectionist industrial and trade policies led to over-investment in import
substitution and non-tradable sectors, as easy credit encouraged excessive borrowing by
private firms and worsened economic competitiveness. Finally, serious governance
problems and political instability, and a number of external shocks 71 exposed these
weaknesses and led to a major crisis, marked by a default on external obligations in 1983,
widespread bankruptcies of domestic banks and corporations, and a deep recession.
Debt restructuring and market-oriented reforms
In 1983, the Philippines declared a debt moratorium, which was followed by several
unsuccessful waves of restructuring until it ended in the issuance of Brady Bonds in
1992. Out of a total of US$32.5 billion of external debt outstanding, US$4.47 billion was
debt eligible for Brady debt reduction. The face value debt reduction was US$1.26
billion. While the face value debt reduction was about 28 percent of total eligible debt,
given the Philippines’ total external debt burden, the impact of the Brady deal was not
that significant.
Market-oriented reforms, implemented after the regime change in 1986, aimed at
reducing macroeconomic imbalances, opening up the economy, and addressing structural
rigidities. These reforms paved the way for the economic recovery in the 1990s – in fact
growth accelerated to around 6 percent by 1996, while the average annual GNP growth
during 1994-1997 was about 4 percent. Inflation was down, and the external position had
strengthened with rapid export growth and rising reserves, and the stock of the debt was
falling. The consolidated public sector balances have been steadily improving since 1991,
moving to a balanced public sector budget in 1996 and 0.7 percent of GNP in 1997.
These developments reflected not only the fiscal consolidation efforts of the general
government, but also substantial improvements of the accounts of other public sector
entities (non-financial public enterprises) 72 . Finally, privatization was accelerated, a
number of important sectors were opened up to competition, and limits on foreign
participation were liberalized in various sectors.
71
Among those were the second oil price shock, hikes in world interest rates, the Latin American debt
crisis, and a recession in industrialized countries.
72
A significant part of this improvement in the mid-1990s resulted from the reduction of the size of the
Government Owned and Controlled Corporations (GOCCs) – for instance, privatization efforts in 1994
and 1995 have reduced those by roughly 30 percent.
96
Figure 45. Philippines: External debt, real GNP growth and non-debt creating
inflows
100
8
90
6
80
4
70
2
60
0
50
-2
40
-4
30
20
-6
10
-8
0
-10
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
net non debt creating capital inflow s as % of GNP
external debt as % of GNP
real GNP grow th
The Asian Crisis
Nevertheless, some weaknesses remained: low domestic savings; an overstaffed civil
service and an inefficient inter-government transfer system; a weak banking sector; weak
tax collection, which, given the high debt burden, has limited much needed outlays on
infrastructure and social sectors. Finally, there was a degradation of governance under the
Marcos regime, which had created powerful interest groups in opposition to economic
reforms.
The acceleration of growth, investment, and a surge in capital inflows in mid-1990s
masked these shortcomings, but also heightened the economy’s vulnerability to sudden
shifts in market sentiment. The de facto pegging of the peso to the US dollar in late 1995
added to the risks by encouraging rapid growth of short-term capital inflows. The switch
in the exchange rate regime was followed by a period of very rapid credit growth, fueled
by large-scale external borrowing (much of which was short-term), a boom in asset
prices, and a widening of the external current account deficit. A strong bias in favor of
borrowing and lending in US dollars rather than in pesos (reserve requirements and
taxation were higher for peso transactions), contributed to a build-up in foreign exchange
exposures and increased vulnerabilities.
Nevertheless, the Philippines did not experience a systematic financial crisis in 1997-98
in part because of financial sector restructuring and reforms undertaken after the debt
crisis of the early 1980s, and stronger capital positions and better portfolio quality among
its banks. Real GNP contracted by about 0.5 percent, followed by a quick recovery in
1998. The Philippines grew at about 3-4 percent over 1999-2002 period. The Central
97
Bank reacted promptly to the Asian crisis, by floating the peso in July 1997, and
tightened monetary policy. The interest rates came down in subsequent months to the precrisis level. At the same time, fiscal policy was relaxed to support domestic demand. The
extent of fiscal relaxation reflected the more modest economic slowdown compared with
other crisis countries, as well as constraints imposed by the high level of public debt, and
concerns over adverse market reaction to a higher deficit.
Post Crisis Issues
a)
Fiscal Pressures
Despite a relatively mild output drop, and a quick recovery, fiscal policy continues to be
expansionary, with sizeable fiscal deficits and despite a very high public debt burden.
The main reason for persistent budget deficits has been a weak revenue performance (tax
revenues declined from 16.3 to 11.6 percent of GNP during 1997-2002. At the same time,
the share of public expenditure has been maintained at the level of 18-19 percent of GNP
during 1996-2002 period. However, the wage bill, interest payments and other mandatory
expenditures account for a large part of the total expenditure of the national government.
The difference between revenues and mandatory expenditure obligations decreased from
3.3 percent of GNP in 1998 to almost none in 2002, leaving hardly any room for
discretionary spending. High fiscal deficits forced the government to borrow more, and
interest payments as a percentage of government expenditures rose from 16.6 percent in
1997 to 24.6 percent in 2001, then to 23.9 percent in 2002.
Besides fiscal stress, the government had to face explicit and implicit contingent
liabilities from the past. The centralized, state-centered approach of the Marcos
government created substantial contingent liabilities, including: (i) contingent liabilities
associated with the insurance scheme for bank deposits (ii) un-funded liabilities of the
public pension scheme; (iii) guarantees on risks associated with build-operate-andtransfer contracts; (iv) loan guarantees extended to GOCCs and government financial
institutions (GFIs).
b)
Banking System
Since 1997, the banking system has weakened. Profitability has fallen, credit growth has
stagnated and the level of non-performing loans (NPL) and non-performing assets has
steadily increased. The NPL ratio in commercial banks rose to about 17.4 percent of the
total loan portfolio in December 2001, up from about 15 percent in December 2000.
c)
Corruption
In addition, institutional weaknesses in governance are widespread and hamper
development. Corruption is probably the best-known reflection of the country’s deep
institutional weaknesses in governance. The economic dominance of closely held family
business groups is a feature of the Philippine political economy that continues to have a
negative impact on economic performance. As a result, a progressive decline of gross
98
domestic investment started in 1998 and continued in subsequent years. Gross domestic
investment was 18.1 percent of GNP in 2002, compared to 23.8 percent in 1997. The
investment climate in the Philippines was adversely affected by complicated investment
procedures, high transaction costs, and an unstable political situation. Investor confidence
also suffered from concerns about public debt sustainability (debt overhang problem). If
the sluggish situation in investment continues, a further slow-down in the pace of
economic growth is likely to follow.
99
13.
Poland
13.1. Trends in Public Debt
During the 1980s, Poland signed no fewer than six rescheduling agreements with its
external creditors. In the last quarter of 1989, Poland suffered a political and economic
crisis and ceased to service its foreign debt except for trade-related roll-over facilities.
Poland’s external debt to GDP ratio had reached 80 percent of GDP by 1990, with total
public debt close to 100 percent of GDP. Large fiscal deficits, financed mainly through
direct Central Bank lending, propelled inflation. The large debt burden was an obstacle to
successful transition to a market economy.
Poland edged towards hyperinflation towards the latter half of 1989, but inflation
fell dramatically after drastic reforms were enacted in January of 1990. At the
beginning of the 1990s, the new reformist government adopted a ‘Big Bang’ reform
towards a market economy.73 The new government was also successful in
restructuring external debt with the Paris and London Clubs, which had a very
favorable impact on the external debt burden (See
Figure 46)74. Public debt maintained a steady downward trend throughout the last decade,
reaching 39 percent of GDP in 2000. During the last three years, however, this trend was
reversed and public debt (domestic public debt in particular) climbed back by about 13
percentage points of GDP.
Figure 46. Poland: Public sector debt (% of GDP)
100
90
80
Domestic currency donominated debt
70
Foreign currency donominated debt
60
50
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
73
The design, implementation and results from the economic reform process in Poland has been a subject
of a large number of studies, among which the studies. See Nuti (1990), Calvo and Coricelli (1992), Lane
(1992), Sachs (1993), Berg (1994) and Blanchard (1994) among others.
74
The figure shows only the nominal reduction in the debt stock.
100
13.2. Public Debt Decompositions
During 1990-2000, Poland reduced its public debt-to-GDP ratio by 56 percentage points
(see Table 13-1). During the past three years, however, this trend has been reversed, and
public debt rose by nearly 13 percentage points of GDP.
Table 13-1. Poland: Cumulative public debt decomposition
Public Debt decompositions
1990-1991
Change in public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
-13.3
5.2
-0.2
7.2
-6.2
-22.1
2.9
1992-2000 2001-2003
Percent of GDP
-42.8
12.6
2.1
9.0
-11.7
-1.8
-25.5
-2.7
-9.5
6.6
-9.0
-1.8
10.8
3.2
1990-2003
-43.5
16.3
-13.7
-21.0
-9.0
-32.9
16.8
These developments pose interesting questions: What determined the sharp decline in
debt to GDP ratio during 1990 and 2000, and consequently, the sharp reversal of the
downward trend in public debt-to-GDP ratio during the past three years?
During the period 1990-1991, Poland’s debt to GDP ratio decreased by about 13
percent. Capital gains from a substantial real exchange rate appreciation during 1991 had
the largest impact on debt reduction.75 Poland’s debt reduction agreement with the Paris
Club at the beginning of the 1990s also helped to lower the foreign debt burden (which is
evident by the negative real interest contributions), as a substantial part of the debt
reduction was instrumented via lower interest payments during 1990-1994. At the same
time, as output and consequently, fiscal revenues collapsed during Poland’s transition
period, negative real growth rates and sizeable primary fiscal deficits (notwithstanding
drastic expenditure cuts) were working towards debt accumulation.
Between 1992 and 2000, Poland’s debt to GDP ratio fell by 43 percent. The largest
contribution to debt reduction came from solid real GDP growth (25.5 percent of GDP).
Privatization proceeds had also a substantial impact (12 percent of GDP). Further, lower
real interest rates and real exchange rate appreciation were also instrumental in reducing
Poland’s debt to GDP ratio (with a combined impact of about 19 percent of GDP).
During this period, Poland experienced solid growth, with average annual growth rates
above 5 percent. Debt reduction agreements with the Paris and London Clubs had a very
75
Note that this sizeable real exchange rate appreciation was just a consequence of a massive real
depreciation during 1989, necessary to liberalize the exchange rate and to remove the multiple exchange
rates of the previous period. By now exchange rate overshooting, or real depreciation at the beginning of
the transition period is a stylized fact in transition economies, and it was necessary to remove distortions in
relative prices. The subsequent real appreciation, therefore, although sizeable, is not a symptom of an
overvalued exchange rate – if anything, it is evidence for an undervalued exchange rate at the beginning of
transition period.
101
favorable impact on Poland’s external debt burden, eliminating the debt overhang and
obstacles to economic growth. At the same time sound macroeconomic policies and
microeconomic reforms helped to sustain this solid growth performance.
Poland’s successful macroeconomic stabilization was supported by (i) a successful debt
management strategy, including external debt restructuring; (ii) a genuine fiscal
adjustment, resulting from far-reaching tax reform and eliminating the subsidies to
enterprises which hardened the budget constraints; (iii) a policy of gradual inflation
reduction, consistent with the pace of fiscal adjustment and Poland’s debt management
policy; (iv) price and foreign trade liberalization; (v) decisive microeconomic
restructuring and privatization of state enterprises; and (vi) financial and banking sector
reforms and bank bail-outs by the government. Smaller primary deficits, together with
lower interest costs on external debt, as well as the successful development of domestic
debt markets, allowed a relatively quick decline of inflation rates from triple digits down
to moderate levels.
Figure 47. Poland: Public Debt Dynamics
15
10
5
0
-5
-10
-15
-20
-25
-30
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
P rimary Deficit (- surplus)
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real interest rate
Co ntributio n fro m real exchange rate change
Co ntributio n fro m debt indexatio n
Other Facto rs
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GDP ratio during that year.
102
In the 2001-2003 period, public debt increased by nearly 13 percent of GDP, as growth
performance weakened (annual growth averaged about 2 percent). A relaxation of fiscal
policy, as evident by the contribution of primary fiscal deficits, had the largest
contribution in the recent debt build-up. At the same time, adverse automatic debt
dynamics were also instrumental for debt accumulation, as the gap between real interest
rate and real growth widened (real interest rates increased sharply, while real growth
slowed). The key explanation of this development is due to a lack of consistency between
fiscal and monetary policy: Poland adopted inflation targeting at a time of an economic
slowdown and fiscal relaxation. This led to aggressive hikes in interest rates, which
fueled public debt accumulation and further depressed economic growth.
13.3. Poland’s Debt Restructuring Process
Economic reforms in Poland received strong international support, resulting in significant
debt relief from Paris and London club reduction agreements. In April 1991, the Polish
government reached an agreement with its Paris Club creditors to reduce their claims by 50
percent in net present value terms. This debt reduction had two stages: (i) the first stage
envisaged an immediate 30 percent debt reduction in net present value terms, (ii) the second
stage envisaged a 20 percent debt reduction in net present value terms by April 1994, upon
successful completion of the IMF program. An additional precondition for stage 2 was the
conclusion of a similar agreement with private creditors (the so called London Club).
In 1994, Poland also reached a favorable debt restructuring agreement with the London
Club. The London Club agreement covered the principal and interest arrears of longterm, commercially-contracted debt and also included short-term trade-related debt. With
this agreement, the face value of Poland’s commercial debt was reduced from US$ 14.3
billion to US$ 8.57. In market value terms, Poland’s debt agreement compares favorably
to other Brady style agreements (e.g., Mexico).76
Substantial debt relief, coupled with sound fiscal policies, led to a sharp reduction in
Poland’s debt burden: in 1996, the external debt to GDP ratio was below 30 percent.
Debt-management policies have played an important role in macroeconomic stabilization.
Poland’s debt rescheduling deal at the beginning of the 1990s decreased its foreign debt
burden successfully and, together with fiscal adjustment and tight monetary policies,
restored public debt sustainability. It further helped to reopen access to international
capital markets and to promote economic growth.
76
A debt deal will be beneficial for a country debtor only if the market value of the debt without
enhancements (guarantees) falls through the agreement, or, if the agreement achieves a reduction of the
foreign debt burden. See Claessens and van Wijnbergen (1989), World Bank (1996), Sgard, J. (1996), van
Wijnbergen and Budina (2002).
103
Figure 48. Poland: Total external debt, growth, and net non-debt creating flows
90
8
80
6
70
4
60
2
50
0
40
-2
30
-4
20
-6
10
-8
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
net non debt creating capital inflow s as % of GDP
104
external debt as % of GDP
real GDP grow th
14.
Russia
14.1. Trends in Public Debt.
After the dissolution of the Soviet Union in December 1991 77 , Russia inherited a
significant share of the external debt from the previous regime.78 As a result, Russia’s
public debt in 1992 was very high. During 1993-2003, Russia’s public debt-to-GDP ratio
was reduced by more than 80 percentage points (see Figure 49). Nevertheless, this
process was not smooth: by 1996, the public debt-to-GDP ratio declined by more than 60
percentage points as compared to its initial level in 1992. This trend was, however, soon
reversed, and as a result of the Russian meltdown in August 1998, public debt to GDP
increased by 37 percentage points during 1997-1999. Since 2000, as a result of debt
restructuring and fairly quick crisis resolution, public debt has been rapidly declining,
reaching 33 percent of GDP in 2003.
Figure 49. Russia: Public sector debt (% of GDP)
140
Domestic currency denominated debt
120
Foreign currency denominated debt
100
80
60
40
20
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
14.2. Public Debt Decompositions
The decomposition results are broken down in three sub-periods: before crisis (1996-97);
Russian crisis (1998-99); and post-crisis period (2000-03).
77
The Soviet Union was declared dissolved on Dec. 8th by the signatories to the Minsk Accord (Belarus,
Ukraine, and Russia). This dissolution was finalized upon the resignation of Gorbachev as president of the
USSR on December 25, 1991. See Russian Economic Reform, pp. 5, World Bank, 1992.
78
The debt allocation treaty of December 1991 required Russia to assume 61 percent of the debt of the
former Soviet Union at Jan 1, 1991 (USD 65.3 billion). According to a Country economic document of the
World Bank, Russia has de facto assumed all foreign debt accumulated by the USSR in return for assets,
including embassies, held by the USSR.
105
Table 14-1. Russia: Cumulative public debt decomposition
Public Debt Decomposition
1996-1997 1998-1999 2000-2003 1996-2003
Change in public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GDP growth
Contribution from real interest rate
Contribution from real exchange rate change
Other factors
1.0
6.6
-5.5
1.3
0.7
-7.6
5.5
Percent of GDP
34.0
-55.2
0.7
-16.7
-4.1
-6.5
-1.3
-15.4
-3.1
-1.4
40.4
-19.3
1.3
4.0
-20.2
-9.4
-16.1
-15.3
-3.7
13.5
10.7
The beginning of Russia’s transition to a market economy was marked by a dramatic
drop in output, a collapse of revenues and large fiscal deficits, financed mainly through
money printing. As a result, Russia experienced hyperinflation, and Russia’s public debtto-GDP ratio was well above 100 percent at the beginning of the 1990s.
During the period 1996-1997, Russia’s public debt-to-GDP ratio increased by only
about 1 percent. Negative real growth rates and sizeable primary fiscal deficits
contributed to debt accumulation. At the same time, a real exchange rate appreciation and
high privatization receipts were offsetting the impact of negative growth rates and high
primary deficits.
During the period 1998-1999, the crisis period, the public debt-to-GDP ratio increased
by about 34 percent of GDP. The main factor contributing to this increase was the real
exchange rate depreciation (about 40 percent of GDP). The second factor which
contributed towards public debt increase was the primary deficit, with some 0.7 percent
of GDP. The real growth rate, revenue from privatization, and real interest rate have had
a combined contribution of about 9 percent in the opposite direction, but this was not
sufficient to offset the large contributions from the real exchange rate depreciation and
the primary fiscal deficits to debt accumulation.
The 2000-2003 period. Almost all factors have contributed to the decrease in public debt
since the 1998 crisis: Russia witnessed a successful recovery and strong economic
growth, which contributed with about 15 percent of GDP to total debt reduction. The
primary balance substantially improved, shifting from a large deficit to a substantial
surplus, and contributed with about 17 percent of GDP to public debt reduction. Real
exchange rate appreciation contributed with another 19 percent of GDP, while average
nominal and real interest rates were kept at favorably low levels.
106
Figure 50. Russia: Public Debt Dynamics
80
60
40
20
0
-20
-40
-60
-80
-100
1993
1994
1995
1996
1997
1998
P rimary Deficit (- surplus)
Co ntributio n fro m real GDP gro wth
Co ntributio n fro m real exchange rate change
Other Facto rs
1999
2000
2001
2002
2003
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntributio n fro m real interest rate
Co ntributio n fro m debt indexatio n
Change in public secto r debt
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GDP ratio. Items above the zero line
contribute to an increase in the debt/GDP ratio, while items below the line contribute to a reduction in the
debt/GDP ratio. As an example, a negative sign for Contribution from real GDP growth in a given year
indicates that positive real GDP growth during that year contributed to a reduction in the debt/GDP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a real
depreciation increased the debt/GDP ratio during that year.
14.3. Debt Analysis and Debt Restructuring
In 1995, Russia embarked on a macroeconomic stabilization program, supported by
the IMF. This program was essentially an exchange rate-based stabilization, to be
supported by fiscal adjustment, replacing monetary financing of the deficits by public
borrowing, and growth-enhancing microeconomic structural reforms. Indeed, this
program helped stabilize the exchange rate and inflation fairly quickly; however, in
retrospect, this success was short lived.
What went wrong with Russia’s stabilization program? Unlike macroeconomic
stabilization and structural reforms in Poland, Russia’s fiscal adjustment was illusory,
mainly because of the lack of micro-economic restructuring and reforms.79 The lack of
structural reforms, and a policy of tight money that caused a real exchange rate
appreciation, created a system of soft budget constraints and a vicious circle of nonpayments and arrears, which at the end found its way into the fiscal accounts. This
system created powerful interest groups which were opposed to reforms, including fiscal
reforms. The system was also plagued by corruption and distorted the economic
incentives, with a disastrous impact on productivity and growth.
79
See Pinto et al (2004).
107
What caused the 1998 crisis?
The key issue of the 1998 crisis were the “soft budgets” implicit in the pervasive noncash settlements and barter nonpayment system. Higher non-payment implied lower
taxes, rising government debt and higher interest rates, and hence poor growth. These
dynamics fed on each other leading to the crisis. Lack of productivity and growth,
together with weak fiscal fundamentals also coincided with low oil prices and weak
external fundamentals, cumulating in exchange rate overvaluation, which masked the
unsustainable public debt dynamics.
Contagion effects from the Asian crisis, led to capital flow reversal, which made matters
even worse. The weak banking system also played a role, as there were a few large
private Moscow-based banks, engaged in connected lending, which invested heavily in
government securities, and had large balance and off-balance sheet exposures. At the
same time, the government attempted to swap GKOs, domestic short term ruble
denominated debt, for long-term dollar-denominated Eurobonds, once again in the face of
unsustainable debt dynamics, masked by overvalued exchange rate. Finally, the
parliament failed to approve the full fiscal package, as approved by the IMF board.
Debt Restructuring
Two components of public debt accounted for the bulk of losses borne by creditors: the
ruble treasury bills and bonds (GKOs/OFZs); and Soviet-era commercial debt (debt
incurred by the Soviet Union before January 1st , 1992, which Russia inherited) under the
auspices of the London Club (LC). The face value of GKOs/OFZs (excluding OFZ
coupons) subject to restructuring was about $45 billion at the immediate pre-crisis
exchange rate. This debt was held in almost equal amounts by Russian commercial
banks, the Central Bank of Russia, and non-residents. Under the restructuring terms,
Russia’s commercial banks and non-residents have suffered sizeable losses, mostly
owing to the exchange rate devaluation. Fortunately for Russia, these losses did not have
any real effects, because the banking system had attracted only about 7 percent of GDP as
deposits of the population, and most of them were in the Sberbank, under implicit deposit
guarantee. An important facilitating factor was that GKOs/OFZs were subject to Russian
law.
In August 2000, Russia reached a debt reduction agreement with the London Club (LC).
This involved a write-down of $10.6 billion of the obligations from the Soviet Era debt.
The debt reduction agreement had three options: Prins, or principal, ($22.2 billion);
IANs, or interest arrears notes, ($6.8 billion); and past-due interest on the first two
components ($2.8 billion). Russia’s debt reduction agreement with the London Club is
evaluated as very favorable for Russia80, with an estimated debt reduction of 50 percent
in net present value terms.
80
It was also because of special circumstances whereby GKOs were governed by domestic law; and the
debt owed to the London Club was not a sovereign liability but a liability of Vneshekonombank, which put
the Russian government in a very strong bargaining position.
108
Post Crisis Developments
Following the 1998 crisis, Russia experienced a dramatic recovery (the annual average
GDP growth rate during the last four years was nearly 7 percent) and a dramatic decline
in its public debt-to-GDP ratio. Russia has also benefited from a favorable external
environment as oil and metals prices recovered and capital inflows resumed.
What underpins this brisk recovery and the quick resolution of the debt problem? The
decision to devalue the ruble and to default in August 1998 proved critical to the
resolution of both debt and growth problems. The default shut Russia out of the capital
markets, and given the low oil prices at that time, this acted to harden the budget
constraint of the government, which was then translated into hardening the budget
constraints of the enterprises. Hardening budget constraints, enhanced economic
competitiveness, as a result of the devaluation, and the elimination of the debt overhang,
as a result of debt default and the London club debt restructuring agreement were
essential for quick economic recovery and successful macroeconomic stabilization and
public debt reduction. Robust growth, together with structural fiscal reforms, which
eliminated non-payments and arrears, and high oil prices during the past four years
brought a dramatic switch from primary fiscal deficits to primary fiscal surpluses.
109
15.
Turkey
15.1. Trends in Public Debt
During the past 13 years, the Turkish public debt followed an interesting pattern: In
1990s, the net public debt-to-GNP ratio has been steadily increasing and in 1999 this
ratio doubled, compared to its level in 1990 (less than 30 percent). After a small decline
in 2000, the debt ratio increased by nearly 40 percent, reaching 91 percent in 2001, or
more than three times its 1990 level. After peaking in 2001, this ratio declined by about
25 percent in 2002-2003.
The change in the public debt composition in favor of domestic public debt was another
major development since mid-1990s. While in 1999 public external debt to GNP ratio
was broadly unchanged from its 1990 level, public domestic debt to GNP ratio increased
seven-fold during 1990-1999. This sharp increase in domestic public debt was
predominantly driven by an increase in the domestic debt indexed to the exchange rate
and to the interest rate.
Figure 51. Turkey: Public sector debt (% of GNP)
100
90
80
Public Domestic Debt /GNP
Public External debt/GNP
70
60
50
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
15.2. Public Debt Decompositions
These developments pose interesting questions: What determined the steady increase in
the public debt to GNP ratio during the 1990s, and what caused the nearly 40 percent
jump in the public debt ratio in one single year? Was this a result of excessive spending
that accumulated over time, or from a lack of growth, high real interest rates or real
exchange rate depreciations in countries with foreign currency-denominated debt?
There are several important caveats to public debt decompositions and analysis for the
case of Turkey: (i) Public debt decompositions are performed for the net public debt to
GNP ratio, netting out the central bank net foreign assets and the central government debt
110
held by the Central Bank of Turkey81; (ii) data for public sector deficit include not only
the central government, but also the extrabudgetary funds (EBF), the local authorities, the
social security institutions (SSI), and the financial and nonfinancial state economic
enterprises (SEE); and (iii) given the importance of the monetary financing in Turkey, we
also account explicitly for the seigniorage revenue as a debt reducing factor.82
Table 15-1. Turkey: Cumulative public debt decomposition
Public Debt Decompositions
Change in net public sector debt
Primary Deficit (- surplus)
Rec. of Contingent liab. (net of privatization)
Contribution from real GNP growth
Contribution from real interest rate
Contribution from real exchange rate change
Contribution from debt indexation
Seigniorage revenue
Other factors
1991-1999 2000-2001 2002-2003 1991-2001 1991-2003
Percent of GNP
32.2
34.0
-24.9
66.2
41.3
20.7
-8.5
-10.3
12.2
1.9
-0.7
15.4
0.0
14.7
14.7
-11.0
0.5
-11.3
-10.5
-21.9
37.9
20.4
8.9
58.3
67.2
7.7
6.4
-8.2
14.0
5.8
0.0
1.8
3.5
1.8
5.2
-24.4
-2.9
-2.3
-27.3
-29.6
2.1
0.9
-5.1
3.0
-2.1
Between 1991 and 1999, the net public sector debt to GNP ratio has more than doubled.
The main factors behind the public debt build-up were real interest rate contribution (38
percent of GNP), primary deficits (21 percent of GNP), and capital losses from the real
exchange rate depreciation (7.7 percent of GNP). While the real growth rate was working
in the opposite direction, towards a decline in the public debt to GNP ratio, its
contribution was not sufficient to offset the impact of real interest rates and exchange rate
depreciation. Finally, public debt accumulation would have been much larger, were it not
for the monetization of these deficits through increasingly higher inflation rates –
cumulative seigniorage revenues amounted to 24 percent of GNP!
Turkey experienced two speculative attacks (November 2000 and February 2001)
that had a substantial impact on public finances. After a slight improvement in the
public debt to GNP ratio in 2000, this ratio jumped by 37 percent in 2001, the time of
major financial crisis, despite the primary surplus of 8.5 percent of GNP and seigniorage
revenues of about 3 percent of GNP. The real interest rate contribution to public debt
accumulation was 20 percent of GNP, followed by capital losses from the real exchange
rate depreciation (6 percent of GNP), and a contribution from debt indexed to inflation
and exchange rate (2 percent of GNP). Contingent liabilities, created by implicit and
explicit guarantees provided to creditors of Turkish banks in the aftermath of the
81
See IMF (2000).
Note that typically the transfer of seigniorage revenue, is registered as a transfer of the Central Bank’s
profits to the budget (part of the non-tax revenue). In Turkey, however, transfers from the CBT to the
government, reflected in the budget were insignificant, while seigniorage have been transferred to the
government “in the form of cancellation of government debt vis-à-vis the central bank – which are not
reflected in the budget, interest free short-term advances, and lower than market interest rates on noncash
government securities held by the central bank”. See IMF (2000).
82
111
November 2000 crisis, had a large contribution to public debt accumulation in 2001 (15
percent of GNP).
In 2002-2003, net public debt ratio declined by about 25 percent of GNP, mostly on the
account of even larger primary surpluses (10 percent of GNP), resumed growth, and the
real appreciation of the lira. While in 2002 the real interest rate’s contribution was fairly
small, in 2003 the real interest rate contribution increased again, which shows the
vulnerability of public finances to changes in interest rates.
Figure 52. Turkey: Public Debt Dynamics
40
30
20
10
0
-10
-20
1991
1992
1993
1994
1995
1996
1997
P rimary Deficit (- surplus)
Co ntributio n fro m real GNP gro wth
Co ntributio n fro m real exchange rate change
Seigno rage
Change in public secto r debt
1998
1999
2000
2001
2002
2003
Rec. o f Co ntingent liab. (net o f privatizatio n)
Co ntribution fro m real interest rate
Co ntribution fro m debt indexatio n
Other Facto rs
Note: The interpretation of this chart is as follows. Each column represent the contribution of each factor in
our debt decomposition to the year on year change in the debt/GNP ratio. Items above the zero line
contribute to an increase in the debt/GNP ratio, while items below the line contribute to a reduction in the
debt/GNP ratio. As an example, a negative sign for Contribution from real GNP growth in a given year
indicates that positive real GNP growth during that year contributed to a reduction in the debt/GNP ratio.
On the same token, a positive sign for the Contribution from real exchange rate changes indicates that a
real depreciation increased the debt/GNP ratio during that year.
15.3. Debt Analysis and Debt Restructuring
Turkey’s volatile economic performance in the 1990s and until recently may be
attributed in part to its turbulent (coalition) politics which was compounded by
fundamental weaknesses in the institutional arrangements for aggregate fiscal
management. The inability and the unwillingness of a number of successive
governments to restrain fiscal commitments and manage a sustainable policy framework
112
created a deep problem of credibility vis a vis domestic and international markets which
regarded efforts at fiscal adjustment as an “illusion” and not real.
The Bank’s 2001 assessment of the quality of fiscal management in Turkey
concluded that these fundamental weaknesses compromised the ability of the
government to undertake effective fiscal policy, to manage liabilities and to control
and limit fiscal risk. 83 These weaknesses included, chiefly, (a) a non-comprehensive
budget and lack of transparency in fiscal reporting, (b) fragmented responsibility and
poor coordination of fiscal management among the three central agencies of government
(Finance, Planning and Treasury), (c) a failure to control and to incorporate the effect on
fiscal risk of quasi-fiscal policies and guarantees which created unrecorded, “hidden”
liabilities, both explicit and contingent, and (d) the absence of institutional focus for
fiscal risk control since public liability management was dispersed across several units
within the Treasury. The lack of strong political leadership also contributed, as
differences in perspectives of coalition partners resulted in the collective failure to make
hard decisions.
The quasi-fiscal dimension of the public sector, which reflects the complexity of the
public finance in Turkey, included mainly84: (i) off-budget subsidies to farmers and small
businesses, channeled through the state banking system - for many years, the
government provided subsidized loans to the private sector trough the two state banks,
Ziraat and Halk. The banks have not been able to cover the costs of these loans from their
operations, so they were accumulating claims on the government referred to as unpaid
duty losses; (ii) indirect subsidies to the banking system in the form of implicit and
explicit guarantees to bank creditors - after the financial turmoil of November 2000, the
government issued guarantee to the creditors of Turkish banks that created contingent
liability to the government; (iii) other losses incurred outside the central government
budget – after the turmoil in 2000, the government promised to close 61 extrabudgetary
funds to broaden the effective coverage of the budget in 2000, while only 27 of these
funds were closed.85
The fragmentation and lack of comprehensiveness and transparency contributed to an
inaccurate estimation of the fiscal stance and the degree of fiscal risk. It is conceivable
that this contributed to a sense of complacency in government. In 1999, whereas the
reported consolidated central government budget suggested expenditure equivalent to 36
percent of GNP, a comprehensive assessment would have revealed general government
expenditure of 46 percent of GNP. Including quasi-fiscal policies such as the directed
credit programs through Halk and Ziraat Banks would have boosted this further by 8.2
percent of GNP86. For most of the period up to 1999, the cost of the quasi-fiscal policies
were hidden as accumulating liabilities of government to the banking sector (the so-called
duty losses) were not explicitly recognized. While estimates of the cost of such quasifiscal policies vary, in 1999 the public sector of Turkey had a financing requirement
83
See World Bank (2001).
See World Bank (2003).
85
See Ozatay and Sak (2002).
86
See IMF (2000).
84
113
(including the accumulated costs of quasi-fiscal subsidy programs) of almost 24 percent
of GNP, rather than the reported consolidated budget deficit of about 12 percent (see
Table 15-2).
Table 15-2. Turkey: Central government and consolidated public sector balances.
Public sector balances, % of GNP
1994 1995 1996
1.0 3.9 -1.3
Central Government
3.5 3.4 1.3
Rest of the Public Sector
-1.4 1.3 -0.6
Extrabudgetary Funds
-1.5 -0.6 -0.2
Local Authorities
1.0 1.3 -0.1
State Economic Enterprises
-0.3 1.3 -0.1
Social Sec. Inst. & Revolving funds
-0.6 -0.7 -0.2
Primary Component of Unpaid Duty of Losses
-1.1 -0.8 -1.9
Overall Deficit of the Generagl Govt & SEEs
-9.1 -5.2 -13.5
Central Government
-4.0 -3.8 -8.5
Rest of the Public Sector
-3.4 0.3 -0.9
Extrabudgetary Funds
-1.6 -0.9 -0.3
Local Authorities
0.7 1.1 -0.3
State Economic Enterprises
-1.9 0.7 -0.1
Social Sec. Inst. & Revolving funds
-0.6 -0.7 -0.2
Unpaid duty losses
-1.6 -1.1 -3.1
Source: Turkey: Selected Issues and Statistical Appendix, IMF Staff Report No. 00/14.
Primary Balance of Public Sector
1990
-3.6
1.3
-4.9
-0.6
-0.1
-4.2
0.0
0.0
-7.7
1991
-6.2
-0.6
-5.6
-1.0
-0.3
-4.0
-0.3
0.0
-11.3
1992
-7.0
-1.7
-5.2
-0.8
-0.1
-4.0
-0.3
0.0
-12.4
1993
-5.6
-0.6
-4.6
-1.5
-0.6
-1.9
-0.6
-0.3
-13.0
1997
-2.0
-0.2
-0.4
0.1
-0.1
-0.4
0.0
-1.4
-13.4
-7.7
-1.4
-0.5
-0.3
-0.7
0.0
-3.0
1998
0.8
3.4
-1.5
0.0
-0.4
-1.1
0.0
-1.2
-15.9
-7.8
-2.6
-0.8
-0.5
-1.3
0.0
-4.6
1999
-2.7
0.9
-2.5
-0.5
-0.8
-1.2
0.0
-1.2
-24.0
-12.1
-3.4
-1.3
-0.8
-1.4
0.0
-8.2
Turkey’s public liability management (PLM) practices lacked adequate financial
accountability and risk controls, and did not prevent the transformation of large
contingent liabilities into direct claims on the Budget. New liability issuance and the
management of the existing stock of public liabilities were not sufficiently transparent,
and lacked a strategic, medium-term dimension. Risks were not properly quantified or
adequately provisioned. Quasi-fiscal items were monitored only in nominal terms and
appreciation of their true costs was lacking. Different departments of the Treasury
managing separate classes of liabilities, with no unified view of the government’s
liability portfolio in evidence. This weakened the Treasury’s capacity to control risks and
resulted in excessive and highly volatile borrowing costs.
The large public sector financing requirement (including not only central
government, but also the extrabudgetary funds (EBF), the local authorities, the
social security institutions (SSI), and the financial and nonfinancial state economic
enterprises) would have resulted in a much higher public debt ratios, were it not for
the monetization of these deficits. The seigniorage revenues was substantial and
averaged 23/4 percent of GNP per year during 1991-1999, with a substantial public debt
reducing impact (24 percent of GNP). However, this heavy reliance on seigniorage
propelled the money printing process, and created inflationary pressures in the Turkish
economy (inflation rate averaged 76 percent during the same period). 87 In 1990 the
87
For more info on the fiscal roots of inflation, see IMF (2000).
114
central bank attempted to stabilize inflation by curtailing its credit to the government,
which proved unsuccessful given the lack of fiscal adjustment and the prospects for early
elections in 1991. In 1993, the Treasury attempted to reduce domestic interest rates by
canceling domestic debt auctions and relying solely on external financing and
monetization of rising fiscal deficits. The result of these policies was a spectacular
exchange rate collapse of 1994, a sharp contraction of real GNP growth, and a surge in
inflation.
High real interest rates also played a significant role in public debt accumulation,
especially since mid 1990s. As government’s financial requirement was larger than the
size of domestic financial system, it is not surprising that high real interest rates,
reflecting high government demand for funds, became a striking feature of the Turkish
economy during the 1990s. This problem came into open since 1995, when the Central
bank again attempted to stabilize inflation, by gradually reducing its lending to the
government. This policy however, was not supported by any fiscal adjustment, and as a
result, large public sector borrowing requirements had to be financed exclusively by
domestic borrowing, as both monetary and foreign88 financing were limited. High public
deficits, exclusive reliance on domestic borrowing, shallow financial markets, and the
central bank’s policy of sterilized interventions led to sustained increases in real interest
rates and shortening maturity profile of domestic debt instruments.
In 1989, Turkey liberalized its capital account in the presence of severe fiscal
imbalances, high and chronic inflation, and poorly regulated banking sector. 89
Capital account liberalization and the creation of domestic capital markets presented an
opportunity for domestic government borrowing - Turkish banks engaged in short-term
foreign borrowing and then sold these short-term funds to the Treasury, taking advantage
of uncovered interest rate parity. Sterilized interventions of the central bank, together
with high public deficits, financed almost exclusively by domestic (short-term)
borrowing put further pressure on interest rates. As government’s financing policy was
based on short-term borrowing, the economy was caught in a vicious circle of short-term
debt roll-over and rising interest rates. Banks replaced commercial lending with lending
to the government and opened short-term positions in foreign currencies to finance their
massive investments in government bonds, increasing their vulnerability to exchange rate
and interest rate risks. This indirect form of government external borrowing replaced
direct government borrowing from international capital markets.90
Against this background, the economy had a few sources of vulnerability: (i) weak
banking system, attributable in part to years of politically directed lending of state-owned
banks; (ii) chronic lack of fiscal and monetary control, partly because of delays in
structural reforms and because of heavy state intervention in the economy which resulted
88
Turkey experienced difficulties to return to external capital markets in the aftermath of the 1994 crisis.
Many analysts found this decision to be premature. For instance, many important indicators of vulnerability
such as the ratio of short-term debt, foreign debt to Central Bank reserves, and the standard ratios of
financial deepening revealed that the Turkish foreign exchange market was not yet ready for the opening of
the capital account. Turkey continued to display significant fragility over the 1990s with short- term foreign
debt to CB reserves exceeding 100 percent, and M2 to CB reserves over 300 percent.
90
See Onis (2003).
115
in large off-budget expenditures, contingent liabilities, and high and rising public sector
borrowing requirements (iii) inconsistent policy decisions, such as, liberalizing the capital
account in the face of fragile banking systems, and implementing exchange rate-based
stabilization in the presence of large fiscal imbalances and an open capital account, which
further exacerbated the banking sector weaknesses.
The 2000 November and 2001 February crises
Turkey never fully shook off the 1994 crisis. Real interest rates remained high after the
crisis and the problems in the banking sector accumulated and grew into contingent fiscal
liabilities. These liabilities primarily consisted of: (i) “duty losses”, as a result of
subsidized loans channeled through state banks (these duty losses have more than
quadrupled throughout the 1990s); (ii) growing exposures of banks to exchange rate and
interest rate risks.
In December 1999, the government adopted another disinflation program with the aim to
bring the inflation rate down to a single digit levels by the end of 2002. The centerpiece
of the stabilization program was a crawling peg exchange arrangement. Although
macroeconomic performance was good in 2000, the potential problems in the banking
sector remained: net open forex positions were growing due to a domestic-foreign interest
differential, and the exposure to interest rate risk was rising due to heavy investments in
fixed-income government securities.
An inconsistency developed between the pre-announced crawling peg exchange rate and
the prospective rise in fiscal deficits and public debt was fueled by banking system
losses. The timing of the speculative attacks in November 2000 and February 2001 were
determined mainly by growing demands on the Central bank of Turkey’s foreign
exchange rate reserves from banks increasingly exposed to interest rate and exchange rate
risks. A public political disagreement between the Prime Minister and the President acted
as a trigger for the February crisis. After spending $10 billion in defense of the Turkish
lira, the crawling peg was finally abandoned.
Post-crisis Management and Institutional Reforms
In 2001, the government introduced a crisis resolution strategy, largely aimed at cleaning
up of the banking system, sharp fiscal adjustment, and accelerated structural reforms.
Despite the large fiscal adjustment in 2001 (nearly 6 percent of GNP), public sector
borrowing requirement was still more than 20 percent of GNP, as a result of substantial
increase in interest payments. What was behind the high real interest rates in Turkey?
High interest rates reflected doubts about the sustainability of the exchange rate regime,
which in turn resulted in financing difficulties of commercial banks, and given the mode
of deficit financing, created a roll-over risk and doubts about public debt sustainability.
Furthermore, poor track record with macroeconomic stabilization and the inability of
successful governments to sustain fiscal adjustment and structural reforms, combined
with political fragmentation all contributed to high interest rates, despite the sizeable
116
fiscal surplus in 2001,91 highlighting the importance of government’s credibility in crisis
management situations.
While the three way division of responsibilities between the treasury, finance and
planning ministries remains in place, Turkey has begun to address the other major
institutional and structural weaknesses of debt and fiscal management. With assistance
from the Bank, the government agreed on a reform strategy to address these institutional
weaknesses.
A new Law on Public Finance and Debt Management enacted in March 2002 created the
foundations for more efficient and centralized management of public liabilities, while
implementing regulations strengthened control procedures and introduced sophisticated
technical tools to measure fiscal risk. A high-level Debt Management Committee and a
Deputy General Directorate for Risk Management (Middle Office) have been established
within the Treasury with full statutory authority to design and implement an integrated
PLM policy. The Bank has approved an IDF grant for $320,000 to support the
Government’s capacity-building program to further strengthen the financial and fiscal
risk management practices. The Government is currently addressing the remaining
challenges, namely consolidation and strengthening of institutional mandates for public
liability management and the introduction of comprehensive portfolio risk valuation
techniques (benchmarks). As a result, many of Turkey’s recently adopted risk control
procedures and sophisticated technical tools compare well to best international practices.
The Public Finance Management and Control (PFMC) Law that was enacted in
December 2003 enshrines a comprehensive fiscal framework encompassing the general
government. The new law sharply reduces the scope for extra-budgetary and revolving
funds, which are being eliminated or integrated into the budget. Explicit appropriations
are provided to compensate for “duty” obligations of state enterprises and banks and that
this is now accounted for in the budget. 92 Thus while quasi-fiscal policies are still
undertaken, they are now provisioned in the budget.
Looking forward, the law provides for the preparation of a medium term fiscal strategy
that will be explicitly endorsed by the Council of Ministers and that will inform the
preparation of a medium term budget. This will commence in 2005 with the preparation
of the 2006 budget. Definition of and adherence to the medium term fiscal strategy will
be key to building the credibility of government fiscal management and to reduce the
perceived risk to the Turkish economy.
Longer term reforms that will modernize the financial control arrangements and allow
greater scope for managerial authority to improve public sector performance are also
91
The decomposition of the real interest rates into its components (risk free interest rate, country premium,
the exchange rate risk premium, tax equivalent of any restrictions of capital flows) indicate that the
exchange rate risk or policy risk premium has been the major factor in the determination of the real rates in
Turkey (Celasun, Denizer, and He, 1999).
92
The 2004 budget included transfer allocations of TL 347 trillion to finance duty losses of state
enterprises.
117
being initiated. Although realistically these are very challenging reforms whose effects
will be manifested only in the long run they do underline the government’s
comprehensive perspective on reform, including improvements to front-line services that
are key to enhancing policy credibility and sustaining political support for the
government.
Turkey’s experience highlights the need to address the underlying institutional weakness
in fiscal management both to achieve credibility with markets and to make adjustment
"real". The volatile economic performance in the 1990s and until 2001 was a reflection
of fundamental weaknesses in the institutional arrangements for aggregate fiscal
management which undermined the credibility of efforts at fiscal adjustment. A noncomprehensive budget and lack of transparency in fiscal reporting, fragmented
responsibility and poor coordination of fiscal management among the central agencies,
and a failure to control and to control fiscal risk all reflected weak fiscal institutions. The
economic crisis of 2000/01 provided the impetus for Turkey to undertake major
institutional reforms to debt and fiscal management which, if fully implemented and
sustained, are key to maintaining credibility achieving public debt sustainability and
lasting inflation reduction.
118
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16.
Appendix
Dynamics
1:
Derivation
of
Debt
Decomposition
The following section provides a detailed description of the methodology used for
decomposing debt dynamics. Section 17.1 lists the variables and their definitions used in
the debt decomposition. Section 17.2 outlines the basic debt decomposition equation and
Section 17.2 augments the basic equation to account for the debt indexation.
16.1 Set of variables:
Dt - total public debt, d t = Dt / GDPt
Ddt - domestic public debt, d dt = Ddt / GDPt
D ft - foreign public debt, d ft = et D ft / GDPt
PDt - primary deficit, pd t = PDt / GDPt
NDFS t - non-debt financing sources, ndfst = NDFS t / GDPt
et – nominal exchange rate (domestic currency per U.S. dollar)
st - changes in the nominal exchange rate: 1+ st = et / et −1 , with st > 0 indicating nominal
depreciation of the local currency
g – real GDP growth rate
π – domestic inflation (change in the domestic GDP deflator)
π* - U.S. inflation (change in U.S. GDP deflator)
id - nominal interest rate on domestic debt
i f - nominal interest rate on foreign debt
RXR – change in bilateral real exchange rate, with RXR > 0 indicating real exchange rate
(1 + s t )(1 + π *)
1
=
appreciation defined as:
1 + RXR
1+π
d f ,t −1
)
α - the share of foreign currency denominated debt in total public debt ( α =
d t −1
16.2 Basic Framework for Decomposition of Debt Dynamics:
The underlying equation for the evolution of public debt is:
Dt = ( PDt − NDFS t ) + Dd ,t −1 (1 + id ) + et D f ,t −1 (1 + i f )
where Dt-1 is the total stock of debt at time t-1, and PB is the primary deficit. The debt
stock is composed of debts denominated in both domestic as well as foreign currencies.
Domestic-currency debt (Dd,t-1) evolves according to the interest rate in the market (id),
while the evolution of the foreign-currency debt (Df,t-1), expressed in domestic currency,
is affected not just by the foreign interest rate (if) but also by changes in the exchange rate
(et).
124
Dividing both sides by GDPt = GDPt −1 (1 + g )(1 + π ) , and defining lower case variables as
upper-case variables expressed as a proportion of GDP, we get:
d t = ( pd t − ndfst ) +
Dd ,t −1 (1 + id )
GDPt −1 (1 + g )(1 + π )
or,
d t = ( pd t − ndfst ) + d d ,t −1
D f ,t −1et −1 (1 + i f )et
GDPt −1 (1 + g )(1 + π )et −1
(1 + i f )(1 + st )
(1 + id )
+ d f ,t −1
(1 + g )(1 + π )
(1 + g )(1 + π )
d t = ( pd t − ndfs t ) + (1 − α )d t −1
d t = ( pd t − ndfst ) +
+
(1)
(1 + i f )(1 + st )
(1 + id )
+ αd t −1
(1 + g )(1 + π )
(1 + g )(1 + π )
d t −1
[(1 − α )(1 + id ) + α (1 + i f )(1 + st )]
(1 + g )(1 + π )
(2)
Define iˆ = (1 − α )id + αi f (1 + s t ) as the average nominal interest rate on public debt, and
equation (2) can be rewritten as
d t −1
d t = ( pd t − ndfst ) +
[iˆ + 1 + αst ] ,
(1 + g )(1 + π )
(3)
Practically, the average nominal interest rate, iˆ , is calculated as ratio of interest payments
on debt divided by the previous period stock of public debt.
Subtracting d t −1 from both sides of equation (3) yields
αst − π
iˆ
g
d t −1 −
d t −1 +
d t −1
∆d t = ( pd t − ndfs t ) +
(1 + g )(1 + π )
1+ g
(1 + g )(1 + π )
(4)
Based on the conversion of nominal change in exchange rate into real terms,
(1 + s t )(1 + π *)
1
=
, after some algebra, it is possible to show that the numerator
1 + RXR
1+π
of the last term in equation (4) is:
αst − π = α
1+ π
1+π
+ (1 − α ) − αRXR
− (1 + π )
1+π *
(1 + RXR)(1 + π *)
Substituting (5) into (4) gives the basic accounting framework for public debt
decomposition:
125
(5)
d
g
iˆ
π
α (π * −π )
d t −1 + t −1 [
−
−
]
(1 + g )
1 + g 1 + π 1 + π (1 + π )(1 + π *)
d t −1
RXR
−α
(1 + π *)(1 + RXR) 1 + g
∆d t = ( pd t − ndfs t ) −
(6)
Equation (6) provides the decomposition of the dynamics of debt to GDP ratio. The
equation separates different channels that contribute to the evolution of the debt to GDP
ratio: (i) primary deficit; (ii) non-debt financing sources; (iii) real growth effect; (iv)
interest rate effect; (v) and real exchange rate effect.
16.3 Debt Dynamics with Domestic Debt Indexation
Consider three categories of indexed domestic debt: foreign currency-, inflation-, or
interest rate – indexed. Denote d REG the regular non-indexed domestic debt, and d FX ,
d π , and d INT the indexed domestic debt in percent of GDP, respectively. Denote i REG ,
i FX , iπ , and i INT as the interest rates on the non-indexed and indexed domestic debts,
respectively. Equation (1) can then be modified to incorporate the domestic debt
indexation as follows.
1
d t = ( pd t − ndfst ) +
{d REG ,t −1 (1 + i REG ) + d FX ,t −1 (1 + i FX )(1 + s t )
(1 + g )(1 + π )
(1’)
(1 + i f )(1 + st )
+ d π ,t −1 (1 + iπ )(1 + π ) + d INT ,t −1 [1 + i INT (1 + ∆ INT )]} + d f ,t −1
(1 + g )(1 + π )
Define w’s and α as the shares of various categories of debt in total debt, that is,
d
d
d
d
wREG = REG , wFX = d FX , wπ = π , wINT = INT , and α = f . Clearly,
d
d
d
d
d
wREG + wFX + wπ + wINT + α = 1 . Equation (1’) can now be rewritten as
d t −1
d t = ( pd t − ndfst ) +
{1 + wREG ,t −1i REG + wFX ,t −1i FX (1 + st ) + wFX ,t −1 st
(1 + g )(1 + π )
(7)
(1 + i f )(1 + st )
+ wπ ,t −1iπ (1 + π ) + wπ ,t −1π + wINT ,t −1i INT (1 + ∆ INT )} + αd t −1
(1 + g )(1 + π )
Now redefine the implicit average interest rate on public debt as follows
iˆ = wREG i REG + wFX i FX (1 + st ) + wπ iπ (1 + π ) + wINT i INT (1 + ∆ INT ) + αi f (1 + s t ) . Practically,
iˆ is calculated as the ratio of interest payment divided by previous period stock of public
debt. Subtracting d t −1 from both sides of equation (7) yields
∆d t = ( pd t − ndfst ) +
d t −1
st − π
(1 + iˆ + wFX ,t −1 s t + wπ ,t −1π ) + αd t −1
(1 + g )(1 + π )
(1 + g )(1 + π )
126
(8)
Applying equation (5) again, with some rearrangement of the terms, yields the following
accounting framework for debt decomposition with the domestic debt indexation.
d
g
iˆ
π
α (π * −π )
∆d t = ( pd t − ndfs t ) −
d t −1 + t −1 [
−
−
]
(1 + g )
1 + g 1 + π 1 + π (1 + π )(1 + π *)
(9)
d t −1
wFX st wπ π d t −1
αRXR
−
+[
+
]
(1 + π *)(1 + RXR) 1 + g
1+π 1+π 1+ g
Obviously, without domestic debt indexation, equation (9) reduces to equation (6).
Equation (9) provides a more detailed decomposition of the dynamics of debt to GDP
ratio into different channels: (i) primary deficit; (ii) non-debt financing sources; (iii) real
GDP growth effect; (iv) real interest rate effect; (v) real exchange rate effect, and (vi)
debt indexation.
127
17.
Appendix 2: Selected Economic Indicators
Argentina
1990
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Public Sector Debt
External Public Debt
Domestic Public Debt
Private External Debt
FDI + Equity Investment
Primary Balance (- deficit)
Overall Balance
Revenue and Grants
Tax Revenue
Total Expenditure
Primary Expenditure
Interest Expenditure
Noninterest Current Exp.
Current Expenditure
Capital Expenditure
Other
Gross domestic investment
Public sector
Private sector
Gross national savings
Public sector
Private sector
Interest / Tax Revenue (%)
41.5
40.1
1.4
9.1
1.3
-0.8
-4.1
16.5
20.6
17.3
3.3
1991
10.5
16.4
1.7
95.7
17.3
137.5
35.8
31.3
4.5
8.3
1.3
-0.6
-3.2
18.8
12.6
22.0
19.4
2.6
16.7
19.3
2.3
0.4
1992
10.3
6.1
1.9
3.8
6.9
13.6
30.3
25.3
5.0
8.2
1.8
1.3
-0.4
21.2
14.9
21.6
19.9
1.7
18.0
19.7
1.9
0.0
1993
6.3
4.2
2.7
0.9
-4.9
-1.8
30.1
22.5
7.6
6.4
1.8
1.5
0.2
24.6
14.8
24.4
23.1
1.2
18.7
19.9
2.0
2.4
19.1
2.0
17.1
1994
5.8
4.8
2.5
0.0
0.7
2.8
31.0
24.7
6.3
8.0
2.6
0.2
-1.2
24.2
14.8
25.4
24.1
1.3
19.6
20.9
2.0
2.5
19.9
2.0
17.9
1995
-2.8
6.0
3.6
0.0
1.1
3.2
38.4
26.0
12.4
14.8
2.2
-0.4
-2.3
23.2
15.6
25.5
23.7
1.9
19.8
21.7
2.1
1.8
17.9
2.1
15.8
16.0
1996
5.5
5.7
4.4
0.0
-1.9
-0.1
41.1
27.0
14.1
16.0
2.7
-1.1
-3.2
22.2
15.8
25.4
23.3
2.1
19.4
21.5
1.8
2.1
18.1
1.8
16.3
15.7
1997
8.1
6.1
5.2
0.0
-2.1
-0.5
38.1
25.5
12.6
19.3
3.3
0.3
-2.1
23.2
16.8
25.3
22.9
2.3
19.1
21.4
1.6
2.2
19.5
1.6
17.9
15.3
1998
3.8
7.0
7.0
0.0
-2.8
-1.7
40.9
27.8
13.1
20.2
2.3
0.5
-2.1
23.8
17.4
25.9
23.3
2.6
19.4
22.0
1.6
2.3
19.9
1.6
18.3
15.0
20.7
11.6
8.3
9.0
11.9
13.1
13.9
15.1
1999
-3.4
7.9
7.7
0.0
-3.2
-1.8
47.7
29.9
17.8
20.5
-0.7
-0.8
-4.2
24.3
17.5
28.5
25.1
3.4
21.4
24.8
2.0
1.7
18.0
2.0
16.0
13.8
-2.2
16.0
19.5
2000
-0.8
8.5
6.7
0.0
-1.1
1.0
50.8
29.9
20.9
19.6
1.8
0.4
-3.6
24.6
18.1
28.2
24.2
4.1
20.9
24.9
1.5
1.8
16.2
1.5
14.7
13.1
-2.1
15.2
22.4
2001
-4.4
8.8
8.0
0.0
-3.4
-1.1
62.4
32.9
29.5
19.8
0.8
-1.3
-6.1
23.7
17.6
29.7
25.0
4.7
21.7
26.4
1.5
1.8
14.2
1.5
12.7
12.6
-4.5
17.1
26.9
2002
-10.9
23.9
6.5
236.3
-61.8
30.6
164.5
96.1
68.4
45.3
0.7
0.9
-12.0
22.9
16.8
34.9
22.0
12.8
19.5
32.4
0.9
1.6
12.0
0.9
11.1
25.8
-0.7
26.5
76.4
2003
8.7
3.1
-2.1
-13.8
26.3
10.7
146.1
86.0
60.1
0.6
3.0
-1.3
25.7
20.0
27.0
22.7
4.3
19.3
23.6
1.5
1.9
14.9
1.5
13.4
24.2
2.6
21.6
21.3
128
Brazil
1990
1991
1992
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Nominal Selic (%, eop)
1993
1994
4.9
5.9
136.0 284.4
-42.0
-42.6
1860.0 1886.7
4.5
15.3
1996.1 2240.2
5756.8
56.4
1995
4.2
47.1
-5.1
43.7
21.1
77.6
38.9
1996
2.7
22.9
7.1
9.4
5.3
17.4
23.9
1997
3.3
17.5
9.2
7.3
-0.8
8.3
42.0
1998
0.1
23.5
18.2
8.0
-4.0
4.9
31.2
1999
0.8
22.6
16.6
59.6
-34.7
5.7
19.0
2000
4.4
15.1
7.3
-1.2
7.3
8.4
16.2
2001
1.3
15.3
8.3
28.3
-18.2
7.4
19.1
2002
1.9
17.8
8.5
26.5
-14.2
10.2
24.9
2003
-0.2
19.3
7.9
2.6
8.7
13.3
17.3
Primary Balance (- Deficit)
2.6
0.5
0.3
-0.1
-1.0
0.0
3.2
3.5
3.6
3.9
4.3
Privatization Proceeds
Recognition of Contingent liability
0.0
0.0
10.6
10.6
7.7
7.7
7.5
10.5
5.8
6.8
4.7
7.7
3.6
4.6
3.0
4.0
0.0
2.0
0.0
1.8
0.0
0.7
37.2
18.7
18.5
33.1
14.5
18.6
4.9
3.2
7.8
0.7
1.9
29.1
8.4
20.7
8.3
1.7
2.6
3.3
4.8
30.5
5.6
24.9
10.6
1.3
1.3
9.4
2.2
33.3
3.9
29.4
16.7
2.6
0.5
5.1
2.5
35.4
4.3
31.1
12.4
4.7
0.1
10.5
2.6
42.2
6.4
35.8
1.3
7.7
0.1
25.5
2.2
53.0
10.4
42.6
3.5
8.9
2.2
22.2
2.2
51.1
10.0
41.1
5.9
8.8
2.4
20.7
1.9
53.3
10.6
42.7
3.3
12.2
3.0
22.5
1.6
55.9
14.4
41.5
0.9
9.3
5.2
25.2
0.9
58.7
12.0
46.7
5.8
5.0
6.3
28.7
0.8
0.9
33.0
1.8
32.9
1.8
27.9
1.1
22.8
2.2
23.4
3.1
24.5
3.4
30.7
5.6
46.5
5.6
39.8
5.3
44.5
3.6
50.5
2.6
42.1
Public Sector Debt
External Public Debt
Domestic Public Debt
Fixed Rate
Dollar indexed
Inflation indexed
Selic-indexed
Other
FDI + Equity Investment
Total External Debt
0.3
25.8
0.4
29.7
129
Chile
1990
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Deficit (- Surplus)
Public Sector Debt
External Public Debt
Domestic Public Debt
Total External Debt
FDI + Equity Investment
Reserves
-5.0
1991
8.0
6.3
-6.4
14.5
2.3
21.2
-1.4
1992
12.3
4.6
-2.8
3.8
5.2
11.8
-1.1
1993
7.0
5.4
-1.6
11.5
-3.0
10.6
0.3
1994
5.7
4.6
-3.4
4.0
6.1
12.6
0.9
1995
10.8
4.5
-1.7
-5.6
13.3
9.1
-4.2
1996
7.4
3.3
1.5
3.9
-3.9
1.7
-3.0
1997
6.6
3.0
-0.6
2.0
0.5
4.3
-2.4
1998
3.2
5.1
3.3
9.5
-8.0
1.9
-0.6
1999
-0.8
2.6
0.4
10.5
-8.6
2.4
1.8
2000
4.2
3.6
-0.2
6.0
-3.6
4.4
0.4
2001
3.7
3.7
0.3
17.7
-13.9
3.7
0.4
2002
2.2
2.0
-1.6
8.5
-5.1
4.5
1.1
2003
3.3
3.5
0.4
0.4
1.9
3.9
0.6
42.9
18.0
24.9
57.4
0.7
18.4
37.0
16.0
21.0
46.9
1.5
18.6
30.6
13.0
17.5
41.3
2.2
20.0
28.4
11.4
17.1
40.7
3.4
19.8
23.1
9.2
13.9
39.4
5.6
23.4
17.7
5.7
12.0
30.6
2.3
19.8
15.1
4.2
10.9
30.4
6.3
19.9
13.2
3.2
10.0
27.6
7.2
21.4
12.7
3.2
9.5
38.0
6.0
20.1
13.9
4.0
9.9
47.0
12.9
20.1
13.9
3.7
10.2
49.5
3.2
20.1
15.4
4.6
10.8
56.1
4.7
21.0
15.9
5.8
10.1
62.3
0.6
22.8
15.6
5.3
10.3
54.7
2.1
20.8
India
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Deficit (- surplus)
Recognition of Contingent liability
Public Sector Debt
External Public Debt
Domestic Public Debt
1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03
6.7
5.6
1.3
5.1
5.9
7.3
7.3
7.8
4.8
6.5
6.1
4.4
5.6
4.4
7.6
7.4
7.6
7.6
7.6
8.1
8.2
8.7
8.9
9.3
9.9
9.0
9.0
8.7
-1.3
-3.2
-0.6
0.1
0.1
0.7
1.8
3.2
2.1
5.3
5.6
5.3
6.6
4.7
10.6
13.4
59.0
0.0
0.4
0.4
9.1
4.6
10.0
7.4
2.8
7.0
4.7
-2.6
-4.2
-3.7
-32.3
6.8
6.9
6.5
-3.2
0.1
-2.8
-4.3
-0.5
-5.2
-3.8
5.1
10.0
13.0
10.0
9.3
9.7
9.1
7.6
6.4
8.0
4.3
4.5
3.8
2.3
4.1
5.0
4.8
2.6
2.3
3.2
2.3
1.5
1.2
1.5
3.9
3.8
3.6
3.7
3.5
0.0
0.0
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
70.6
15.1
55.5
72.5
16.3
56.1
74.5
19.3
55.2
76.5
21.8
54.7
76.5
19.6
56.9
72.5
17.7
54.8
68.6
15.1
53.5
65.1
12.8
52.3
66.5
11.9
54.6
66.9
11.1
55.9
70.6
10.3
60.2
74.4
9.5
64.9
81.3
9.2
72.1
87.0
8.2
78.7
130
Indonesia
1990
1991
7.0
7.0
2.9
5.8
1.2
10.8
-2.4
1992
6.5
7.3
4.6
4.1
-0.3
6.1
-1.1
1993
7.3
6.7
3.9
2.8
3.5
8.9
-1.4
1994
7.5
6.6
4.0
3.5
1.9
7.8
-2.0
1995
8.2
6.1
3.6
4.1
3.5
9.9
-2.6
1996
8.0
6.9
4.5
4.4
2.0
8.5
-2.9
1997
4.5
8.2
5.6
24.0
-10.6
12.7
-0.4
1998
-13.1
18.1
9.2
244.2
-49.6
75.3
-0.4
1999
0.8
5.1
0.7
-21.6
43.5
14.2
-2.0
2000
4.9
6.2
0.2
7.2
0.1
9.6
-1.2
2001
3.5
7.9
-0.1
21.7
-9.9
12.2
-2.8
2002
3.7
6.8
2.7
-9.3
14.9
5.8
-3.8
2003
4.1
5.5
1.0
-7.7
13.6
6.6
-1.7
39.2
39.2
0.0
34.7
34.7
0.0
36.6
36.6
0.0
34.8
34.8
0.0
35.4
35.4
0.0
29.0
29.0
0.0
23.2
23.2
0.0
23.7
23.7
0.0
79.3
62.0
17.3
91.8
45.8
45.9
94.6
41.1
53.4
90.3
41.2
49.1
80.7
35.4
45.3
72.2
30.6
41.6
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Deficit (- surplus)
Public sector debt
External Public Debt
Domestic Public Debt
Jamaica
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Balance ( - Deficit)
Public sector debt
External Public Debt
Domestic Public Debt
FDI + Equity Investment
1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04
1.0
1.7
1.7
0.9
0.5
-1.2
-1.4
-0.4
-0.2
0.9
1.1
1.5
2.2
14.3
6.5
9.8
10.1
10.3
15.2
13.0
12.9
13.0
10.7
11.5
12.8
13.3
-3.2
-1.4
0.5
2.3
1.3
7.1
7.1
8.0
6.2
2.8
4.3
7.8
7.8
167.4
3.2
46.4
2.2
19.3
-12.0
4.2
2.0
11.4
10.0
4.1
7.4
19.2
-43.6
47.7
-9.7
24.8
1.4
30.8
3.3
3.6
-3.7
-2.1
2.6
-2.3
-11.7
56.1
56.0
35.3
30.3
23.4
17.3
9.5
6.8
8.9
10.0
9.3
6.5
7.0
17.4
15.7
9.8
10.1
11.4
10.0
5.8
1.8
5.5
9.6
11.8
8.0
7.5
12.1
138.3
100.2
38.1
3.7
180.9
163.4
17.5
4.1
107.7
87.4
20.3
4.9
115.3
96.5
18.7
-1.0
103.0
72.5
30.5
-1.5
85.9
59.5
26.4
1.7
78.0
43.0
34.9
1.5
102.3
43.0
59.3
2.3
115.7
42.6
73.1
4.2
132.7
42.8
90.0
3.5
131.9
48.3
83.6
4.9
130.6
52.4
78.2
4.1
148.5
58.8
89.8
4.5
144.8
57.5
87.3
4.7
131
Korea
1990
1991
9.2
4.6
-2.5
3.6
3.4
10.9
-1.3
0.0
1992
5.4
4.8
-0.1
6.4
-1.2
7.6
-0.1
0.0
1993
5.5
3.3
-1.3
2.8
1.8
7.1
0.8
0.0
1994
8.3
4.6
-0.4
0.1
5.3
7.7
0.7
0.0
1995
8.9
5.2
-0.2
-4.0
9.4
7.1
0.9
0.0
1996
7.0
4.5
0.5
4.3
-1.1
5.1
0.5
0.0
1997
4.7
4.4
0.9
18.3
-13.0
4.6
-1.2
0.0
1998
-6.9
5.8
2.2
47.3
-29.0
5.8
-3.1
0.1
1999
9.5
5.3
4.5
-15.2
16.1
-0.1
-1.7
0.6
2000
8.5
6.0
4.7
-4.9
3.6
0.7
3.5
0.0
2001
3.8
6.7
3.4
14.2
-11.4
3.5
3.3
0.0
2002
7.0
6.1
3.4
-3.1
4.5
2.8
5.0
1.1
2003
3.1
4.3
2.0
-4.8
5.6
2.3
4.3
0.0
15.1
7.4
7.7
14.6
7.6
7.0
15.3
7.7
7.6
15.1
7.1
8.0
13.6
4.8
8.8
12.5
4.5
8.0
12.5
4.9
7.6
18.8
9.5
9.3
43.5
24.1
19.4
42.8
16.0
26.8
38.3
10.7
27.6
41.8
7.9
33.9
39.6
6.3
33.3
39.2
6.0
33.2
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary balance (- deficit)
Privatization Proceeds
Public sector debt
External Public Debt
Domestic Public Debt
132
Lebanon
1990
1991
38.2
10.6
-23.1
4.4
40.3
51.5
1992
4.5
18.9
-40.0
109.1
2.8
120.0
1993
7.0
16.2
-7.9
-6.9
35.6
29.1
1994
8.0
22.8
14.2
-3.7
9.9
8.0
1995
6.5
17.4
7.0
-3.1
11.8
10.6
1996
4.0
18.7
9.9
-2.8
9.9
8.9
1997
4.0
17.1
9.5
-1.6
7.7
7.8
1998
3.0
14.0
9.5
-1.2
4.7
4.5
1999
1.0
13.0
12.4
0.0
-1.2
0.2
2000
-0.5
12.4
12.2
0.0
-2.5
-0.4
2001
2.0
11.3
11.0
0.0
-2.7
-0.4
2002
2.0
11.0
9.2
0.0
0.3
1.8
2003
3.0
10.7
9.0
0.0
-0.2
1.4
98.4
12.6
85.8
62.7
50.1
66.2
7.6
58.7
34.9
27.4
51.0
5.4
45.6
32.6
27.1
49.8
4.9
44.9
17.9
13.0
70.6
8.3
62.3
23.3
15.0
78.5
10.3
68.2
26.7
16.4
99.8
15.9
83.9
30.8
14.8
104.8
16.2
88.6
33.8
17.6
113.6
25.6
88.0
41.8
16.2
135.2
35.3
99.9
49.6
14.3
153.7
47.3
106.4
59.8
12.8
169.9
61.6
108.3
74.5
13.1
177.6
80.6
97.0
98.7
18.1
177.9
86.0
91.9
Primary Balance (- deficit)
Overall Balance
Revenue and Grants
Total Expenditure
Primary Expenditure
Interest Expenditure
-18.9
-29.8
9.7
39.4
28.6
10.8
-8.1
-13.1
15.9
28.9
24.0
5.0
-5.9
-11.4
12.0
23.4
17.9
5.5
-1.8
-7.7
15.6
23.4
17.4
6.0
-7.5
-17.2
18.0
35.1
25.4
9.7
-7.6
-18.0
17.2
35.2
24.8
10.4
-7.2
-20.2
17.7
37.9
24.9
13.0
-10.6
-25.8
16.7
42.5
27.3
15.2
-2.2
-15.8
18.3
34.0
20.4
13.6
-1.6
-16.2
19.6
35.7
21.2
14.5
-7.6
-24.6
19.6
44.2
27.2
17.0
-1.7
-18.9
18.7
37.6
20.4
17.2
3.0
-15.1
22.4
37.5
19.4
18.1
3.6
-14.6
24.4
39.0
20.9
18.2
Gross domestic investment
Public sector
Private sector
Gross national savings
Workers' remittances
17.8
1.7
16.1
-64.1
64.0
19.3
3.9
15.4
-51.7
42.6
25.0
1.5
23.5
-39.5
36.4
29.1
3.4
25.7
-32.0
27.2
32.4
9.3
23.1
-25.1
23.8
35.8
9.4
26.4
-17.8
21.5
29.7
8.5
21.3
-17.8
19.3
26.3
5.6
20.7
-14.4
17.4
29.1
11.0
18.0
-2.9
16.8
21.6
6.2
15.3
-4.4
17.3
18.1
4.9
13.2
-6.7
18.2
16.7
2.8
13.9
-12.6
18.9
18.0
1.2
16.8
-9.0
19.1
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Public sector debt
External Public Debt
Domestic Public Debt
Total External debt
Private External Debt
133
Malaysia
1990
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Privatization Proceeds
Recognition of Contingent liability
Public sector debt
External Public Debt
Domestic Public debt
Private external debt
Exports
Gross Domestic Investment
Private
Public
Gross National Savings
Private
Public
Primary Balance (- deficit)
Overall Balance (- deficit)
Revenue and grants
Total Expenditure
Current Expenditure
Development Expenditure
Other expenditure
Primary Expenditure
Interest Payment
Interest / Tax Rev. (%), Fed Govt.
Primary Balance, Fed. Govt.
Overall Balance, Fed. Govt.
91.4
30.7
60.7
8.9
74.6
32.4
21.2
11.2
30.3
12.1
18.1
4.8
-1.8
37.2
39.0
1991
9.5
7.4
3.7
1.7
-1.6
3.6
0.0
0.0
83.5
27.4
56.0
9.7
77.8
37.8
25.5
12.3
29.2
12.3
16.8
5.6
-0.4
39.8
40.2
32.4
6.6
34.2
5.9
2.8
-3.0
2.8
-2.4
1992
8.9
7.4
4.9
-7.4
8.1
2.4
0.9
0.0
73.2
21.5
51.7
13.7
76.0
35.1
21.5
14.5
31.3
14.9
16.4
2.1
-3.4
41.7
45.1
25.7
18.3
1.0
39.6
5.5
24.2
4.0
-0.9
1993
9.9
7.8
4.1
1.0
0.6
4.0
0.5
0.0
66.6
21.1
45.5
19.9
79.0
37.8
23.8
14.6
33.0
16.5
16.5
2.6
-2.4
38.4
40.8
21.6
17.9
1.3
35.8
5.0
21.6
4.3
0.2
1994
9.2
7.4
3.8
2.0
-0.2
3.9
1.5
0.0
59.0
18.0
41.0
22.1
89.1
40.4
27.2
13.0
34.0
16.5
17.5
6.3
2.0
38.9
36.9
21.1
14.6
1.3
32.6
4.3
17.5
6.2
2.7
1995
9.8
7.7
4.4
-4.6
6.4
3.6
0.5
0.0
55.7
19.0
36.8
21.6
93.9
43.2
30.5
12.6
34.7
19.6
15.1
7.2
3.2
35.2
31.9
19.3
13.5
-0.9
28.0
4.0
15.1
4.2
1.3
1996
10.0
7.8
4.5
0.5
1.3
3.7
0.0
0.0
50.0
16.1
33.9
24.9
91.6
41.5
31.3
11.2
37.1
21.4
15.7
8.6
4.8
36.1
31.3
20.4
11.7
-0.7
27.6
3.8
13.8
3.7
1.1
1997
7.3
8.9
5.8
11.8
-9.0
3.5
0.0
0.0
56.1
23.7
32.4
32.1
93.3
43.0
31.8
11.3
37.0
17.2
19.9
10.2
6.2
38.1
31.9
18.1
13.3
0.5
27.9
4.0
11.5
4.8
2.5
1998
-7.4
7.3
1.8
39.5
-23.1
8.5
0.0
1.5
62.1
23.8
38.3
35.5
115.7
26.7
15.5
11.3
39.9
24.5
15.4
2.7
-1.3
32.9
34.3
17.9
17.2
-0.8
30.2
4.1
15.3
1.0
-1.5
1999
6.1
7.5
6.9
-3.2
1.8
0.0
0.0
5.4
64.8
25.4
39.5
31.2
106.3
22.4
7.7
14.6
38.3
21.5
16.9
6.7
2.3
35.8
33.5
18.8
15.2
-0.5
29.1
4.4
17.5
-2.4
-3.5
2000
8.6
7.6
3.5
0.0
2.7
4.9
0.0
5.2
61.7
23.1
38.6
27.5
109.2
27.2
12.8
14.3
36.5
20.3
16.2
5.0
0.7
34.2
33.5
19.2
14.6
-0.3
29.2
4.3
19.2
-3.1
-5.8
2001
0.3
7.3
8.4
0.0
-5.0
-2.7
0.0
7.3
70.6
27.3
43.3
25.2
100.0
24.0
6.5
17.5
32.1
16.1
16.0
4.3
-0.3
39.2
39.5
22.0
18.0
-0.5
34.9
4.6
15.7
-2.6
-5.5
2002
4.1
6.1
3.2
0.0
2.0
3.6
0.0
6.8
69.9
27.8
42.1
25.3
98.4
24.5
6.0
18.5
32.0
16.7
15.3
3.1
-0.9
39.4
40.3
21.8
19.0
-0.5
36.3
4.0
14.5
-2.9
-5.6
2003
5.2
5.1
2.4
0.0
1.7
3.3
0.0
0.0
67.0
25.9
41.1
97.0
23.0
3.6
19.4
33.6
15.8
17.7
1.7
-1.7
39.5
41.1
21.7
19.6
-0.2
37.8
3.3
12.8
-3.1
-5.4
134
Mexico
1990
1991
4.2
13.0
0.8
7.3
11.0
23.3
4.5
1992
3.6
11.4
4.4
2.5
9.1
14.4
5.0
1993
2.0
10.0
5.0
0.7
6.3
9.5
3.3
1994
4.4
9.6
5.2
8.3
-2.1
8.3
2.1
1995
-6.2
14.1
-5.0
90.2
-29.0
37.9
4.4
1996
5.2
49.1
31.3
18.4
8.4
30.7
10.3
1997
6.8
24.2
12.7
4.2
11.1
17.7
5.2
1998
5.0
19.4
8.8
15.4
-1.1
15.4
1.9
1999
3.6
16.7
5.8
4.6
8.6
15.3
1.6
2000
6.6
10.2
1.5
-1.1
11.0
12.2
0.7
2001
-0.2
9.6
4.4
-1.2
5.1
6.3
0.7
2002
0.7
6.9
3.1
3.4
-0.2
4.8
-0.2
2003
1.3
7.7
1.4
11.7
-4.6
8.3
0.4
50.2
29.6
20.6
3.8
37.7
25.4
12.3
5.7
29.6
20.8
8.8
5.2
27.3
19.5
7.8
6.2
42.2
20.3
21.9
1.5
44.8
35.7
9.1
5.9
55.4
29.6
25.8
5.9
51.3
22.0
29.3
7.2
56.6
21.9
34.7
7.6
50.8
19.2
31.6
6.6
49.2
17.3
31.9
6.1
47.8
15.9
31.9
7.2
50.2
16.5
33.7
7.9
51.0
17.8
33.2
9.6
1990
1991
6.2
5.6
-1.4
4.1
3.8
11.8
-4.5
1992
4.6
6.3
1.0
5.4
1.3
9.2
-2.5
1993
2.7
6.9
0.9
12.1
-3.2
11.0
-2.9
1994
4.4
7.8
0.7
8.8
2.2
13.5
-0.7
1995
4.9
7.0
1.0
3.5
4.9
10.9
-1.5
1996
2.9
8.1
1.8
14.0
-4.5
10.9
-1.7
1997
1.8
8.2
2.1
13.9
-4.8
10.3
-0.3
1998
3.1
8.7
4.7
14.5
-7.8
6.7
-0.3
1999
4.0
8.1
5.2
9.0
-5.7
4.2
1.7
2000
3.4
8.0
4.6
5.3
-2.9
4.4
2.3
2001
2.7
6.8
3.3
14.7
-11.0
4.5
2.8
2002
4.4
6.5
3.7
-2.6
5.0
3.9
2.4
2003
5.5
5.6
2.6
-3.8
6.7
4.3
3.6
0.0
0.1
0.1
0.6
0.6
0.1
0.0
0.0
0.0
0.0
0.0
0.2
0.3
91.0
54.0
37.0
88.0
53.0
35.0
89.0
51.0
38.0
87.0
50.0
37.0
85.6
46.4
39.2
88.5
46.0
42.5
93.9
51.2
42.7
97.4
53.5
43.9
104.7
57.3
47.4
109.1
58.9
50.2
113.5
62.9
50.6
104.2
56.9
47.3
95.2
49.1
46.1
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Balance (- deficit)
Public Sector Debt
External Public Debt
Domestic Public Debt
Reserves
Pakistan
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Balance (- deficit)
-3.7
Privatization Proceeds
Public sector debt
External Public Debt
Domestic Public Debt
91.7
53.1
38.6
135
Philippines
1990
1991
-0.6
10.3
2.1
12.9
-0.3
16.6
0.5
1992
0.3
7.4
2.8
-7.2
13.9
8.2
1.4
1993
2.1
7.3
2.9
6.3
-1.8
6.8
3.0
1994
4.4
9.3
3.2
-2.6
10.6
10.0
0.8
1995
4.7
8.6
3.8
-4.5
10.3
7.6
0.3
1996
5.8
9.6
4.5
2.0
3.6
7.7
0.0
1997
5.2
10.6
6.1
12.5
-7.2
6.2
0.4
1998
-0.6
11.4
4.8
38.2
-20.9
10.5
0.0
1999
3.4
6.2
1.7
-2.3
9.0
8.0
0.3
2000
4.4
6.1
1.8
13.0
-7.9
6.3
0.0
2001
3.0
7.0
2.4
15.3
-9.9
6.4
0.0
2002
4.4
6.3
2.9
1.3
2.0
4.9
0.0
Public sector debt
External Public debt
Domestic Public Debt
Private external debt
77.9
54.2
23.7
8.9
82.6
55.3
27.3
9.7
81.5
48.8
32.7
13.7
93.5
50.9
42.6
19.9
81.9
46.7
35.2
22.1
74.4
38.5
35.9
21.6
68.5
32.7
35.8
24.9
68.2
32.1
36.1
32.1
79.2
44.3
34.9
35.5
87.4
45.7
41.7
31.2
84.1
40.1
44.0
27.5
85.3
40.8
44.4
25.2
89.1
42.3
46.8
25.3
Primary Balance (- deficit)
Overall Balance (- deficit)
Revenue and grants
Tax revenue
Total Expenditure
Primary Expenditure
Interest Payment
Current Expenditure
Capital Expenditure
Gross Domestic Investment
Gross National Savings
2.3
-3.8
16.4
4.5
-2.4
17.2
20.2
14.2
6.0
19.6
12.7
6.9
3.3
-2.3
16.5
15.1
18.8
13.2
5.6
15.5
3.1
20.9
19.4
3.9
-1.6
17.2
15.3
18.8
13.4
5.4
15.1
3.7
23.6
18.1
5.9
-1.7
18.4
15.6
20.1
12.5
7.6
17.1
3.0
23.5
19.0
4.9
-1.3
18.0
15.8
19.3
13.1
6.2
15.5
3.7
21.6
17.3
5.9
-0.4
18.8
16.3
19.2
13.0
6.2
14.4
3.3
23.3
18.8
5.8
-0.7
19.1
16.1
19.9
13.4
6.5
14.5
3.8
23.9
18.7
4.5
-2.6
16.8
14.8
19.4
12.3
7.1
16.7
3.8
19.3
21.6
0.1
-4.3
16.4
14.5
20.7
16.3
4.4
16.8
3.9
18.8
28.3
0.3
-4.5
15.5
13.7
20.0
15.2
4.8
16.7
3.3
21.2
29.4
0.9
-4.5
15.5
13.3
20.0
14.6
5.4
17.1
2.9
20.6
22.5
-0.6
-5.5
14.2
12.3
19.7
14.8
4.9
16.5
3.1
19.3
24.7
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Privatization Proceeds
2003
4.5
6.8
3.9
5.0
-2.9
3.7
0.0
0.7
-4.9
14.4
19.3
13.7
5.6
136
Poland
1990
1991
-7.0
2.4
-6.0
11.4
34.6
55.2
-5.2
0.2
1992
2.0
5.4
-3.4
28.8
5.6
39.2
-3.7
0.4
1993
4.3
5.2
-3.7
33.1
-4.5
30.0
0.0
0.5
1994
5.2
6.2
-4.7
25.3
6.8
36.6
0.9
0.7
1995
6.8
8.9
-3.9
6.7
23.0
34.0
1.4
0.8
1996
6.0
8.1
-0.6
11.2
4.9
18.8
0.4
0.9
1997
6.8
8.2
1.0
21.7
-7.9
13.9
0.3
1.3
1998
4.8
7.6
1.3
6.5
3.6
11.6
-0.1
1.2
1999
4.1
7.4
3.2
13.6
-7.7
6.4
-0.3
2.1
2000
4.0
6.4
1.8
9.6
-4.7
6.7
-0.9
3.8
2001
1.0
7.4
4.0
-5.8
7.9
4.0
-2.7
0.9
2002
1.4
7.7
6.3
-0.4
0.0
1.2
-3.2
0.3
2003
3.7
6.6
5.6
-4.6
3.9
0.7
-3.1
0.6
95.1
82.7
12.4
81.8
65.7
16.1
86.7
64.1
22.6
88.7
63.0
25.7
68.0
43.0
25.0
54.3
32.8
21.5
47.9
27.3
20.6
46.9
24.9
22.0
42.9
21.0
21.9
43.0
21.1
21.9
39.0
17.6
21.4
41.0
14.3
26.7
46.7
15.5
31.2
51.6
17.2
34.4
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Balance (- deficit)
Privatization proceeds
Total Public debt
External Public Debt
Domestic Public Debt
Russia
1992
1993
-8.7
11.9
-7.4
197.6
224.6
888.4
-5.3
1.5
1994
-12.7
9.6
-20.3
184.0
40.6
307.9
-8.3
3.8
1995
-4.1
9.6
-12.2
30.7
82.9
143.9
-2.7
3.8
1996
-3.6
15.4
-0.8
19.8
19.4
45.8
-3.2
2.9
1997
1.4
10.0
2.3
7.2
5.6
15.1
-3.5
2.7
1998
-5.3
8.5
0.2
62.8
-28.0
18.6
-3.6
2.4
1999
6.3
7.3
-4.6
153.7
-33.0
72.5
2.9
1.7
2000
10.0
6.8
-2.2
14.4
17.8
37.6
7.7
1.8
2001
5.1
5.4
-0.2
7.0
6.3
16.5
5.5
2.2
2002
4.7
5.3
0.6
5.4
8.1
15.7
2.2
2.4
2003
7.3
5.0
0.7
-7.3
21.5
14.4
1.2
0.0
116.0
97.5
18.5
92.4
60.4
32.0
63.5
40.1
23.3
53.7
35.1
18.6
51.9
27.6
24.3
54.7
29.9
24.8
73.1
45.7
27.3
88.7
68.5
20.2
58.8
45.3
13.5
43.8
33.4
10.4
36.0
28.1
7.9
33.4
24.9
8.6
Real GDP growth (%)
Average nominal interest rate (%)
Average real interest rate (%)
Nominal depreciation (%)
Real appreciation (RXR, %)
Inflation (%)
Primary Balance (- deficit)
Privatization proceeds
Public sector debt
External Public Debt
Domestic Public Debt
137
Turkey (% of GNP)
1990
1991
1.1
28.6
7.3
59.9
-0.9
63.8
1992
5.5
26.8
4.8
65.1
-2.3
65.1
1993
8.4
37.6
8.8
48.1
11.1
68.4
1994
-5.0
56.0
12.0
191.4
-31.0
105.4
1995
6.9
41.1
6.6
54.1
17.2
84.2
1996
6.9
54.5
19.0
77.2
-6.4
68.9
1997
7.6
46.9
3.9
87.0
-1.9
86.4
1998
3.1
69.0
16.4
71.7
4.1
80.8
1999
-4.7
72.7
22.9
60.4
0.2
63.1
2000
7.4
57.0
19.1
49.3
-6.2
43.1
2001
-7.5
65.0
15.5
96.4
-20.9
59.1
2002
7.9
27.7
3.9
22.8
9.9
37.1
2003
5.8
26.7
10.7
-0.6
20.7
21.9
Net Public Debt
External Public Debt
Domestic Debt
Fixed rate and other
Foreign exchange indexed
Inflation indexed
Floating rate
28.7
23.2
5.5
5.5
0.0
0.0
0.0
35.2
26.5
8.7
8.7
0.0
0.0
0.0
35.7
25.2
10.5
10.6
0.0
0.0
0.0
35.1
25.7
9.4
9.4
0.0
0.0
0.0
44.7
30.7
14.0
14.0
0.0
0.0
0.0
41.3
29.1
12.2
12.2
0.0
0.0
0.0
46.5
26.0
20.4
20.5
0.0
0.0
0.0
42.9
22.5
20.4
20.4
0.0
0.0
0.0
44.4
20.3
24.1
24.4
0.0
0.0
0.0
58.0
19.4
38.6
40.9
0.0
0.0
0.0
57.5
19.5
38.0
35.3
2.7
0.0
0.0
91.0
38.2
52.8
2.2
20.4
1.6
28.6
78.7
32.4
46.2
10.4
15.3
0.0
20.5
70.5
22.2
48.3
Public Sector Primary Surplus
Public Sector Overall Balance
-3.6
-7.7
-6.2
-11.3
-7.0
-12.4
-5.6
-13.0
1.0
-9.1
3.9
-5.2
-1.3
-13.1
-2.0
-13.1
0.8
-15.6
-2.7
-23.3
3.0
-18.9
5.5
-21.1
4.1
-12.1
6.2
-10.0
Real GDP growth
Average nominal interest rate
Average real interest rate
Nominal depreciation
Real appreciation (RXR)
Inflation
138
18. Appendix 3: Data Sources.
C ountry
P ublic sector debt
P ublic Sector O verall P ublic sector revenue
B alance
and grants
P ublic sector
expenditure
Public sector interest
expenditure
A rgentina
Gross, C onsolidated public
sector including C entral
B ank, Source: IM F Staff
C ountry R eports
W EO
WEO
WEO
B razil
N et, Public Sector, Source:
C entral B ank, IM F Staff
C ountry R eports
W EO
WEO
C hile
N et, C entral Governm ent,
Source: IM F Staff R eports,
M inistry of Finance
W EO
WEO
India
Gross, General Governm ent,
Source: Governm ent B udget
D ocum ents, H andbook of
Statistics on Indian E conom y,
R B I B ulletins
Governm ent B udget
D ocum ents,
H andbook of Statistics
on Indian E conom y,
R B I B ulletins
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
E conom y, R B I B ulletins
Indonesia
Gross, General Governm ent,
Source: IM F Staff C ountry
R eports, W orld B ank LD B
W EO
Jam aica
Gross, N onfinancial Public
Sector, Source: W orld B ank
LD B
K orea
Gross, C onsolidated Public
Sector, Source: IM F Staff
C ountry R eports
L ebanon
Gross, Public Sector, Source:
W E O , IM F Public
Inform ation N otice, W D I
W EO
WEO
M exico
Gross, N onfinancial Public
Sector, Source: W E O
W EO
WEO
M alaysia
Gross, N onfinancial Public
Sector, Source: IM F C ountry
R eports
IM F C ountry R eports
IM F C ountry R eports
P hilippines
Gross, N onfinancial Public
Sector, Source: IM F C ountry
R eports
IM F C ountry R eports
IM F C ountry R eports
P oland
Gross, Public Sector, Source:
W orld B ank LD B , IM F
C ountry R eports
W EO
R ussia
Gross, Federal Governm ent,
Source: W orld B ank LD B
T urkey
N et, Public Sector, Source:
IM F C ountry R eports,
Treasury of Turkey
T ax R evenue
Public Sector C urrent Public Sector C apital
E xpenditure
E xpenditure
G D P, current prices
G D P, constant prices
WEO
W EO
W EO
WEO
WEO
W EO
W EO
WEO
WEO
W EO
W EO
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
E conom y, R B I B ulletins
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
Econom y, R B I B ulletins
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
E conom y, R B I B ulletins
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
E conom y, R B I B ulletins
WEO
WEO
WEO
W EO
W EO
W EO
W E O , IM F C ountry
R eports
W E O , IM F C ountry
R eports
W E O , IM F C ountry
R eports
W EO
W EO
IM F Staff C ountry
R eports
IM F Staff C ountry
R eports
IM F Staff C ountry
R eports
IM F Staff C ountry
R eports
W EO
W EO
WEO
WEO
W EO
W EO
WEO
WEO
W EO
W EO
IM F C ountry R eports
IM F C ountry R eports
IM F C ountry R eports
IM F C ountry R eports
IM F C ountry R eports
W EO
W EO
IM F C ountry R eports
IM F C ountry R eports
IM F C ountry R eports
IM F C ountry R eports
IM F C ountry R eports
W EO
W EO
WEO
WEO
WEO
W EO
W EO
W orld B ank LD B ,
W EO
W orld B ank LD B ,
WEO
W orld B ank LD B ,
WEO
W orld B ank LD B ,
WEO
W orld B ank LD B
W EO
W EO
WEO
WEO
WEO
W EO
W EO
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
E conom y, R B I B ulletins
W orld B ank W D I
139
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
Econom y, R B I B ulletins
W orld B ank W D I
Governm ent B udget
D ocum ents, H andbook
of Statistics on Indian
Econom y, R B I B ulletins
W orld B ank W D I
Table A-1. Data Sources (cont.)
C o u n tr y
A r g e n tin a
E x c h a n g e r a te
W EO
R e c o g n itio n o f
C o n tin g e n t L ia b ilitie s
D o m e s tic D e b t
I n d e x a tio n
" A re th e re re a s o n s to
d o u b t d e b t s u s ta in a b ility
i n B r a z i l" b y Ila n
G o ld f a jn , B a n c o C e n t ra l
d o B ra s il
C e n tra l B a n k
JP M o rg a n
EM BI
G lo b a l
n .a .
JP M o rg a n
EM BI
G lo b a l
C h ile
W EO
W EO
n .a .
I n d ia
G o v ern m e n t B u d g et
D o c u m e n ts, H a n d b o o k
o f S t a t i s t i c s o n In d i a n
E c o n o m y , R B I B u lle tin s
G o v ern m en t B u d g e t
D o c u m e n ts , H a n d b o o k
o f S t a t i s t i c s o n In d i a n
E c o n o m y , R B I B u lle tin s n .a .
G o v ern m e n t B u d g et
D o c u m e n ts, H a n d b o o k
o f S t a t i s t i c s o n In d i a n
E c o n o m y , R B I B u lle tin s n .a .
I n d o n e sia
W EO
W EO
n .a .
n .a .
n .a .
J a m a ic a
IM F IF S
W EO
n .a .
n .a .
n .a .
K orea
W EO
W EO
IM F S t a f f C o u n t r y
R e p o rts
n .a .
n .a .
W EO
n .a .
n .a .
n .a .
n .a .
W o r ld B a n k
W DI
W o r ld B a n k
W DI
W EO
W EO
n .a .
n .a .
C e n tra l B a n k
M a la y s ia
W EO
W EO
IM F C o u n t r y R e p o r t s
IM F C o u n t r y R e p o r t s
n .a .
IM F C o u n t r y
R e p o rts
IM F C o u n t r y
R e p o rts
P h ilip p in e s
W EO
W EO
IM F C o u n t r y R e p o r t s
n .a .
n .a .
IM F C o u n t r y
R e p o rts
IM F C o u n t r y
R e p o rts
P o la n d
W EO
W EO
IM F C o u n t r y R e p o r t s
n .a .
n .a .
R u ss ia
IM F IF S
W EO
W o r ld B a n k L D B
n .a .
n .a .
IM F C o u n t r y R e p o r t s
W o r ld B a n k
L D B , T re a s u ry
o f T u rk ey
W EO
IM F C o u n t r y R e p o r t s
140
W o r ld
B ank
WDI
IM F
C o u n try
R e p o rts
W o rkers'
R e m itta n c e s
W o rld B a n k W D I
JP M o rg a n
EM BI
G lo b a l
M e x ic o
W EO
EM BI
Spreads
W EO
W EO
T urkey
T o ta l
E x te r n a l
D ebt
" L e s so n s fro m th e c risis " L e ss o n s fro m th e c risis
i n A r g e n t i n a " , IM F O c t . i n A r g e n t i n a " , IM F O c t .
8, 2003
8, 2003
n .a .
W EO
E x p o r ts
G D P per
c a p ita
P r iv a tiz a tio n R e c e ip ts
B r a z il
IM F IF S
G ro ss
D o m e stic
S a v in g s
G D P d e fla to r
" A re th e re re a s o n s to
d o u b t d e b t s u s ta in a b ility
i n B r a z i l" b y Ila n
G o ld f a jn , B a n c o C e n tr a l
d o B ra sil
L ebanon
G ro ss
D o m e stic
In v e stm e n t
W EO
JP M o rg a n
EM BI
G lo b a l