再思「償債能力」之人道主義因素：尼加拉瓜案例之探討 - 政大學術集成

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(1)International Master’s Program in International Studies National Chengchi University 國立政治大學國際研究英語碩士學位學程. 政治大. ‧. ‧ 國. 學. 立 Bring Humanitarianism back into Debt Sustainability: The Case of Nicaragua Nat. er. io. sit. y. 再思「償債能力」之人道主義 al. n. v i n Ch 因素：尼加拉瓜案例之探討 engchi U. Oscar-René Vargas Delgado Advisor: Teng Chung-chian. July, 2015.

(2) ___________________________________________. by Oscar-René Vargas 范宇睿 APPROVED BY. 立. 政治大. ______________________________________ Committee Member. ‧ 國. 學. ______________________________________. ‧. Committee Member. Nat. Committee Member. n. al. er. io. sit. y. ______________________________________. i n U. v. ______________________________________. Ch. engchi. Thesis Advisor. ______________________________________ Program Director. International Master’s Program in International Studies NATIONAL CHENGCHI UNIVERSITY. July 2015. i.

(3) Acknowledgements In the academic sphere I am grateful to the Taiwan International Higher Education Scholarship Program and the Government of The Republic of China for giving me the opportunity to study in this amazing country. I am also grateful to the Government of Nicaragua and the Ministry of Foreign Affairs of Nicaragua that supported my candidacy. I owe an important gratitude to National Chengchi University in which I had a great training experience and through the master teachers, classmates and all. 政治大 encouragement, support and guidance of my advisor: Professor Teng Chung-Chian and 立. department members for their help and support. It is pertinent to stand out the. ‧ 國. 學. in like manner to the Thesis committee members: Professor Pai Po Lee and Professor Wei Mei-Chuan, without which this research would not have existed nor reached its. ‧. final form.. sit. y. Nat. I take this opportunity to express my gratitude to Patricia, my mother for her. io. al. er. example of convictions and firm principles, pillar of every project I undertake, reason. v i n C inspiration h e n gand i Ubrother c hmy. n. and inspiration of my ideas for the future. To my two role models, My sister Karla for her enthusiasm, constancy,. Karl-Heinz for his. encouragement, tenacity and advice with which I have been blessed.. ii.

(4) Abstract The author's research studies the synergies and tensions between external debt and human rights. To do this, the study examines the joint world bank-international monetary fund Debt Sustainability Framework for Low Income Countries, whilst paying particular attention to Nicaragua’s case. The author finds support for the validity of theoretical arguments that link the two variables. Specifically, the investigation examines and specifies how political decisions as a result of changes in human rights impact debt sustainability as well as and how high debt affects respect of human rights. The review of the Debt Sustainability Framework revealed that the framework. 政治大. ignores human rights issues in its methodology, which inhibits the framework’s ability. 立. to: i) accomplish its mandate to provide guidance to multilateral and bilateral lenders. ‧ 國. 學. that have incorporated human rights elements in their development aid interventions; ii) to consider human rights violations, especially civil and political rights as a factor. ‧. io. sit. Nat. rights impacts of the policies which reduce debt related risks.. y. that undermines the quality of governance and institutions; and iii) address human. n. al. er. The inclusive growth diagnostic conducted by Nicaragua provided an in-depth. Ch. i n U. v. study of the growth drivers (repayment capacity) and factors that are hindering their. engchi. growth. As a result of the analysis, it revealed that high human rights violations (specially civil and political rights) have not only led to political instability, but also undermined macroeconomic stability - upsetting macroeconomic stability and increasing indebtedness. Key words: Human Rights, External Debt Sustainability, Nicaragua. iii.

(5) 摘要本研究旨在討論外債和人權之間的協同作用和緊張關係，藉由探討聯合世界銀行國際貨幣基金組織債務對低收入國家的償債能力，尤其著重尼加拉瓜的例子。筆者發現有效支持兩個變量理論的連結，另外，本研究強調了政治決策改變人權債務的結果。文獻探討發現過往討論各國償債能力忽略了人權因素，如此會抑止：（一）完成其任務，指導已納入人權要素在其發展援助干預的多邊和雙邊貸款；（二）審議侵犯人權的行為，特別是公民權利和政治權利的破壞治理和機構質量的因素；和（三）解決其減少債務相關的風險政策的人權影響。研究分析的結果發現高度的侵犯人權行為（特別是公民權利和政治權利），不僅導致政治不穩定，也破壞了宏觀經濟的穩定。. 政治大. 立. ‧. ‧ 國. 學. 關鍵字：人權、債、尼加拉瓜. n. er. io. sit. y. Nat. al. Ch. engchi. iv. i n U. v.

(6) Table of Contents Introduction Chapter 2: Literature Review Chapter 3: Inclusive Growth Diagnostic of Nicaragua Chapter 4: Findings and Discussions Chapter 5: Conclusions Bibliography. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. v. i n U. v.

(7) List of Figures Figure 3.1 Inclusive Growth Analytics ................................................................ 52 Figure 3.2 Business Environment Analysis ......................................................... 53 Figure 3.3 Foreign Investment, Grants and Personal Remittances Received as percentage of GDP, Nicaragua 1960 to 2013 ............................................................... 54 Figure 3.4 GDP per capita and GDP per capita growth rates, Nicaragua 1960 to 2013.............................................................................................................................. 55 Figure 3.5 Nicaragua GDP/ Latin America and the Caribbean GDP and Nicaragua GDP per capita / Latin America and the Caribbean GDP per capita, period 1960 to 2013 ...................................................................................................................................... 55 Figure 3.6 GDP per capita 5 year moving average, Nicaragua, Latin America and the Caribbean from 1965 to 2013 ................................................................................ 56 Figure 3.7 Economic Growth (value added) by Sectors, Nicaragua.................... 57. 治政大 Figure 3.8 Degree of Nicaraguan concentration, diversification, No. of Products and Five Largest (share of 立 merchandise exports) ........................................................ 59 ‧ 國. 學. Figure 3.9 Poverty headcount ratio at national poverty line, Extreme Poverty headcount ratio, Nicaragua 1993 to 2009 .................................................................... 62. ‧. Figure 3.10 poverty headcount ratio at international poverty line, extreme poverty headcount ratio, Nicaragua 1993 to 2009 .................................................................... 62 Figure 3.11 Poverty Gap, International Poverty Line, Nicaragua 1993 to 2009 . 63 Figure 3.12 Household income shares of Nicaraguan Households 2009 ............ 64. sit. y. Nat. er. io. Figure 3.13 Decomposition of Changes in Poverty, Nicaragua 2005 to 2009 ..... 65 Figure 3.14 Poverty Expenditure by Source of Finance, Nicaragua 2007 to 2013 ...................................................................................................................................... 66. n. al. Ch. engchi. i n U. v. Figure 3.15 Health Expenditure, Per capita, percent of GDP and percentage of external resources for health, Nicaragua 1995 to 2013................................................ 71 Figure 3.16 Access to electricity, Nicaragua 1990, 2000 and 2010 ..................... 76 Figure 3.17 Electricity production from oil, hydro and renewable sources, Nicaragua 1971 to 2013 ............................................................................................... 77 Figure 3.18 Improved water Source, total, urban and rural Population, Nicaragua 1990 to 2013 ................................................................................................................ 78 Figure 3.19 Improved Sanitation Source, total, urban and rural Population, Nicaragua 1990 to 2013 ............................................................................................... 79 Figure 3.20 Nicaragua in the Heavily Indebted Poor Countries Initiative process ...................................................................................................................................... 95. vi.

(8) List of Tables Table 2.1 Public and Public-Guaranteed External Debt Thresholds .................... 32 Table 2.2 Public Debt Benchmarks ...................................................................... 32 Table 2.3 Country Policy Institutions Assessment 2013 Criteria ........................ 34 Table 2.4 Frequency distribution of External Debt Ratios in Middle-Income Countries at the Time of Default: 1970 to 2001 .......................................................... 38 Table 2.5 Donor Approaches to Integrating Human Rights and Indicative Activities ...................................................................................................................... 48. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. vii. i n U. v.

(9) Acronyms CPIA: Country Policy Institutional Assessment IDA: International Development Association DSA: Debt Sustainability Analysis DSF: Debt Sustainability Framework EDC: European Debt Crisis GDP: Gross Domestic Product GFC: Global Financial Crisis IMF: International Monetary Fund HR: Human Rights HRBDSF: Human Rights-Based Debt Sustainability Framework LIC: Low Income Countries MAC: Market Access Countries UN: United Nations WB: World Bank. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. viii. i n U. v.

(10) 1.. Introduction This research aims to relate debt sustainability to human rights and examine the. frictions and synergies between them. The research examines this relationship by analyzing The Worlds Bank's (WB's) and International Monetary Fund’s (IMF's) Debt Sustainability Framework (DSF) for Low Income Countries (LICs) which is supposed to: i) “guide the borrowing decisions of LICs” by exposing them the debt related risks in relation with the country’s repayment capacity; ii) “provide guidance to creditors lending and grant allocation decisions” by giving advice to development cooperation at. 政治大 advice by expanding their comprehension of the countries risks and vulnerabilities (IMF, 立 multilateral and bilateral levels; iii)“inform the IMF and the WB analysis and policy. ‧ 國. 學. 2013c) and; “assess debt sustainability” by evaluating domestic and/or external sovereign default risks. For this purpose the investigation provides theoretical evidence. ‧. and examples in the case of Nicaragua of how the HR situation may impact debt. sit. y. Nat. sustainability and vice versa.. n. al. er. io. Literature pertaining to the probability of a country failing to comply with the. i n U. v. contractual obligations of its loans (sovereign default risks) reveals that it must conduct. Ch. engchi. a country risk assessment based on two risk categories: political risks and transfer risks(UN, 2009). In other words, to evaluate the risk involved in lending operations, economists must evaluate the actions of governments (government policy and political institutions) that establish incentives for the creation of repayment capacity and the economic environment. However, the DSF fails to take into account in its framework: i) political risks which might undermine the repayment capacity of the country, in which HR constitute an important component and ii) policy tradeoffs not only between government actions that reduce debt related risks and political risks, but also government actions that reduce debt related risk and HR. 1.

(11) The thesis hypothesizes that political risks arising from HR violations in Nicaragua (NI) influence the country’s debt sustainability. Further, it hypothesizes that the incorporation of HR elements into the DSF for LICs will reduce political risks and enhance human rights. The integration of HR elements into the DSF would not only strengthen the assessment of probable causes of unsustainable indebtedness and deterioration of the county’s repayment capacity, but also improve the recommendations to creditor lending and grant allocation decisions. With this in mind, the respect of HR will lower the negative impacts of government policies that reduce. 治政大these questions: The research in this study will focus on answering 立. debt related risks.. How are external debt and HR connected?. •. Does Nicaragua’s history provide evidence of the relationship between. ‧ 國. 學. •. ‧. debt sustainability and HR?. Do HR influence the capacity of repayment and political stability?. •. What would be the benefits of incorporating HR elements into the DSF?. er. io. sit. y. Nat. •. al. v i n C h the Debt Sustainability undermine engchi U. n. The main objective of this analysis is to identify political vulnerabilities and HR elements risks that may. of NI. The research. specifically considers: •. The impact of human rights on external debt and vice versa;. •. What political, human, and economic factors undermine Nicaragua’s debt sustainability;. •. The role and effectiveness of the DSF as currently applied by the IMF and WB;. •. How the DSF is affected by HR; and. •. A different interpretative methodology and concept as an alternative to 2.

(12) the existing framework through built-in HR elements. Recent events in the European debt crisis have drawn worldwide attention to the debt sustainability of European countries. Two primary theoretical frameworks are currently used by economists to present their analyses to government officials from the European Union and IMF. The IMF and WB utilize the DSF to evaluate Market Assess Countries (MACs) and the DSF for LICs for countries with no or limited access to market, while other institutions like the rating agencies Standards & Poor’s and Moody’s utilize other frameworks.. 治政大of external indebt on the sustainability has revived concerns about the impact 立 The current humanitarian crisis in Europe due to the pursuit of external debt. realization of human rights(UN, 2014b). External debt levels have grown at global. ‧ 國. 學. scales. Following the 2007 global financial crisis (GFC), governments were forced to. ‧. commit public funds in order to bail out their financial sectors, substantially increasing. sit. y. Nat. debt levels in comparison to the size of their economies. This situation raised concerns. io. er. about debt sustainability and the effects of high debt burdens on developed countries.. al. Equally important was the political crisis in Honduras that undermined its. n. v i n C heconomic prosperity, ability to repay its loans, impeded e n g c h i U increased indebtedness and resulted in the suspension of aid by the international community (except the IMF). Similar effects were suffered in various Middle Eastern countries amidst the “Arab Spring”; these developments remind us of the importance of political stability (of which HR were an important element) for economic prosperity and their ability to repay their loans. Renowned contemporary scholars have identified the negative impact of high indebtedness on economic growth(Reinhart, Reinhart, and Rogoff, 2012), debt sustainability(Baldacci, Gupta, and Mulas-Granados, 2010), and human rights(UN, 3.

(13) 2011). Others have found that political stability undermines economic activity(Aisen and Veiga, 2013). Specifically, as a result of the economic contraction, government revenues fall, which limits the availability of funds to maintain current expenditure levels (previous crisis) on loan repayments and public services. This research will examine whether these relationships hold true in the context of Nicaragua. This research builds on a relatively small domain of work on the impact of human rights on debt and vice versa. Within this domain, this research contributes to academic literature by identifying limitations within the DSF and it raises awareness of external debt. 治政 This case was selected because Nicaragua has 大 been dealing with debt-related 立. implications to society.. problems for three decades, and has continuously applied economic policies developed. ‧ 國. 學. by the IMF and WB since the 1990s to reduce debt-related risks and improve its. ‧. socioeconomic indicators. The DSF was created with the purpose of keeping the. sit. y. Nat. external debt of countries that received debt relief, such as Nicaragua, at sustainable. io. er. levels after receiving debt relief under the Heavily Indebted Poor Country (HIPC). al. initiative. Nicaragua was the second poorest country in the Americas - in 2013. n. v i n CGDP Nicaragua had the second lowest capita in PPP terms in the Latin American h e per ngchi U. and Caribbean region, at 4,425.291 at constant 2011 International dollars(WB, 2014). The country was ranked 132 out of 187 in the World Human Development ranking, with 0.614 points in the Human Development Index (UNDP, 2014) and a .405 Gini Index(WB, 2014). Identifying the factors that affect growth is necessary in order to accurately evaluate Nicaragua’s capacity to repay debt. In this research, we used the Inclusive Growth Analytics Framework created by Ianchovichina and Lundstrom (2009) to reach our objective. The Inclusive Growth Analytics Framework explains the reasons why 4.

(14) the poor and the majority of the labor force are not contributing and benefitting from growth. The makers of this analytical tool state that “inclusive growth refers to both the pace and pattern of growth” to obtain pronounced sustainable growth in the long run and reduce poverty by increasing the rate of economic growth and enlargement of the “size of the economy, while leveling the playing field for investment and increasing productive employment opportunities”(Ianchovichina and Lundstrom, 2009). The three pillars of this framework are as follows: •. The “background analysis”: a brief review of the factors that explain the. 政治大 The “economic profile of the economic agents”: delivers the scenario of 立 growth and poverty reduction rates.. •. the activities citizens realize to earn their income in order to analyze the. ‧ 國. 學. growth potential and possible migration to other more productive. The “identification of constraints to inclusive growth”: is responsible for. sit. y. Nat. •. ‧. economic activities.. io. er. analyzing all the factors mentioned above, in the decision tree that. al. affects the level of investment and entrepreneurship.. n. v i n C h is as follows. U The structure of the research e n g c h i Chapter 2 reviews the relevant literature with the intention of theoretically associating external debt, political risks, and HR. Furthermore, Chapter 2 also examines and specifies how political decisions impact debt sustainability and how debt affects the political and economic environment. Additionally, it assesses the DSF for LICs with regard to the methodology used to evaluate countries debt as sustainable or not, and how it evaluates the capacity of the lender to repay its loans. Subsequently, it concludes with an analysis of the implicit and explicit links between debt sustainability and HR. Chapter 3 examines Nicaragua’s repayment capacity by conducting an Inclusive 5.

(15) Growth Diagnostics (IGD). The IGD allows for the identification of the elements that constrain economic growth and outlines the evolution of Nicaragua’s key variables. This provides a more subtle and complex view of changes in Nicaragua’s external debt, economic growth, and human rights than the one found when using more conventional economic analyses. Chapter 4 discusses the key findings of the research, presents the theoretical implications and ensuing recommendations. Finally, Chapter 5 concludes the dissertation with a summary of the overarching conclusions.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 6. i n U. v.

(16) 2.. Chapter 2: Literature Review The main objective of the literature review is to link debt and human rights by. revealing that external debt has a negative impact on human rights through the following mechanisms: i) the debt overhang effect on economic growth and poverty; ii) adjustment programs; iii) social expenditure reduction; and iv) policy conditionalities imposed by the international community and/or debt relief mechanisms as a requirement to receive financial resources. Lastly it will conduct an appraisal of debt sustainability framework.. 政治大 sustainability can be traced立 back to the beginning of cross-border lending. The act of. External indebtedness is a very old phenomenon, and the study of its. ‧ 國. 學. lending implies risk of unprofitable outcomes and rational creditors loan funds on the presumption that full contractual payment of interest, fees, and the original principal. ‧. will be made according to the legal terms and covenants of the loan agreement.. sit. y. Nat. Creditors found the need to evaluate debt-related risks of economic losses due to. n. al. suspend scheduled debt payments(Solberg, 1992).. Ch. engchi. er. io. unanticipated events, that may force the borrower to temporarily or permanently. i n U. v. The fiscal deficit of a government is defined as the excess of a government's expenditures over that government's revenues. The accumulated value of this deficit is the public debt. The differentiation between domestic and foreign debt is based on “the place of issuance and jurisdiction that regulates debt contracts”, thereby if it is issued in the country’s economy regulated by the country’s laws it is domestics, if not, then it is foreign public debt or public external debt(Paniza, 2008). The IMF defines external debt as “the outstanding amount of those actual current and not contingent liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and are owed to non-residents by residents of an economy”(IMF et al., 2014). 7.

(17) The deficit is a flow, while the debt is a stock(Ferrarini, Jha, and Ramayandi, 2012). The banking theory of external debt states that debt can accumulate actively and passively. Active processes are new obligations (loans) and passive procedures include fluctuations in existing contracts' exchange rates, interest rates, and inflation rates(Czerkawski, 1991). Governments incur deficits for various reasons. These reasons are explained by six models of political economy of government budgeting. These are the tax-smoothing theory, the fiscal illusion model, the intergenerational redistribution model, the intra-. 治政大 Firstly, Robert Barro's taxthe debt as a strategic instrument model(de Wolff, 1998). 立 generational geographical redistribution model, the government weakness model, and. smoothing theory (1979) hypothesized that governments incur deficits to keep taxes. ‧ 國. 學. stable through time(Barro, 1979). This model entails that “budget deficits will be the. ‧. optimal outcome of the government decision to smooth distortionary taxes in the. sit. y. Nat. presence of temporary shocks to public expenditures and output”(Roubini, 1988).. io. er. The fiscal illusion model bases its main argument in claiming that the. al. complexity of the tax structure and citizens' low awareness of indirect taxes generate a. n. v i n C h provide higher U fiscal illusion that will “systematically e n g c h i levels of public debt”(Buchanan and Wagner, 2000). This incentivizes politicians to use debt instead of raising taxes, making “debt finance […] seem less costly than tax finance” to citizens(Wagner, 1976). This is because voters do not fully understand the policies' implications and “overestimate the benefits of current expenditure and underestimate future tax burdens”(Alesina and Perotti, 1994). Intergenerational redistribution models expose one generation's preference to use future generations' projected wealth to afford its present provisions, as measured by the size of a government's debt(Cukierman and Meltzer, 1989). Meanwhile, Tabellini 8.

(18) (1991) holds that the size of government debt and the provision of public goods is influenced by the degree of altruism within the same generation, assuming that the poor benefit more from additional government spending in public goods and that higher taxes to pay the contracted debt will more greatly impact the rich(Tabellini, 1991). Alesina and Peroti (1994) uncover an alternative view of this phenomenon by relating the accumulation of public debt to the division of governments and to the amount of political cohesion between them(Alesina and Perotti, 1994). Intra-generational geographical redistribution models identify inefficient fiscal. 治政大 making”. A typical feature larger than [more] efficient in the area of distributive policy 立. decisions of policy makers as “biased [towards making] public decisions [that are]. of policy projects is that their benefits are concentrated in geographically specified. ‧ 國. 學. constituencies, while the cost of financing them is spread across all constituencies. ‧. through generalized taxation(de Wolff, 1998). A geographically based representative. y. sit. io. er. and Perotti, 1994).. Nat. does not internalize the effect of its proposal on the tax burden of the nation(Alesina. al. Models of government fragmentation, government duration, and electoral. n. v i n C hto budget deficits U systems relate government stability e n g c h i to explain how politicians delay stabilization measures to control growth of indebtedness. They force this delay because of disagreements over the distribution of stabilization costs(Alesina and Drazen, 1991). A study of public financial policies in industrialized countries after World War II characterized those governments that incurred high public debt as representational democracies with highly fractionalized party systems, political extremism, and low government durability(Grilli et al., 1991). Lastly, the model of debt as a strategic instrument claims that political parties increase indebtedness to improve the probability of staying in office by inducing voters to give him his vote and to condition the 9.

(19) economic policies of subsequent leaders(de Wolff, 1998). Some models try to address specific behaviors in scenarios of future political defeats and how they will lead to increased debt levels, but this probability of political defeat has been empirically difficult to address(Hadjimichael, 1994). Debt is generated by the gap between domestic saving and investment. As the gap widens, debt accumulates, interest charges accumulate, and the country must borrow increasing amounts just to maintain a constant flow of net imports. It must borrow to refinance maturing debt obligations. Income in turn grows as a result of. 治政大close and then to reverse the growth of output, which makes it ultimately feasible to 立. investment. The capacity to service debt depends fundamentally on the continuing. gap between domestic saving and investment(Franko and Seiber, 1979).. ‧ 國. 學. Sovereign debt is characterized by three facts:. sit. y. Nat. money;. ‧. 1. Governments have at times been able to borrow substantial amounts of. io. al. er. 2. Much of what they borrow is eventually repaid; and. n. 3. Repayment is often complicated by delay, renegotiation, public intervention,. Ch. and default(Eaton and Fernandez, 1995).. engchi. i n U. v. The assessments of the sovereign default risks (country risk analysis) have been insufficient and unable to comprehend fully the borrower’s ability and willingness to repay debts. In response, creditors have conducted and improved country risk analyses in order to identify the relevant indicators to predict debt-related risks. Despite its long trajectory of trying to develop an efficient framework to foresee debt crisis or debt servicing difficulties of countries, at present there exist several quantitative and qualitative techniques. However, as the European debt crisis exposed in 2010, there is a need to improve the efficiency of current apparatuses. 10.

(20) External debt is defined as “the outstanding amount of those actual, current, and not contingent liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy”(IMF et al., 2014). In terms of international law, under the Vienna Convention on Succession of States in Respect of State Property, Archives and Debts(1983), state debt means any financial obligation of a processor state arising in conformity with international law towards another state, an international organization, or any other subject of international law (art. 33)(Megliani, 2015).. 治政 every citizen in the given society. The four particularities大 common to all sovereign debts 立 Sovereign borrowing implies contractual relations between the creditor and. are that they involve asymmetric information, a succession of obligations, a limited. ‧ 國. 學. scope of judicial remedies, and a lack of a bankruptcy regime(Bonilla, 2011).. ‧. Firstly, asymmetric information generates several problems: the agency. sit. y. Nat. dilemma, the risk of adverse selection, and moral hazard. The agency dilemma takes. io. er. place “when a principal is unable to adequately monitor or assess an agent’s behavior”. al. because the agent's tasks are not programmable (Eisenhardt, 1989) or entail risks, or. n. v i n the agent's goals are in conflict C with of the principal(Stroh et al., 1996). The h the e ngoals gchi U. performance of the agent cannot be guaranteed ex ante and creditors have incomplete information on the economic and political prospects of the lender. Changes in these prospects can alter the risks of the loan after funds have been disbursed, and this is attributed partly to the unpredictability of the future(Bonilla, 2011). Other elements to this risk are the inability to identify the borrower’s willingness and ability to repay the principal and interest when the loan contract is under consideration. This generates a risk of adverse selection by creditors. Moral hazard arises because creditors do not know and cannot ensure a debtor's financial performance ex post. 11.

(21) Secondly, the succession of obligations refers to the inter-generational burdens of the new loan to future generations, taking into account that governments undertake debt on behalf of their citizens and obligate them to fulfill repayment. Thirdly, the limited scope of judicial remedies refers to the inability to use legal means to manage sovereign defaults because of sovereignty issues or effective procedures to enforce debt contracts. This claim is based on the fact that “states cannot be sued in foreign courts without its consent unless it has submitted to [the creditor's] jurisdiction or it falls within an exception” (Primo Braga and Vincelette, 2011)and there is a “lack of a regular. 治政 2011). Another element is the difficulty in enforcing 大 debt contracts and seizures of 立 institutional framework to manage debt overhangs at the international level”(Ocampo,. foreign assets as collateral(Primo Braga and Vincelette, 2011).. ‧ 國. 學. Lastly, the limited scope of judicial remedies and a lack of a bankruptcy regime. ‧. mean that there is not a legally binding mechanism to enforce bankruptcy procedures.. sit. y. Nat. There's no “place” in which countries can proclaim themselves incapable of repaying. io. al. er. their loans. The solution of these situations is left to negotiations between parties,. n. generally violating the principle of mutual benefit due to the economic crises countries face in these situations.. Ch. engchi. i n U. v. Debt sustainability is a very complex phenomenon to determine. At present there exist ongoing differences on the measurement of debt sustainability(CESifo, 2008). This is because all try to quantify the risk of a country's ability to pay its financial obligations in the future, a future which is unknown. Despite this fact, country risk analyses identify two sources of risk. First is the ability to pay, addressed in economic literature as “transfer risk” (UN, 2009); which deals with national economic performance, debt ratios, and global trends. Second is the ability to pay, referred to as the “political risk”(UN, 2009), which speaks to the asymmetric information problem. 12.

(22) Transfer risks refer to “the economic capacity to meet obligations on debt incurred through sovereign borrowing as well as through the cross-border liabilities of private institutions operating within the country's frontiers”(UN, 2009). Transfer risk arises from hazards associated with global market conditions and the debtor government's policies and performance in three areas: structural change, balance of payments, and external asset-liability management(Solberg, 1992). It is “structured around the need of the country to incur new debt, as well as its ability to earn the necessary foreign exchange to service those liabilities and/or to obtain new cross-border. 治政 The second examination component refers to大 the political will to pay its 立. financing”(Krayenbuehl, 2001). It analyzes the balance of payments and its projections.. financial obligations, which are governmental and public actions that can have an. ‧ 國. 學. impact upon the disposition of loan repayment. Some political factors affecting this can. ‧. be the “the constitutional environment, political parties, quality of government, social. sit. y. Nat. structures, demographic structure, ethnic and religious differences, corruption, and. io. er. discriminating acts”(Krayenbuehl, 2001). Interactions between politics and economics. al. occur on a continuous basis and affect not just fiscal, monetary policies, but a large. n. v i n C h vital to nationalUeconomies, such as changes in number of issues which are deemed engchi labor laws, regulatory restrictions, and requirements for national content.. Measuring political risk requires an assessment of the likelihood of either a politically motivated change in economic policy or a change in the political regime itself which, in turn, might erode a country's willingness or ability to repay foreign debt. Assessing prospects of political change, both in pace and scope, involves a review of the country’s level of economic development, its political institutions, power elite, social classes, and the external relations. Political instability, actual or perceived, can have significant effects with both the formulation and implementation of domestic 13.

(23) economic policies and with the ability of a sovereign borrower to gain access to new international loans. Social, ethnic, and religious cohesion, the rate of population growth and urbanization, the distribution of power among political and social classes, and the degree of social freedom and political participation are all important considerations for the political risk analyst. Another key element of the political risk assessment includes external political relations and alliances, which can affect the country’s security, domestic fiscal demands, and foreign concessional aid flows(Solberg, 1992). A detriment in HR standards can have a negative effect on external debt. 治政大about the behavior of policy debt. A confidence crisis is a critical change in expectations 立 sustainability. Debt literature links confidence crises with the sustainability of external. makers, and it is capable by itself of precipitating a change of government or at least of. ‧ 國. 學. increasing the probability of a change of government(Dornbusch and Draghi, 1990).. sit. y. Nat. obligations.. ‧. Political risk is used to address the fear of the government in honoring its debt. io. er. The party in power will then consider various plans of action, some of which. al. lead to the party staying in power, and others to its losing power. For each such plan,. n. v i n Cconsequences the party considers the long-term h e n g c honiitsUrepresentative voters. Since the election outcome depends on the party’s actions, it can knowingly choose an economic policy where it increases its probability to stay in power or lower its probability to lose power. This is how the term “election manipulation” is used in the literature of the political economy of government budgeting. The pressures and constraints that a government faces due to expected election results influence its decisions(de Wolff, 1998). Human rights violations can cause social polarization that is responsible for coordination failures and is associated with sociopolitical instability. The causes of anti14.

(24) government protest and rebellion are multifaceted. They can be divided into two broad categories. The first can be attributed to political adversaries' taking advantage of a government’s political weakness. The second can be attributed to groups' protesting against their government because its economic policies performed poorly(Abouharb and Cingranelli, 2007). Labor unrest was considered a factor contributing to political instability that generated the Asian financial crisis in 1997 like Thailand(Corsetti, Pesenti, and Roubini, 1998). The threat of a change in regime or a regime that is not committed to sound. 治政 community to provide current account financing. So大 deteriorations in expectations 立 macroeconomic policies can reduce the willingness of the international financial. about the political and financial environment can contribute to a balance-of-payments-. ‧ 國. 學. and-exchange crisis, especially when economic fundamentals are not very comforting.. ‧. Moreover, political instability may lead to larger budget deficits(Corsetti, Pesenti, and. sit. y. Nat. Roubini, 1998). It may also adversely affect export performance (Fosu 2003) and lead. io. er. to lower-level output and economic growth rates(Woo, 2006). Another issue that may. al. aggravate the political instability of a country is the dependency of financial resources. n. v i n to maintain current expenditure C by h official creditors and e n g c h i Umultilateral institutions, like in low-income countries where “sustainability depends largely on the willingness of official creditors and donors to provide net transfers through new financing”(IMF, 2004b). Default by a sovereign borrower is almost always a choice, and because the default is by a government, such a choice necessarily has a political element(Kolb, 2011, p. 7). The notion of debt intolerance hypothesis suggests a historical regularity that some governments defaulted at relatively low levels of debt, while others were able to sustain much higher borrowing levels(Reinhart, Rogoff, and Savastano, 2003a), and the 15.

(25) concept of attributes the variation to the countries' institutions. Governments can always honor their debts by reducing their expenses or increasing revenues, or both. Sovereign states cannot go bankrupt. According to this framework, different policy choices have different macroeconomic and distributive consequences. A rational government will consider which policies provide it the most benefits and contribute to its own political objectives. This framework concludes that an influential middle-class improves debt sustainability(Giordano and Tommasino, 2011). In general, the poor oppose. 治政 struggle between different大 socioeconomic 立. consolidation through cuts in the welfare state and the rich oppose increases in wealth taxes(Kolb, 2011). The. groups with. “conflicting distributional objectives” leads to postponements in making any decision,. ‧ 國. 學. and the politically stronger groups then bear a less significant load (Alesina and Drazen,. ‧. 1991). sit. y. Nat. A debt overhang situation is defined as “the presence of an existing inherited. io. er. debt sufficiently large that creditors do not expect with confidence to be fully. al. repaid”(Krugman, 1988). This work speaks of an existing negative relationship. n. v i n C h from a certain threshold, between growth and high debt because, debt begins to generate engchi U distortions in the economy. He argues that not all the income that the government receives can be used to pay debt. This creates uncertainty among investors due to fears of cessations by the government of its financial obligations (default) and its political considerations. Krugman’s early theory has been further developed. Some authors have provided systematic ideas on the transmission mechanisms and effects of external debt on growth. According to existing literature, there are several mechanisms through which debt can affect economic growth. 16.

(26) The basic debt dynamics equation explains that the debt ratio can increase for two reasons. The first is because the government runs a primary deficit, measured as a share of the GDP. The second is because the interest rate of the debt exceeds the growth rate of the GDP. Debt dynamics depend on outlooks for the primary deficit and the interest growth differential. Correspondingly, Debt to GDP ratio is the basis for debt sustainability analysis(Allen, Hemming, and Potter, 2013). External debt sustainability is a very complex issue due to the number of assumptions and the unpredictability of the future. A given analysis will change depending on “whether the current account can. 治政大 and assessments about the balance of payments[,] and the associated debt dynamics 立 be financed through private and official capital flows[,] projections of the medium-term. appropriate level of the exchange rate […] relation through various stock flow and trade. ‧ 國. 學. elasticity relationships”(IMF, 2002b).. ‧. A debt is considered sustainable when “a country can meet its current and future. sit. y. Nat. debt service obligations in full, without recourse to debt relief, rescheduling, or. io. er. accumulation of arrears”(Gunter, 2011). On the other hand, the IMF defines debt as. al. “sustainable if it satisfies the solvency conditions without major correction […] given. n. v i n C hThe institution defines the costs of financing(IMF, 2002b). e n g c h i U a country's external debt as. sustainable “when the primary balance needed to at least stabilize debt under both the baseline and the realistic shock scenarios is economically and politically feasible, such that the level of debt is consistent with an acceptably low rollover risk and with the preserving potential growth at a [satisfactory] level”(IMF, 2013d, p. 4). This also implies that “sustainability is excluded when a debt restructuring is already needed (or expected to be needed), the borrower keeps on indefinitely accumulating debt faster that its capacity to service these debt is growing, or the borrower lives beyond its means by accumulating debt in the knowledge that a reduction will be needed to service these 17.

(27) debts”(Megliani, 2015, pp. 3-4). A more practical criterion for debt sustainability was developed by Roubini and Setser(2004), considering it as a current account position that does not lead to everincreasing foreign indebtedness. This situation will generate doubts over the borrower’s ability to pay. This concept requires a stabilization of the ratio of external debt, which is a net international-investment-deficit-to-GDP ratio that does not grow(Iley and Lewis, 2007, pp. 140-141). Another element that characterizes the debt sustainability considers the. 治政 economy and the living standards of people(Hjertholm,大 2003, p. 68). Consequently, it 立. implication of high external debt levels originate from the normal function of the. is of great importance to know to what extent and in what ways debt affects human. ‧ 國. 學. rights. The plan is to explore two elements:. External debt's indirect influence on human rights through:. ‧. •. sit. y. Nat. o Constrained economic growth,. io. al. er. o Adjustment programs applied to improve debt-related risks, and. n. o Sovereignty undermined by having to comply with foreign interests in. Ch. engchi. order to obtain financial resources •. i n U. v. How the realization of human rights promotes development, strengthens governance, and generates the capacity to carry more debt.. External Debt-Human Rights Relationship Debt overhang effect on economic growth Economic progress creates the conditions for attaching a high importance to citizens’ human rights, and consequently the government needs resources to protect all human rights, in addition to requiring adequate staff and laws, and the means to enforce them(Alesina and Guido, 1989). Typically, debt levels are expressed as a percentage of 18.

(28) a measure of the capacity to repay debt(Raseel, 2005, p. 345). High debt levels undermine economic growth and development as a result of the debt overhang problem. A debt overhang is defined as “the presence of an existing inherited debt sufficiently large that creditors do not expect with confidence to be fully repaid”(Krugman, 1988, pp. 1-2). Despite the consensus on the theoretical aspect of the Debt overhang hypothesis there exist discrepancies of what should be a prudent level of indebtedness and what should be the maximum level of indebtedness Debt overhang constrains economic growth, causing a rise in poverty rates and. 治政大 early theory of debt that economic contraction constrains human rights. Krugman’s 立. lower public expenditure which are linked to lower human rights. It can thus be inferred. overhang has been further developed; now some authors have provided systematic ideas. ‧ 國. 學. about the transmission mechanisms of external debt effects on growth. A modern. ‧. analysis of debt overhang using endogenous growth models, model of endogenous debt. sit. y. Nat. dynamics, arises because of governments are unable to repay the full amount of. io. er. indebt(Aguiar and Amador, 2013).. al. According to the existing literature, there are seven causal mechanisms through. n. v i n C hgrowth, namely: i)Umacroeconomic instability; ii) which debt can affect economic engchi political instability; iii) investment; iv) interest rate; v) capital flight; vi) inflation; and vii) poverty. Adjustment programs The first traces of the human rights-external debt connection appeared in 1991. Danilo Türk’s preliminary UN report 7 (UN, 1991) and its final version (UN, 1992) led to a formal acknowledgment of structural programs as a barrier to the realization of human rights in the form of UN resolutions 1991/27 and 1992/29 on the SubCommission on Prevention of Discrimination and Protection of Minorities. Structural 19.

(29) adjustments came in response to economic imbalances emerging in the debt crisis. Solving a debt crisis requires eliminating the debt overhang, and this is achieved through the application of structural adjustment policies (Diwan and Rodrik, 1992, pp. 6-16) aimed at increasing the primary balance. These measures are intended to achieve: i) a reduction in inflation; ii) a re-establishment of equilibrium in the balance of payments; and iii) the promotion of growth(UN, 1995, p. 4). They are meant to apply a sequence of economic policies to “export their way out of the crisis” through liberalization, deregulation and reduction of the role of the state in the economy.. 治政 adjustments are: i) devaluation of the local currency;大 ii) a decrease in government 立. The UN report E/CN.4/Sub.2/1992/16 stated that the common components of. expenditure on public services; iii) abolition of price controls; iv) imposition of wage. ‧ 國. 學. controls; v) reduction of trade and foreign exchange controls; vi) restrictions on. ‧. domestic credit; vii) reduction of the role of the state in the economy; viii) increasing. y. sit. io. er. enterprises.. Nat. the basis for the export economy; ix) decreasing imports; and x) privatization of public. al. The austerity measures generated economic stagnation(Easterly 2001), lower. n. v i n C h and Cingranelli,U2006a), and reduced workers’ standards of human rights(Abouharb engchi rights(Abouharb and Cingraneli, 2006b), thus creating concerns among scholars and the international community. The implementation of structural adjustment programs has jeopardized the rights to: i) food; ii) education; iii) shelter; and iv) health(UN, 1999). UN resolution 1994/11 issued by the Office of the High Commissioner for Human Rights deals with the effects on the full enjoyment of human rights of the economic adjustment policies arising from foreign debt and, in particular, on the implementation of the Declaration on the Right to Development. It affirms that debt payments should not take precedence over the basic rights of the people of debtor 20.

(30) countries to food, shelter, clothing, employment, health services and a healthy environment(UN, 1994, p. 2). The UN Economic and Social Council report (UN, 1997a) identified constraints imposed by adjustment programs on the fulfillment of economic, social and cultural rights contained in the Universal Declaration of Human Rights and in the International Covenant on Economic, Social and Cultural Rights in developing countries. Since 2001, several resolutions have been issued addressing the effects of structural adjustment policies and foreign debt on the full enjoyment of all human rights,. 治政 Lumina to the UN establishes the link between debt and大 human rights: “Excessive debt 立. particularly economic, social and cultural rights. The latest report by Dr. Cephas. burdens reduce the maximum resources available to States for the fulfillment of human. ‧ 國. 學. rights[...] and to establish and strengthen the institutions that promote and protect civil. ‧. and political rights”(UN, 2014a, p. 7). The Resolution of Human Rights Council. sit. y. Nat. 2003/21 acknowledges that debt repayments have limited the ability of the state to. io. al. n. Sovereignty. er. realize HR by limiting the provision of public services(UN, 2003).. Ch. engchi. i n U. v. High debt burdens force countries to seek additional resources abroad, in order to meet their financial obligations and avoid default or smoothen consumption. They can negotiate with international financial institutions to get additional funds or participate in debt relief initiatives. Countries must apply for and comply with economic programs that go beyond mere macroeconomic measures, thus undermining their sovereignty(Briscoe, 2006). The depth of IMF and WB policies can be visualized in works dealing with the Latin American and African debt crises in the 1980s (Helleiner, 1992) and the Asian financial crisis in the 1990s(Feldstein, 2002), which went beyond economic issues. The most compelling evidences was the introduction of new laws, 21.

(31) regulations, economic systems, privatization of public entities and non-economic measures as a condition to receive additional resources from the international community. Appraisal of Debt Sustainability The main objective of this subsection is to explain how the DSF for LICs and its political instability assessment work. Then, the objective shifts to the exposure of their flaws and proposed improvements on them from academics, to lead the reader to understand why the current DSF operates without taking human rights issues into. 政治大 we explain key concepts 立 in the framework: sustainability solvency, liquidity that. account. First, we present a brief review of the framework's origins in the 1990s. Next,. ‧ 國. 學. integrates into the sustainability analysis, and other important issues with the framework. Third, we explain the function of the DSF for LICs and present a review of. ‧. the official assessments of debt in Nicaragua. Following that will be a discussion of the. sit. y. Nat. flaws of the present framework and the alternative approaches to debt sustainability.. n. al. i n U. operates without taking human rights issues into account.. Ch. engchi. er. io. Finally, we present the argument to answer the question of why the current DSF. v. The historical analysis was greatly influenced by the writing of Baduel and Price(2012). They addressed the evolution of the debt sustainability framework. The appraisal of the debt sustainability of this chapter was greatly influenced by Wyplosz(2012). He provided key insights on the functions of this framework and valuable contributions to the assessment of this framework. In the 1990s, the international community noted that some LICs remained with debt-related problems even after receiving several debt relief initiatives from the Paris Club. These LICs have been returning to the Paris Club to obtain rescheduling and debt forgiveness since 1987(UN-ECLAC, 1999, p. 10). These countries were categorized as 22.

(32) having the world's lowest GNPs per capita and highest indebtedness levels. Debt ratios in these countries exceeded 80 percent of the present value of total debt service to GNP or their debt service ratios at present value to exports were above 220 percent(WB, 1994, p. 49), and were experiencing debt overhang. These countries' economic difficulties and the low social conditions of most of their people made the international community realize that debt intensities were constraining economic growth and were impeding poverty reduction(WB, 1994, p. 37). Thus came a general consensus that a permanent exit strategy had to be developed to. 治政大no official document says so debt relief initiative called the HICP initiative. Although 立 address these problems and as a response, the IMF and WB developed a multi-lateral. the realization of their citizens' human rights.. 學. ‧ 國. directly, it apparently assumes that high debt levels impede development, and thereby. ‧. The 1996 G7 summit acknowledged the need for additional actions to solve debt. sit. y. Nat. problems for heavily indebted, poor countries. It accepted proposals from the Bretton. io. er. Wood Institutions(Summit, 1996). The initiative was “targeted at lowering external debt. al. to sustainable levels” (IMF-WB, 1998, p. 15)and to eliminate the debt overhang (IMF-. n. v i n C heconomic distortions, WB, 1999, p. 1) that was generating e n g c h i U “undermine[ing] confidence and crowd[ing] out private investment and productive public expenditure”(IMF, 1996, p. 128). The external debt was considered sustainable if “countries [would] in all likelihood meet its current and future external obligations in full without resorting to rescheduling in the future or accumulation of arrears”(Kanbur et al., 1996). The initiative developed an assessment of debt sustainability, which initially consisted of a methodology which stated that a country's debt was unsustainable if its debt-service-toexports ratio was above 25 percent, and/or if their present value of debt-to-exports ratio 23.

(33) was above 250 percent(IMF, 1996, p. 129). During its two-year application, ten countries applied for eligibility and had to go through three phases: The entry, decision point, and completion point required a series of structural reforms, and a determined performance in economic and social issues. Only eight countries successfully passed through all three points from 1996 to 1998. After completing all three stages, the countries received enough debt relief to reach a debt-to-export ratio of 200% to 250% and debt-service-to-exports ratio of 20% to 25%(IMF-WB, 1998, p. 40).. 治政 mechanism primarily because of rewarded countries 大 substantial debt cuts with long 立 The Heavily Indebted Poor Country (HIPC) was an innovative debt relief. histories of debt relief and the structural reforms attached to it. The initiative also. ‧ 國. 學. explicitly set the pursuit of debt sustainability as an objective, involved debt relief. ‧. beyond the members of Paris Club, and included social and economic performance in. sit. y. Nat. its conditions(IMF-WB, 1998, p. 28). An innovative element of this debt relief was that. io. er. the new fiscal space of the government product of the reduction of the volume debt. al. services had to be channeled towards poverty reductions expenditures, which. n. v i n represented a shift of resources C traditionally to uphold the country’s financial h e n gdestined chi U commitments to social development(IMF-WB, 1998, p. 15).. The G8 summit in 1999 expanded the HIPC to provide higher debt relief to countries, but also formally linked debt relief with a reduction in its beneficiaries' rates of poverty(Summit, 1999). The developers of the initiative conducted a review in 1998; and in 1999, they modified the framework and named it Enhanced HIPC(IMF-IDA, 1999). Basically, the Enhanced HIPC implied broader debt relief, faster delivery of relief, deeper debt relief, and an explicit link between debt relief and poverty reduction(IDA-IMF, 2000, pp. 4-9). The beneficiaries of this framework would receive 24.

(34) debt relief to reach new sustainable debt levels. Countries were deemed to have unsustainable debt levels if their external-debts-at-net-present value-to-exports ratio exceeded 150% and if their external-debt-at-net-present value-to-revenue ratio exceeded 250%(IDA-IMF, 1999). In 2005, the G8 summit approved the Multilateral Debt Relief Initiative (MDRI) to provide debt cancellations to countries which successfully completed the HIPC initiatives on their debt with the International Development Associations (IDA), IMF, and African Development Bank(Summit, 2005). The Inter-American Development. 治政大Development Goals. It also resources to support the realization of the Millennium 立. Bank agreed to a similar scheme in 2007(IADB, 2008, p. 46). This action freed more. stimulated more investment in LICs(Primo Braga and Dömeland, 2009, p. 29).. ‧ 國. 學. In 2002, the IMF formally expanded the theoretical foundations of sustainability.. ‧. It defined debt sustainability to “[satisfying] the present value budget constraint without. sit. y. Nat. a major correction in the balance of income and expenditure given the cost of financing. io. al. n. things:. er. it faces in the market”(IMF, 2002a, p. 5). This definition implies the following four. 1.. i n C It denies the possibility h of debt restructuring; engchi U. v. 2. It denies the possibility of debt relief; 3. The accumulation of external debt cannot increase faster than the country’s capacity to repay it; and 4. It acknowledges the existence of political risks that can limit the ability to repay debt. The financial assessment of the capacity to pay debt involves two important concepts. The first is solvency. Solvency refers to a country's ability to pay its debt on a continuing basis. More technically, “an entity is solvent if the present discontinued 25.

(35) value of its current and future primary expenditure is no greater that the present discontinued value of its current and future income, net of any initial indebtedness”(IMF, 2002a, p. 5). Countries decide to stop servicing their loans before this financial limitation is reached, and countries in most cases stop servicing their loans when the debt is considered “too costly in terms of the country’s economic and social objectives”(IMF et al., 2014, p. 166). The second, liquidity, refers to a country's ability to pay its immediate external obligations. More technically, a country's faces a liquidity problem when “its liquid. 治政大 2002a, p. 5). External regardless of whether it satisfies the solvency condition”(IMF, 立 assets and available financing are insufficient to meet or roll over its maturing liability,. shocks can prompt liquidity problems: oscillations in commodity prices that alter export. ‧ 國. 學. earnings or import costs, instability in the conditions of international financial markets. ‧. that affect interest rates or resource accessibility etc. This means that a country can have. sit. y. Nat. a sustainable indebtedness level, but that an external shock can make it unsustainable.. io. er. There was a need to develop a forward-looking approach to debt sustainability,. al. which differs from the backward-looking approach of the HIPC initiative(IMF-IDA,. n. v i n C h that the beneficiaries 2004). The first need was to guarantee of the enhanced HIPC engchi U. initiative could sustain debt and to prevent more LICs from reaching unsustainable stages. Debt relief contributed to some LICs' reaching sustainable indebtedness, but could not guarantee it. The second need was for LICs economic and social situations to acquire new foreign funds to pursue development and accomplish the Millennium Development Goals or MDGs(IMF, 2003a). Debt sustainability therefore had to address the three players involved: the international financial institutions that monitor loans and debt, the donors and lenders that provide financial resources, and the borrowers that contract debts. Governmental 26.

(36) entities use this tool to develop a good debt management strategy. Meanwhile, lenders and donors use published debt sustainability assessments (DSAs) to guide their financial commitments to LICs. The IMF and the WB conduct a country-by-country DSA on an external debt yearly as part of IMF regular motoring of its member’s economic and financial development published in the IMF´S Annual Art. IV report. The Debt Sustainability Framework for LICs is a standardized analytical tool within which evaluations of LICs’ debt-related risk are conducted by a DSA. The DSF's main objectives are to advise countries that are taking loans, to counsel lenders and. 治政大 defines a country’s debt policy advice from the IMF and WB. The analytical instrument 立 donors of their financial resource allocations, and to appraise data for examination and. present value of its expenditures”(IMF-WB, 2013, p. 6).. 學. ‧ 國. level as solvent “if the present value of its income stream is at least as large as the. ‧. The DSF is used to monitor individual countries and international institutions. sit. y. Nat. which donate and lend resources to LICs. Among the international institutions which. io. er. use the DSA to guide their decisions to finance LICs are the countries receive funding. al. from International Development Association (IDA), regional development banks, the. n. v i n Paris Club, and the OrganizationC forhEconomic Co-operation e n g c h i U and Development (OECD) working group on export credit and credit guarantees. The IDA, the World Bank’s financial institution to finance the world’s poorest countries, determines the degree to which grants and loans fight poverty using this framework. For example, IDA 14, determined that 33 billion dollars is sure to fight poverty in LICs(IDA, 2005). Also, LICs' achievements of the MDGs have been based on the debt risk classification of DSA results since 2004(IDA, 2004). Subsequently, the rest of IDA replenishment funds, IDA 15, 16, and 17, follow the same principles and guidelines. The DSF is also designed to assess the debt vulnerabilities of countries that are 27.

(37) eligible for the IMF’s concessional lending facilities at the Poverty Reduction and Growth Trust (PRGT) and for the WB’s concessional resources at the International Development Association (IDA)(IMF-WB, 2012b, p. 6). The framework became operational in 2005(IMF-IDA, 2005). One implication of this framework is that it synthesizes the complexity of debt dynamics and its risk to provide an easy, functional assessment to policy makers or borrowers and creditors by analyzing key inputs, plus macroeconomic and political constraints, to ably set forth a sustainable growth strategy to meet their development objectives, avoid debt overhang, and avoid a debt crisis.. 治政 financial situation, via indicators of debt stock and 大 debt service relative to some 立 The DSF is based on an assessment of the country’s debt burden relative to its. repayment capacity. It is further linked to the quality of policies and institutions(IMF,. ‧ 國. 學. 2004a, pp. 12-21). The basic equation consists of equating a debt indicator with. ‧. indebtedness divided by repayment capacity. Debt burden indicators consist of solvency. sit. y. Nat. indicators like external debt at present value to GDP ratio, exports and revenue.. io. er. Liquidity indicators count debt service in relation to a percentage of its exports and. al. revenue(IMF-BW, 2013, p. 11).. n. v i n C hratios to evaluate fulfillment The framework utilizes debt of the aforementioned engchi U. sustainability principle. When one comes to the topic of the sustainability condition, it must achieve solvency and liquidity. In fact, the solvency condition is met by generating debt-dynamic projections of debt ratios over a twenty-year period. To comply with the liquidity condition, it evaluates risks related to “debt composition, maturity structure, interest rate structure, and [the] availability of liquid assets”(IMF-BW, 2013, p. 7). These two conditions are linked to specific debt ratio thresholds, depending on the soundness of the countries' institutions and policies to make appropriate evaluations. The link between debt and the WBs institutional evaluation tool Country Policy 28.

(38) Institutions Assessment (CPIA) performance is due to Kraay and Nehru (2004). They empirically demonstrated that countries with weaker institutions (lower CPIA scores) face more debt-related problems than countries with robust institutions (higher CPIA scores). The CPIA will be analyzed further in the text, putting an especial enfasis on the work of Kraay and Nehru(2004). The appraisal of nation-states' institutions and policies is done by the Country Policy Institutional Assessment CPIA, based on the assumption that these elements are essential to determining the effectiveness of a state's use of resources (Santiso, 2001, p.. 治政大 and their abilities to the quality of borrowers' policies and institutional frameworks 立 4) and of its poverty reduction and growth strategies(WB, 2013b, p. 1). It aims to assess. foster sustainable growth and poverty reduction, to effectively use developmental. ‧ 國. 學. assistance(Cagé, 2013). The conventional wisdom validating the role of institutions and. ‧. national policies on economic growth has been recognized theoretically (North, 1991). sit. y. Nat. and empirically(Acemoglu, Johnson, and Robinson, 2004). Robust results prove that. io. er. institutions do matter to economic growth and development outcomes. Meanwhile,. al. inquiries of national policies on economic growth also have reached similar conclusions. n. v i n empirically (Easterly, 1992) andC theoretically(Easterly, h e n g c h i U2005).. The Debt Sustainability Framework for LICS is comprised of two separate Debt Sustainability Assessments: one conducted to evaluate the external debt (an external DSA) and another is conducted to evaluate all debts, public and private debts (public DSA) which are nested in the LIC DSA template, an Excel file that produces charts and tables for respective DSA. The template is publicly available and downloadable through the IMF (IMF-WB, 2012b) or WB (IMF-WB, 2012a) website. The first DSA covers external debt contracted by the public sector. The external DSA utilizes five debt burden indicators for its assessment: 29.

(39) •. The present value of Public and Public-Guaranteed external debt relative to GDP, exports, and revenue. •. Public and Public-Guaranteed external debt service relative to exports of goods, services, and fiscal revenues.. •. Concurrently, the public DSA analyzes external debt contracted by the public sector and external debt guaranteed by the government. It also utilizes three debt burden indicators for its analysis:. •. the present value of public debt relative to GDP,. •. fiscal revenue,. •. 政治大 and the public debt service to fiscal revenue. 立. ‧ 國. 學. Based on the WB's DSA How-to Guide (WB, 2006) and taking the latest 2012 modifications into account, the framework includes the following steps(IMF-WB,. IMF analysts populate the missing information regarding present and. sit. y. Nat. •. ‧. 2012c):. n. al. er. io. projected debts, interest rates, balance of payments, fiscal accounts, GDP,. v. exchange rates, inflation rates, and other macroeconomic data. •. Ch. engchi. i n U. The program automatically calculates the evolution of external debt following the accounting identity of debt dynamics (equation). It then projects that data over a twenty-year period. The output can either be for the external DSA or public DSA, depending on the information inserted. The external DSA has two components: the baseline scenario and stress test scenarios. The baseline scenario is the most likely outcome calibrated by a decade of historical data on the country. The stress test scenarios are scenarios where the basic assumptions are modified to simulate single and combined shocks, like falls in exports, GDP growth, and others(Painchaud 30.

(40) and Stučka, 2011). •. Basically, the analysis compares the debt burden indicators presented by these two scenarios with the thresholds determined by the CPIA and determines the risk rating. The indicative thresholds are presented for the external DSA in Table 1 and for the public DSA in Table 2. The risk rating is classified as low, medium, high, and debt-distressed. The mechanical classification of the risk ratings is based on the number of breaches (that is, the number of debt burden indicators that exceed the determined. 治政大 Low risk is assigned magnitude, durations, and nature of the breaches. 立. thresholds). This analysis is complemented with an evaluation of the. when there are no breaches. Moderate risk is assigned when there are no. ‧ 國. 學. breaches under the baseline scenario, but there are some breaches under. ‧. stress test. High risk is assigned when they are some breaches under the. sit. y. Nat. base line scenario as well as the stress test scenarios. Debt distress is. io. er. assigned when the country is already experiencing difficulties repaying its. al. financial obligations.. n. v i n C h with a judgment Lastly, the DSA concludes e n g c h i U by the analysts on whether. •. debt levels exceeded the determined thresholds and in which circumstances they did so(IMF-IDA, 2010).. 31.

(41) Table 2.1 Public and Public-Guaranteed External Debt Thresholds. m. Weak Mediu. Present value of debt in percent of GD Export Revenu s e 30 100 200 40 150 250. P. Strong. 50. 200. Debt Service in Percent of Export Revenu e 15 25 20 30. s. 300. 25. 35. Source: Authors elaboration based on (IMF-BW, 2013, p. 13). Table 2.2 Public Debt Benchmarks. 政治大. Public Debt Benchmarks Quality of Present value of Total Public Debt Policies and Institutions in Percent of GDP Weak 38 Medium 56 Strong 74. 立. ‧ 國. 學. Source: Authors elaboration based on (IMF-BW, 2013, p. 14). ‧. Besides determining IDA resource distribution and the DSF, the CPIA also has. Nat. sit. y. an impact on determining the WB´s Country Assistance Strategies (GTZ, 2008, p. 7). n. al. er. io. fragile and conflict-affected state statuses(IEG, 2014, p. 14), and allocation of resources.. i n U. v. This rating analyses more than half of the WB member states and world. Ch. engchi. population(Riegner, 2012, p. 7). The evaluation of governance by the WB can be traced to the 1970s, subsequently expanding its assessment (IEG, 2008) to its latest revision in 2013(WB, 2013b). The DSF thresholds are policy-dependent to the score the country obtains in the CPIA index. It is constituted of four main areas divided into sixteen key divisions(WB, 2013b, p. 3). See Table 3. The CPIA scores weights each group in the same way and content of each group each group and condition obtain equivalent importance, although each component within a criterion can have different significance(WB, 2013b, p. 6). The academic literature supports the claim that the indicators incorporated in these 32.

(42) assessments have positive impacts on growth(IEG, 2010, p. 16), while corruption analysis is used with the assumption that lower levels of corruption will enhance growth. The questions are intended to assess management procedures and establishments to the degree conceivable, rather than results, and the “sub-criteria in the questions are quantitative”(Knack, 2013, p. 5). This diagnostic tool is created by WB country staff and revised by WB Regional and Main Headquarters. It involves two steps: a benchmarking phase and a countryrating phase. Based on the extensive number of countries and individual regional. 治政大the country under assessment within regions. The second phase determines the score of 立. differences, the WB creates benchmarks for different regions to ensure consistency. using the first step as a guidepost.. ‧ 國. 學. The WB analysts utilize the CPIA questionnaire, which defines a detailed list of. ‧. criteria and sub-criteria and provides full rating specifications; the guideposts, which. sit. y. Nat. provide additional data and information drawn from trusted sources; and the. io. al. er. benchmarking results, which are used for comparison. Initial assessments are subject to. n. internal review processes, based on numerical ratings and written justifications of the ratings.. Ch. engchi. 33. i n U. v.

(43) Table 2.3 Country Policy Institutions Assessment 2013 Criteria Economic Structural Policies for Social Public Sector Management Policies Inclusion/Equity Management and Institutions Monetary Trade Gender Equality Property Rights and Rule-based Governance Fiscal Financial Equity of Public Quality of Budgetary and Policy Sector Resource Use Financial Management Debt Business Building Human Efficiency of Revenue Policy and Regulatory Resources Mobilization Mangement Environment Social Protection Quality of Public and Labor Administration Policies and Transparency, Institutions for Accountability and Corruption Environmental in the Public Sector Sustainability. 立. 政治大. Source: Authors elaboration based on (WB, 2013b). ‧ 國. 學. In order to broaden the comprehensiveness of the DSF to determine which structural problems are the root causes of debt accumulation in Nicaragua, the. ‧. researcher first analyzes what the international financial institutions have to say in this. y. Nat. sit. matter. That is why it is important to present the information that the official DSA. n. al. er. io. analysis presents. In introducing the latest summaries of DSAs, the researcher avoids. i n U. v. in-depth and bland discussion on the baseline and stress test projection results. Though. Ch. engchi. their discussions are important for debt management strategies, it goes beyond our research scope. The objective is to briefly disclose that they often fail to capture, what the author suspects are the problems in structural development that get countries into debt contracts beyond their repayment capacities. Nicaragua acquired $4.5 billion dollars ($4,500,000,000) of HIPC Initiative assistance. It was under the Multilateral Debt Relief Initiative (MDRI) that the assistance totaled $1.913 billion dollars ($1,913,000,000) in nominal terms (IMF 2013, 26). The debt-to-GDP ratio was 59.1% in 2007 and 43.2% in 2013. The 2013 DSA determined that Nicaraguan debt is at moderate risk of external debt distress and that 34.