[Note: This post has been revised to reflect information from a Paris Club press release and conversations with knowledgeable officials.]
Credit: photography-by-winnaing/ cc
In the last few days, a delicate dance of reconciliation between Myanmar and its estranged foreign creditors reached its final measures. At the Club de Paris---the collective negotiating forum for creditor governments such as Japan and the United States---a press release just announced a debt deal with the poor and long-isolated Asian nation. The creditors committed to what is by Paris Club standards an exceptionally generous deal: cancelling half the debt in arrears---Myanmar defaulted in 1998---and instituting a 15-year repayment schedule for the remainder, including a 7-year grace period. Because the interest rates on most of these the loans are low, typically about 1%, this stretching out of repayment further reduces the debt's economic cost ("net present value" or NPV). Overall, the NPV will fall 60%. Meanwhile the World Bank and Asian Development Bank made their first loans to Myanmar in more than 20 years, in the process erasing their own arrears issues with the country.
With aid relationships normalized, the gates---floodgates?---are now open for donors into Myanmar.
[As the government gains legitimacy with the international community, the case strengthens for accepting the government's chosen English name for the country: Myanmar. So even though Aung San Suu Kyi and the US and UK governments still favor "Burma," I'm switching.]
This graph summarizes the recent transactions and commitments. Below, I explain the numbers and put them in some context:
As I recounted in an earlier post, Myanmar's military government fell out of favor with industrial democracies and multilateral development banks in 1988 after it brutally suppressed democracy protests. Aid flows slowed to a trickle, which came mainly from Japan. Myanmar paid the interest and principal due on its old debts to donors until 1998, perhaps hoping for an improvement in relations, but then slipped into default. Recent economic and political reforms have made the great powers desirous of détente: Obama visited right after winning reelection, and Japan promised substantial debt relief. The donors want to reward the government's difficult reforms and improve their own position within the geopolitical rivalries among the United States, Japan, China, and even India.
One obstacle to reconciliation was the clearance of Myanmar's arrears. Formally, for example, the development banks cannot lend to nations that are in default with them. I argued last summer that while debt relief would certainly not harm Myanmar, neither was the case for it that compelling. The country's debt burden was modest by most standards. And famed opposition leader Aung San Suu Kyi had called for foreign governments to suspend but not end economic sanctions on Myanmar, such as on trade and visa issuance; the threat of easy reinstatement, in her judgment, would spur further reform. The analogous step in the debt dance was to refinance defaulted loans rather than cancel them. Just as sanctions can be permanently abolished later, perhaps in order to reward further reform, so can debts be.
Events have exposed my dichotomy between debt refinancing and debt reduction as artificial. Some debts have indeed been refinanced rather than cancelled, but in such a way as to cut their net present value. So refinancing and reduction, rather than being mutually exclusive choices, went hand in hand. This possibility should have been obvious to me. I'm refinancing my mortgage now, which won't reduce my debt but will save me money.
The fresh deals have also sidelined my contention that deep debt relief was not needed. Events have gone otherwise than I envisioned for two reasons. First, the IMF learned that Myanmar was significantly more indebted than it estimated last May in a report that I leaned on. The IMF estimate for the stock rose from $12.4 billion (page 22) to $15.3 billion (note 2). Probably most of these newly discovered debts were penalties from creditors for missing payments. Myanmar didn't pay those penalties, so the creditors tacked them onto the debt stocks. And in many cases, Myanmar didn't even track them, which is why the IMF, relying on Myanmar's data, left them out of last May's debt assessment. Unfortunately, the government has not yet permitted the IMF to publish its revised analysis. Second, creditors are eager to improve relations with Myanmar for foreign policy reasons beyond debt sustainability. So eager are they that the Myanmar deal is generous by the creditors' own standards, offering a larger cut than is normally given for countries at Myanmar's (moderate) level of debt distress. Notably, the Paris Club press release makes no reference to the standard terms of treatment.
I had argued against such generous relief now, citing Nobel Peace Prize winner Aung San Suu Kyi, as giving away too much too soon. Why not condition debt relief on major additional reforms of the political or economic system? In fact, though not made clear in the Paris Club press release, the creditors have formally conditioned their write-offs on modest economic reforms occurring in 2013. The IMF negotiated and will oversee these conditions, under a <a href="http://www.cgdev.org/%3Ca%20href%3D"http://www.imf.org/external/pubs/cat/longres.aspx?sk=40248.0">">Staff-Monitored Program (a type of arrangement that is distinctive in not involving any lending by the IMF). The five listed reforms (page 32) are no doubt important. Myanmar will, for example, "prepare regulations to introduce treasury securities auctions" in order "to facilitate market-based deficit financing." Still, these conditions for reengagement feel pallid next to the conditions that triggered the break-up in 1988, namely the killing of hundreds of protesting students. The contrast became more poignant when, the day after the debt deals were announced, a different kind of news emerged from Myanmar: lab tests showed that the military used phosphorous on protesting monks and villagers in November. If nothing else, this situation illustrates the complex interplay in diplomacy between morality, geopolitics, and development concerns.
Two governments are plotting a different course in managing their Myanmar credits. Norway has agreed to cancel all its claims on the country. And Japan, the largest of Myanmar's Paris Club creditors, had already committed to a 60% cut---but according to its own terms and timing.
Intertwined with the Paris Club deal is a resolution of Myanmar's arrears to the World Bank and Asian Development Bank (ADB). The World Bank announced today that it had lent $440 million, and the ADB announced $512 million. The two credits total $952 million.
The real significance of the transactions lies not in that impressive sum, which is mostly illusory, but in the normalization of relations with the donors, which will lead to more loans and grants. Why is the $952 million illusory? Not by coincidence, the loans almost exactly match Myanmar's arrears to the same lenders (page 13): $436 million to the World Bank and $517 million to the ADB. That is $953 million altogether. Or was. On or soon after January 17, Myanmar paid off those arrears with the proceeds of the new loans. Clearing the arrears then allowed the development banks, by their own rules, to lend to Myanmar...
Sort of. Did you notice the paradox? Myanmar didn't pay the overdues until it got new loans. And the banks couldn't make the new loans until Myanmar paid the overdues. So which came first? As I explained before, what actually happened is that the government of Japan made a bridge loan. It lent Myanmar $950 million or so. Myanmar passed the money to development banks to clear the arrears. The development banks quickly disbursed new loans of similar size. Myanmar repaid the Japanese loan, perhaps along with a fee for the service. Perhaps $20 million is now left over for the other avowed purpose of the World Bank and ADB credits, which is to provide technical assistance to help the government "revamp the national budget process and modernize tax administration" and otherwise strengthen governance and the business climate.
To my knowledge, this is the first time the ADB has skirted its own prohibition on lending to its delinquents. The World Bank has conducted at least seven such pragmatic transactions in the last decade. Usually its descriptions of the deals have carried an Orwellian tinge, as proceeds from loans for "poverty reduction" circle back to the Bank within hours. In that light, the first word in the Bank's description of the Myanmar loan, "Reengagement and Reform Support Program" is refreshingly honest. (The term appears to have been first used under similar circumstances with Liberia.)
And given the dangers of an aid avalanche in Myanmar (see: Haiti), it may also be for the good that the net proceeds from these first loans is modest. A "rush for the entrances" by dozens of well-meaning donors could exceed their capacity and the government's to manage the the aid productively.