Refinance, Don't Cancel, Burma's Debt

In its decade of life, CGD has analyzed and influenced the foreign debt situations of several developing countries (c.f. Nigeria, Liberia, Sudan). In humble emulation of that proud tradition, I'm assessing the foreign debt position of Burma, whose military junta recently brought its domestic political opposition in from the cold, as symbolized by Aung San Suu Kyi's quick transition from house arrest to the chambers of Parliament. In turn, democratic industrial powers have invited Burma in from the diplomatic cold, as symbolized by Hillary Clinton's recent trip from Washington to Naypyidaw. These remarkably encouraging developments force some confrontations with the legacies of Burma's past. How fast and under what circumstances should sanctions on the country be lifted? And what should be done about its $11 billion in foreign debt, most of which has languished in default since 1998? Preliminarily, I think the answers to these two questions are the same. Suu Kyi supports the suspension, not the elimination, of economic sanctions, so that the threat of their return still prods reform. Likewise the debts to donors should for now be refinanced, not erased. But I'm still forming opinions, so I'd welcome feedback. Burma gained independence from the British five months after India did, in January 1948. Like India, it inherited the trappings of democracy. Unlike in India, the political system did not hold. In 1962, General Ne Win staged a coup; the military has run the nation in the 50 years since. In 1988, discontent boiled into widespread pro-democracy protests. The government put down the movement by killing thousands. Another General, Saw Maung, then took power and formed the State Law and Order Restoration Council (SLORC), which imposed martial law and renamed the country "Myanmar" in English. (In the eyes of many, the illegitimacy of the former move tars the latter, which is why the US and U.K. governments still call the nation "Burma.") In 1990, competitive elections rendered an overwhelming verdict in favor of Suu Kyi's party. Evidently shocked by the result, the SLORC put Suu Kyi under house arrest and retained power by force. These events led to the break with the west. Foreign aid to the country fell from $330 in 1988 to $90 million in 1989. Burma's dominant donor, Japan, cut back without completely disengaging, from $260 to $71 million. The US government severed most links to the country and used its heft at the World Bank and Asian Development Bank (ADB) to make them to do the same. The World Bank's Global Development Finance database shows disbursements of new loans to Burma evolving this way:

(This probably omits recent Chinese lending. I know nothing more about the loans from commercial banks and other private creditors.) Despite the cessation of new lending, Burma stayed current for a decade on repayments to the official development banks, and perhaps to Japan as well. But it defaulted in 1998. As of June 30, 2011, it owed the World Bank $884 million, including $289 million in overdue principal repayments and $81 million in unpaid interest. Likewise, on December 31, 2011, it owed the ADB $734 million, including arrears of $399 million in principal and $92 million in interest. The World Bank estimates the country's total arrears at $5.7 billion out of a foreign debt stock of some $8 billion. Here's the evolution over time of Burma's debt stock:

Notes on this graph:

• "Bilateral" means national governments, notably Japan. "Multilateral" means international agencies, notably the World Bank and ADB.
• "Concessional" means low-interest-rate. (Definition.)
• Perhaps precisely because of the breakdown in the financial relationship, the World Bank's data on Burma's debt are unreliable. The government of Burma has reported its foreign liabilities as $11.25 billion, suggesting that the graph above is missing $3 billion.
• After adjusting for inflation, the debt tracked here has hardly grown since the impasse of 1988. Exchange rate shifts probably explain most of the ups and downs since then, as the country's yen-denominated debts oscillated in dollar terms. Being in default has not exacerbated the debt situation as lenders have not generally been imposing hefty penalties for nonrepayment. Only the unpaid interest---perhaps 1--2%/year---has piled up, and that is commensurate with inflation.

Nevertheless, all those overdues block the development banks as they approach the prospect of doing business in Burma again. It's hard to reengage with those who have reneged. Given Burma's natural gas reserves and its proximity to China, geopolitics will determine much of how this situation is resolved. Already Japan has promised to write off 303.5 billion yen ($3.88 billion), conditional on continuing reforms for another year. Presumably it does not want to fall behind China in engaging with Burma. But principles matter too. What approach to Burma's debt will best support the country's economic and political development? Over the past 20 years the donors have built up a system for forgiving loans to poor countries that are so deep in debt that they cannot fully repay. Should Burma qualify for such treatment? Probably not, at least not yet. Two main reasons:

• By standard measures, Burma's foreign debt does not burden its government or economy. The IMF, whose relationship with Burma is not complicated by arrears, has worked with Burmese officials to analyze the question most thoroughly. The country's debt service bills equal just 3.1% of its export earnings and 0.65% of gross domestic product. GDP has been been growing 5--6% a year, which exceeds the average interest rate on the donors' outstanding credits and so is shrinking the relative cost of the debt. The country stands on the safe side of other debt distress indicators. In present value terms (which factor in the light burden of the predominantly low interest rates on Burma's debt), the foreign liabilities equal 17.8% of GDP and 84.8% of export earnings. The IMF worries about ratios above 30% and and 100% respectively.
• It would be premature to drop the debt to reward reform. One might argue that the debts are odious---billion-dollar obligations imposed on the Burmese people by an illegitimate regime---but the current regime is not much more legitimate than the old one. Roughly speaking, the people who released Suu Kyi are the ones who imprisoned her. Donors should husband whatever leverage the debt gives them, perhaps saving debt relief for the day that Suu Kyi or her party takes power.

Aung San Suu Kyi has backed the suspension rather than elimination of sanctions on Burma, in order to keep the pressure on the regime to continue reforms. By analogy, donors should not cancel but refinance the debts: they should renegotiate the payment terms, rolling the unpaid interest in the debt stock, or they should extend new loans to repay the old and clear arrears. This is, I think, a brilliant proposal...with a small problem: formally, the World Bank and ADB aren't allowed to refinance, since they can't lend to countries in arrears to them and their loans are supposed to finance constructive activities, not mop up messes from old loans. But in fact, the World Bank often refinances, without quite calling it that. The fine print of the annual report for 2003 reveals how both Congos and Côte d'Ivoire refinanced. "Certain member countries" and an unnamed "international financial institution" made intraday bridge loans to these debtors. The debtors passed the money to the World Bank in order to come current. Within hours, if not minutes, the Bank made new and larger loans to the same countries, proceeds of which went back to those anonymous angels, the bridge lenders. The circle was closed. The tension between the pragmatic practice of refinancing and the formal ban thereon generated Orwellian language. A "development credit...in support of an economic and poverty reduction program...was used to repay the bridge financing." Kind of like the Bank made a car loan to the Republic of Congo so it could buy a house. But if a bit of muddled language is the price of pragmatism, it is a price worth paying. The Bank appears to be preparing the same transaction for Burma, Japan being the leading candidate for the role of bridge lender. In contrast, the ADB has to my knowledge never faced such a situation. The economic success of its region has generally prevented arrears. (Afghanistan under the Taliban defaulted on a modest $27.7 million in ADB credits, but an avalanche of donor grants in 2002 wiped that blot off its balance sheet.) As a result, the ADB may not be acculturated to Orwellian refinancing. Fortunately, the World Bank is a knowledge bank, so maybe it can send technical advisers to Manila to train them in that peculiar practice. I have much more to learn about this subject, so my thinking is preliminary, and I'd welcome pointers and reactions. Spreadsheet with graphs and data. Also see Vikram Nehru's piece in the Wall Street Journal, which situates the debt issue within the Burma's broader economic challenges.