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‘It is important to have an informed debate on the subject of debt’ |01 December 2015

I refer to various broadcasts by presidential candidates on the subject of the possibility of cancelling what has been referred to as 'odious' debt, as well as letters referring to this that have appeared in local publications.

It is expected that as part of the presidential election campaign, various candidates put forward proposals on how they would manage the country's debt, but as Minister for Finance, I believe it is important that the debate is one which is based on practical proposals that are realistic options for Seychelles, based on our current debt situation.

It is important that certain clarifications are provided through the local media, as the debate has often been misleading, and it is essential that there is also space for an informed debate around the subject outside of the political campaigns.  I thank the local media for also facilitating this debate outside of the PPBs.

The proposal to address Seychelles' debt as an 'odious debt' refers to the example of Greece as a practical example of debt cancellation based on a new government arguing that it is not liable to debt that has been taken on by a previous government.  The reality of the example used is that it remains a proposal which was rejected.  It has never been implemented, and which was in fact soundly rejected by the Troika of parties that was dealing with Greece's debt (The EU, the IMF and the European Central Bank- ECB).

The type of debt cancellation proposed through the 'odious debt' concept has never been agreed to by any international financing institution, nor by any sovereign creditor, and remains the preserve of discussion among politicians, academia and observers of Greece's bailout.

There are generally two ways in which sovereign debt reduction or cancellation can be achieved.

One is in the event of a sovereign default or impending default as was the case of Greece in 2013 and 2015.  This is also what happened to Seychelles in 2008, and Seychelles made an appeal to the Paris Club of creditors, whereby it made a request for debt restructuring in 2009.  As part of the restructuring, the Paris Club granted Seychelles a 45% haircut – whereby 45% of its debt was written off in return for the implementation of its structural reforms already endorsed by the IMF. These reforms were based on what was necessary, but also to ensure that the economy achieved a solid platform for growth, while safeguarding our social investments.

When Greece was facing default as a result of the European economic crisis in 2013 it appealed to the EU and its major creditors and was granted a 55% haircut in return for implementing austerity measures that would allow it to re-balance its budget.

Following the election of the Syriza government, they endeavoured to get further debt reductions as part of negotiations in 2015.  While some politicians referred to 'odious debt', the actual proposal that was considered was not taking this consideration into account.  While the term of the debt was lengthened and there were some other structural amendments, Greece's creditors were adamant that no further debt reduction was possible, and cancellation was never a seriously considered proposition (http://www.bbc.com/news/world-europe-33503955).

The second option for debt restructuring or cancellation is as a development mechanism.  This is covered mainly under the HIPC initiative whereby 'Highly Indebted Poor Countries' (HIPC) were granted debt forgiveness usually by their former colonisers as part of a development acceleration mechanism.  In no cases was the entirety of the debt written off on the basis of the governments of the day not being considered responsible for previous debt obligations.  Variations on this type of debt transaction are covered by debt for nature swaps, where an amount of debt may be forgiven in return for a commitment towards nature conservation.  Seychelles has recently concluded a debt for climate change adaptation 'buy back' as part of which it received a further 5% write-off in relation to a portion of its sovereign debt.

Another example worth considering is that of Ecuador in 2008, which voluntarily defaulted on its sovereign debt, as a means to restructure its debt on more favourable terms.  While the newly elected President of Ecuador had argued at that time that the government was not responsible for the debts of its predecessors, it nonetheless was unable to achieve a write off – in fact it rather engineered a debt buy back, whereby it used its oil revenues to re-purchase its debt at a sizeable discount.

There is no precedent since the advent of the Bretton Woods institutions for a debt cancellation based on the argument that a newly elected government is not liable to the debt of its predecessor.  A basic principle of sovereign debt is that of continuity.

It should be recalled that while presidential candidates may question as part of their democratic right, the way in which previous debt has been invested, this debt has been already rescheduled twice by a democratically elected government.

The Seychelles government has been very proactive already in negotiating the best possible outcomes with regard to reducing its debt and rescheduling it on the most advantageous terms.

If a new government were to repudiate its remaining debt through a voluntary default, (which the 'odious debt' concept infers), this would be tantamount to putting all development which is currently financed by concessional external financing on hold.   This would include projects for investing in upgrading our electricity network, upgrading our sewerage infrastructure as well as new primary, secondary and post-secondary schools, as well as lines of credit to be made available for financing of small businesses.

There is also a risk to the stability of our currency, as a default incentivises capital flight as it will be a clear message that Seychelles will not honour its debts.

Our level of debt today stands at 63% of GDP, compared to over 175% of GDP in 2008. It is important that these facts are considered in their entirety in the interests of giving Seychellois correct information about debt scenarios.

 
Jean-Paul Adam
Minister for Finance, Trade and the Blue Economy

 

 

 

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