Coming to Terms with Reality. Evaluation of the Belgian Debt Relief ...

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Debt relief policy and practice by Belgium
interventions, a series of intra-Belgian political agreements, involving the three main agencies,
determine a series of additional transfers, most of them being intra-Belgian transfers, between
the three main agencies. Basically, they refer to agreements by which DGD (partly) compensates
MINFIN and/or ONDD for debt relief granted at the international front. Although most of them
do not change the volume of debt relief in a direct way, they will do so more indirectly. These
intra-Belgian compensation agreements are discussed in the next section.
3.1.3 Intra-Belgian agreements on debt relief
In Belgium, these compensation payments are based on three decisions, one by the Ministerial
Committee for Foreign Relations and the other by the Council of Ministers. These decisions
aimed at the partial compensation of creditors for the loss of revenue due to debt relief in
application of agreement in the framework of the Paris Club and, for the third decision, in the
framework of the European Union. Each decision charged a substantial fraction of the cost to the
Development Cooperation budget. The first decision, by the Ministerial Committee for Foreign
Relations, was taken at the beginning of 1991. The other two decisions, taken by the Council of
Ministers, related to debt relief in the HIPC framework and were taken in 2001 and 2005.
3.1.3.1 The decision of the Ministerial Committee of Foreign Relations of January 18, 1991
From 1982 onward a number of developing countries started to default on their debt
obligations. As a result the ONDD had to compensate the creditors who were holding a credit
insurance contract and at the end of the 1980s it had started experiencing liquidity problems. To
provide the ONDD again with a sound financial basis the Belgian State would acquire the agency’s
claims on 14 countries qualifying for debt relief under the Toronto conditions, agreed upon at the
G7 summit at Toronto in 1988 54 . The total amount of these claims was 24.17 billion BEF (599.16
million EUR).The State paid the ONDD 50% of the nominal value of the claims. The claims were
transferred from the ONDD’s own account to the State’s account administered by the ONDD.
The operation was financed by a 30 years loan, contracted by the State but with the debt service
administered by the ONDD. The annual debt service payments were estimated at BEF 1,229 million
(EUR 30.47 million). A major part of the debt service would be imputed on the Development
Cooperation budget 55 . This annual contribution was fixed at 550 million BEF (EUR 13.64 million).
In principle, this could have been organised as an annual ‘blank check’ paid by DGD to
ONDD. However, in order to enhance the development relevance for DGD, two mechanisms
were introduced to come to the 550 million BEF.
(1) DGD could purchase claims held by the ONDD on countries with which DGD had a
cooperation agreement. For claims on Toronto countries a discount of at least 50% would
apply. The claims would be converted in the currency of the debtor country at conditions
to be agreed upon with the country in question. The proceeds would be used for local
currency expenditure of DGD projects (debt for aid swaps) or for environmental
conservation operations (debt for nature swaps).
54 See again chapter 2 for a discussion of the Paris Club Toronto terms, and their options involved.
55 In addition the Ministry of Finance, the Ministries of Foreign Affairs and of Foreign Trade would also contribute
to the debt service of the loan. Interest and amortisation payments on the acquired claims and a supplement on
the export credit insurance premium would also be used to pay the debt service. See Annex 3.1 for details.
Coming to Terms with Reality
(2) DGD contributes to the cost of debt relief operations of the ONDD in the framework
of the Paris Club. These so called Paris Club-compensations would only be given if
options A (reduction of the principal by one third and a rescheduling of the remaining
debt over 14 years at the market interest rate) or C (a rescheduling over the same
period at a concessional interest rate at least 3.5% below the market rate or at an
interest rate reduced by one half if the market rate was lower than 7%) of the Toronto
menu were selected. If the ONDD opted for a pure rescheduling of the debt over 25
years (option B of the Toronto menu) the second mechanism was not applicable.
The total compensation had to be spread evenly over both options.
The procedure to be followed for the DGD contributions was specified in the agreement
between the Ministers of Finance and Development Cooperation of September 10, 1991.
This agreement stipulated that a working group consisting of representatives of both
ministries and of the ONDD would elaborate the implementation of the debt alleviation
operations. The working Group would convene at least once a year, at the start of each year.
Initially the ONDD opted under the Toronto terms for a pure rescheduling (B option). As a
result only the first mechanism could be applied to derive DGD’s contribution to the debt
service of the loan for the ONDD’s financial reorganisation. But in December 1991 the
Paris Club adopted the so called Trinidad conditions for debt relief, abolishing the option
of rescheduling over long periods. Henceforth the two remaining options were a reduction
of the principal by 50% combined with a market interest rate on the residual debt, and
reduction of the interest rate combined with a rescheduling such that the present value of
the debt was reduced by 50%. The ONDD systematically chose the second option. This
made it possible to apply the second mechanism for the Development Cooperation’s
contributions to the debt service of the financial reorganisation loan, i.e. a participation of
50% in the costs of Paris Club debt relief granted by ONDD.
On February 2, 1998 a new Agreement between the Minister of Finance and the Secretary
of State for Development Cooperation was reached. This new agreement followed by and
large the arrangements of the 1991 agreement. But it contained adjustments to the changed
international context, specifically with respect to the HIPC Initiative that had been initiated
in 1996. The 1998 agreement also contained a number of new elements. For example it
was also agreed that DGD would receive detailed information (specified in appendix 4 to
the agreement) on each debt operation to prove its development relevance. Moreover for
each operation a special agreement would be signed by DGD and the ONDD.
The price of debt purchases had been agreed upon in successive tripartite agreements between
the Minister of Finance, the Minister or Secretary of State for Development Cooperation and
the ONDD. In 1998 it was agreed that the price of the debt would be set at its ‘economic value’
as calculated by using an internal scoring model that ONDD uses to value its claims. For claims
on HIPC countries it was agreed that the price would be equal to 25% of the nominal value.
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