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

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Debt relief policy and practice by Belgium
earmarking of its compensation on the 1991 agreement to DRC 78 . Furthermore, in 2007, a
creative debt-aid swap construction was used in the case of Pakistan on its bilateral debt in
the aftermath of the great earthquake in Azad Kashmir (October 8, 2005) 79 .
3.3.2 Assessing Belgian debt relief from the evaluation framework
The observations made in the previous sections of chapter 3 are now used to make an
assessment of the overall Belgian debt relief policy to date. As highlighted in the
evaluation matrix (figure 1 in chapter 1), we focus on efficiency, i.e. to what extent the
inputs (actual debt relief interventions resulting from both implementing international
agreements as well as domestic agreements) were an efficient way in reducing debt claims
to the recipient countries. Furthermore, it briefly assesses to what extent Belgium
performed a supporting role in helping to bring about outcomes and impact, which can not
be attributed to Belgium only, but to the international donor community as a whole.
Finally, it assesses to what extent the debt relief policy was coherent with the overall
Belgian aid policy, where applicable, as well as, internationally, to the principles of the
New Aid Approach. As announced earlier, the intra-Belgian (compensation) agreements
will be assessed separately in the next section.
3.3.2.1 Efficiency of the Belgian debt relief policy
When assessing pre-HIPC debt relief, our analysis in chapter 2 clearly showed that the
international debt relief strategy, consisting mainly of piecemeal rescheduling operations
with some element of flow debt service relief in the Paris club, combined with small debt
swap and buyback operations, did not result in reducing debt stocks, did not significantly
reduce debt service paid (as most of the debt relieved would not have been serviced
anyhow) and as such, its economic value was deemed very low and it did not create fiscal
space in the recipient countries. Consequently, it was characterized as being highly
inefficient. Quite logically, also the Belgian debt relief operations in that pre-HIPC period,
largely emanating from the international approach, were not efficient. Piecemeal debt relief
as granted by Belgium through ONDD, and even the cancellations on bilateral loans
through MINFIN, although pro-active, both had a very low economic value, and did not
provide extra fiscal space in the recipient countries. Conditionality relied on the overall
structural adjustment logic as applied internationally. Through the debt swaps window,
78 Of less importance is the Seychelles case. The Seychelles had accumulated important arrears on ODA
loans received from Belgium, as well as on loans from other creditors. It applied for debt relief from all its
creditors. In 2006 Belgium agreed with the Republic of the Seychelles to consolidate the balances on all its
ODA loans and to reschedule the debts over a period of 10 years, from end of 2010 to end of 2019. The
total nominal value of balances was approximately 8.5 million EUR. This operation was contested by other
members of the Paris Club, but the matter was not pursued further.
79 Pakistan has obtained a rescheduling of a number of its debts, commercial as well as ODA, at the end of
the year 2001. After the great earthquake it applied for far going debt relief. As the Paris Club allows ODA
debt swaps without limits Belgium decided to proceed to a debt-for-aid swap for its ODA debt claims on
Pakistan. The vehicle it used was an Asian Development Bank Trust Fund, the Pakistan Earthquake Fund.
Under the agreement signed in January 2007, the balances of all ODA claims of Belgium on Pakistan were to
be cancelled. The total nominal value of these claims was 30.3 million EUR. Pakistan would transfer a rupee
amount equivalent to the present value of these claims, approximately one third of the nominal value, to an
account at the Asian Development Bank. The funds generated by the agreement were to be used for
rehabilitation and reconstruction, with a priority for social infrastructure and services in Azad Kashmir.
Coming to Terms with Reality
DGD was able to become an active player; however, assessed in retrospect, also debt
swaps proved to be a highly inefficient way of dealing with the problem, not only because
the economic value of it was identically low, but also because the micro-earmarking
counterpart funds mechanism approach did not work and was highly inefficient in
channelling more resources towards development. Furthermore, the compensation
mechanism that gave rise to these swaps, did not allow DGD to exert much leverage on
influencing the debt relief policy of Belgium in general, and decisions on ONDD claims in
particular. On top, resources from the DGD budget used for these operations were nonadditional,
and as such, potentially crowded out other aid interventions. Existing political
power imbalances between agencies involved, information asymmetry between parties, and
the lack of sustained expert capacity at the level of DGD to design, implement and monitor
an active debt relief policy contributed to this lack of efficiency at the national level.
The use of more efficient and effective types of debt relief at the international level, from
the HIPC initiative on, also changed the nature of the Belgian interventions likewise,
making them indeed also more efficient. However, the lion share of the Belgian debt relief
operations dealt with ONDD claims. As discussed before, on these ONDD claims, used the
remaining policy space in the largely internationally-driven rules of the game in a rather
conservative way, in the sense that it tried to keep the nominal value of claims at par, and
as such choosing quite consistently for the debt service relief option. In some cases, such
as in the Cameroon case explained later, this has clearly reduced the overall efficiency of
the operation. Also during the HIPC era, and the period 2000-2009 under evaluation, DGD
did not really succeed in increasing its leverage on debt relief decisions taken by the other
agencies. Despite occasional initiatives, and a lot of personal devotion from involved staff,
DGD continued to ‘institutionally’ suffer from the same flaws as in the earlier period, such
as political power deficits, continued information asymmetry between parties, the lack of
sustained expert capacity on the issue, and, at times, lack of internal coordination and
information sharing.
What are the consequences on the net overall development effort to recipient countries, in
other words is there additionality, again measured in economic value? This depends to
some extent on the counterfactual. To the extent that Belgium targets a given and fixed
particular ODA level, and part of that is achieved through debt relief, the level of the DGD
budget will be somehow dependent on the level of debt relief in ODA: debt relief granted
by MINFIN and ONDD in particular, might decrease the amount of budgetary resources
given to DGD, for other aid interventions, hence resulting in non-additionality by design.
This could mean that recipient countries receive cash flow relief through debt relief, but at
the same time receive less new aid through other aid modalities, and, as such, are equally
well-off, and debt relief does not provide additional Belgian aid to these countries.
Moreover, when DGD then has to compensate ONDD for this development effort, which
does not generate ODA, again under fixed ODA, this will come directly at the expense of
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